Trade war rages! Stocks sink! Yield curve inverts! The financial headlines can be pretty alarming right now — but that final bit of jargon is particularly concerning to experts, because it’s a pretty consistent indicator that a recession is coming.
Of course, for all the red downward lines on charts and shrieking commentary, no one knows for sure if a recession is imminent. There is, as ever, a plausible case to be made for both panicking and chilling out.
That said, if the economy is indeed headed for a downturn, many Americans are about to experience some economic pain. And, if and when that happens, a big problem is that there’s little indication the political system is capable of doing anything to ameliorate it, mostly thanks to President Donald Trump and the Republican Party.
Get the think newsletter.
In fact, in Washington, even the most competent people usually have the worst political incentives when it comes to combating a recession — and the most incompetent ones are mostly in charge right now.
Case in point: One of the more economically damaging things occurring at the moment is Trump’s haphazard trade war; his tariffs are causing American farmers real pain, and the fact that his decisions about when to implement them are based on nothing but his whims understandably leaves businesses wary. Given that raising tariffs is one of the few economic policy actions in which he seems to genuinely take a personal interest, and that he is terminally incapable of admitting a mistake and reversing course because it would undermine his “brilliant businessman” shtick, there’s little reason to believe he will stop punching his own economy in the nose.
Meanwhile, when it comes to recession planning, his team is openly not doing anything. Instead, Trump’s main plan to combat a downturn is to continue criticizing the Federal Reserve, America’s central bank, for not doing more to juice the economy. Though there is a case to be made that the Fed hiked interest rates too fast in recent years, and was too slow to lower them again.
That said, rates are quite low at the moment, and only have so much room to head lower; the Fed has just half as much firepower as it did going into the last recession because of where rates are today. Plus, the more Trump pounds on the Fed, the more the institution’s inclination to do the opposite of what he desires in order to maintain its “independence” will come out (as misguided as the notion that the Fed should be independent of elected officials is). Betting on the Fed to save a sinking economy is not a good wager because it’s simply not powerful enough with the current tools at its disposal.
The main recession-fighting force in the U.S. is actually Congress, but the story doesn’t get much better there than in the executive branch. From a purely political standpoint, the Democratic-controlled House has no incentive whatsoever to help Trump turn things around. All he has going for him electorally (beyond his willingness to race-bait and troll the libs) is that the economy has been in decent-enough shape, on the surface anyway, throughout his first term and so, if that goes away, he becomes even more beatable in 2020.
Even presuming — I’d argue correctly — that House Democrats are not monsters interested in immiserating a portion of the population for political gain, there’s the matter of what on earth they could approve to help the economy that would also fly in the GOP-controlled Senate. Remember, in 2008, when there was a legitimate economic meltdown, almost no Republican senators voted for the too-small stimulus package desired by the Obama administration. They spent years stymying the needed economic stimulus out of political spite.
Perhaps this time the fact that it’s their guy in the White House will make Senate Republicans more amenable to doing something to revive a sinking economy, but, if past is precedent, they’ll want to do it via more tax cuts rather than via more effective direct spending, which won’t fly in the House. Democrats are rightfully miffed that $1.5 trillion was blown on tax reductions for the rich and big corporations at a time when the economy was on the upswing, and will not be interested in cutting taxes further. Meanwhile, the sort of spending package that could pass in the House would likely not find much traction with a GOP Senate. So everything is effectively stuck.
And even if the two parties somehow do find some middle ground, that very middle-ness will likely render the response insufficient to the problem. (And who knows what effect a raging Fox News and talk radio ecosystem will have on the ability to get a compromise package signed into law by Trump.)
Making matters worse, Congress also failed after the last recession to bolster what are known as automatic stabilizers — such as automatic expansions of unemployment insurance when a recession occurs — that can blunt downturns without requiring new legislation. Like so much that came out of the Great Recession and 2008 financial crisis, it was an opportunity to reshape economic policy that was simply wasted.
So what we may be headed for is a Great Muddle: institutions doing just enough to prevent total misery, but nothing more, setting up an economic downturn that is longer and affects more people than it needs to. Or we can just hope that former Federal Reserve Chair Janet Yellen is right and everyone seeing a recession in their tea leaves is mistaken.