WASHINGTON DC (September 4, 2019) — Maya MacGuineas, President of the Committee for a Responsible Federal Budget, argued in an opinion piece that we should have a fiscally-responsible framework for handling a recession agreed to well in advance of one. That way, if policy-makers decide to implement a stimulus plan to combat a recession, they will also have agreed to the principle that it should be paid for over time. A stimulus package should not be an excuse to escape the principles of fiscal responsibility that are so necessary for a sound economy in the longer run, and a “Break the Glass” framework can help avoid that mistake:
While we don’t know exactly when the next recession will hit, recent warning signs suggest it may be sooner rather than later. And unlike the last recession, we will not be entering this one in good fighting-shape.
Prior to the Great Recession, the federal funds rate was 5.25 percent and debt was 35 percent of the economy. That meant the Federal Reserve could cut interest rates by a full 5 percent (in addition to rescuing the financial sector and engaging in quantitative easing) and fiscal authorities could more than double our debt-to-GDP ratio without fear of running low on fiscal space.
Today, the federal funds rate is only 2 percent, meaning there is little room to cut and much of the onus for fighting a recession will fall on fiscal policy.
Yet fiscal space, too, is not what it used to be. Today, debt is at 78 percent of GDP — already a post-war era record — and we're borrowing $1 trillion per year in good economic times. On our current path, debt is on course to eclipse the size of the economy in about a decade and reach unprecedented levels thereafter.
That doesn't mean we're out of fiscal space — the United States is still among the safest investments in the world and we should be able to borrow more for the next recession if we need to. But there is a large risk that another huge run-up in the debt could leave the US with untenable debt-levels and all the problems that come with it — depressed economic-growth, too little maneuvering-room in our budget, and less room to keep fighting future recessions.
Thus we must be thoughtful about the design of our next economic rescue. Instead of being caught flat-footed, we should agree to some basic principles ahead of time and have a "break the glass" plan that can serve as a blueprint.
First, the size and shape of any fiscal-stimulus package should be crafted to meet the needs of the particular type of recession. Since stimulus packages are not one-size-fits-all, different designs will be appropriate depending on whether there is a global slowdown, versus a financial meltdown, versus problems in the housing market. They should not, however, be an excuse for politicians to take their favorite policies and dress them up as stimulus. Nor should they be treated as a free-for-all Christmas tree with all sorts of extraneous measures thrown in. And stimulus should not be seen as an opportunity to debt-finance permanent new policies. Once major economic-indicators show we have moved back into a period of growth, any stimulus should be phased out.
Given the state of our political environment these days, and the inability of politicians to prioritize good policy over politics, it would be useful to have an outside panel of bipartisan experts to recommend the specifics of any package based on their value and bang-for-buck.
Finally we need to find ways to boost the economy while still accommodating our poor fiscal position. Our debt should not stand in the way of stimulating the economy, but nor should stimulating the economy stand in the way of ultimately controlling our long-term debt. Refusing to borrow in the near-term would be short-sighted and economically-damaging; but so too would continuing to expand our borrowing into the future.
Squaring this circle requires us to expand deficits when the economy is weak and use the next recovery as a time to reduce the debt, rather than increase it as we have in recent years. This can be achieved by tying short-term stimulus measures to long-term offsets that would kick in once the recovery gets fully underway.
For example, a stimulus package might include extending unemployment benefits, infrastructure spending, a payroll tax holiday and/or aid to the states. A responsible stimulus package would match those policies with reforms to the unemployment tax, tax and benefit changes to make Social Security solvent, a gradual increase in the gas tax, reasonable discretionary spending caps, and/or higher state Medicaid contributions — phased in once the economy had recovered.
Each policy would add to the deficit in the near-term, but reduce it over time. A plan like this would be easy for the public to understand; would time stimulus for when it is truly needed; would target dollars toward where they can do the most good; and would not only replenish all the fiscal space it used, but would actually reduce the debt over the long-term. And instead of implementing tax and spending giveaways and promising to address the debt another day — a day that never seems to arrive — it would link the two ahead of time in a more-sensible way.
Fiscally, we can’t afford to keep adding to the debt year after year. But if we do fall into recession, we can’t afford not to borrow more if we are to rescue the economy. Still, short-term emergencies don’t justify throwing out long-term prudence.
Developing an outline of a "break the glass" plan now which is ready to go when the recession hits is the best way to ensure the plan both spends carefully and judiciously to combat the recession and then offset the costs over time.
