Economists and financial analysts of all stripes continue to prognosticate on performance of the economy in the near term. Will there be a recession during the 2020 campaign season?
Asserting that the 2020 election is the most important in recent history may be overstating it, as every presidential election seems to be more crucial than the previous. If America is “at a crossroads,” it always seems to be “at a crossroads” in one way or another. But the Trump presidency, Democrats and Republicans would agree, for better or worse, is like no other, making the election of 2020 a determinant of America’s future.
The election of 2020 will turn on issues including cultural and racial identity, immigration, health care, and, as always, economics. I contend that performance of the national economy is asymmetric in its political effect. Voters who support Trump will continue to support him even if he would “shoot someone on 5th Avenue,” or, as currently demonstrated, extort a foreign power to smear a likely political opponent. Those who oppose Trump are more determined than ever to defeat him.
Those open to persuasion are few in number. As Trump has done little, actually nothing, to expand his base, those undecided voters are crucial. The economy is Trump’s ace talking point. Continued economic prosperity is not sufficient to increase his numbers. In contrast, a sharp recession, or even significant economic softness, will counter Trump’s ace talking point and may influence just enough undecideds to threaten his reelection.
In other words, Trump has little to gain with continued good economic performance, and much to lose should the economy go south. Hence, the asymmetric effect of the economy on the election.
Trump and administration officials continue to laud the performance of the economy, citing growth, low unemployment with low inflation, and financial markets bouncing around record highs. It is essentially the economy he inherited from the Obama administration. Nevertheless, with Trump in his fourth year, voters will doubtlessly credit Trump for keeping it going.
However, as Yogi Berra sagely observed, “It’s hard to predict stuff, especially when it’s in the future.”
Janet Yellen, Federal Reserve chair from 2014 to 2018, recently made several observations worth listening to. While she doesn’t see a recession on the horizon, she notes that risks are piling up.
Yellen cited the growing inequality of income and wealth as particularly worrisome. During the longest expansion in U.S. history, benefits have flowed mostly to top earners and those with post-high school education levels. She cited “a very worrisome long-term trend in which you have a very substantial share of the U.S. workforce feeling like they’re not getting ahead. It’s true, they’re not getting ahead.”
She added, “It’s a serious economic problem and social problem because it means the gains of our economic system are not being widely shared. It leaves people ultimately with the feeling that the economy is not working for them, a sense of social discontent that is extremely disruptive.”
Yellen asserted that the trade war initiated by President Trump isn’t helping. She added, “I see no sign that that’s been successful in turning around these trends…These tariffs are taxes on American consumers and businesses. It’s making it more difficult and more expensive to do business, to control costs, and consumers are seeing higher prices from it.”
Yellen’s third area of concern is that with the three rate cuts the Fed has already made this year, there remains “not as much scope as I would like to see for the Fed to be able to respond to that. So there is good reason to worry.”
Fiscal policy is not within the scope of the Fed. Many economists and other critics have noted that with record federal deficits and public debt, there is not the political latitude for an expansionary fiscal policy to counter recession. This is due to the Trump/Republican 2017 tax bill that cut corporate taxes and personal income taxes for the nation’s very wealthiest citizens. This legislation was disingenuously sold to the public with outrageous promises. They promised that increased after-tax incomes would be used to stimulate business investment, leading to higher productivity, higher wages and higher economic growth. Some enthusiasts for tax cuts even made the preposterous assertion that “higher growth” would even lead to reduction of the national debt.
None of this has happened. Instead, the tax bill led to increased after-tax inequality of income and wealth, and higher public debt.
Yellen stated that with the Fed’s low interest rates, she had received complaining emails from retirees who depend on interest on savings. This illustrates that there are both upsides and downsides to every economic policy decision. An expansionary monetary policy with low interest rates is the Fed’s primary policy tool with which to counter recession. Low interest rates, of course, are not welcomed by those who depend on returns on interest bearing securities for their income.
At the same time, as low interest rates are helpful to the financial markets that Trump sees as the major metric of economic performance, Trump is bashing current Fed Chair, Jerome Powell, for not reducing interest rates to zero — or even to negative interest rates such as the case in parts of Europe.
The Fed’s task is to remain independent of the president and congress, using its primary tool of monetary policy to attain full employment and low inflation, a target of 2%. It remains for the president and the congress to institute fiscal policy, and formulate broader measures to address structural problems of the economy.
Consumer confidence and spending, much of it financed by debt, remains fairly high. In contrast, due to Trump’s trade escapades, business investment has declined for the last two quarters and is forecast to remain soft. Several of the world’s largest economies are soft.
The business cycle is not extinct; we will eventually encounter recession, but not necessarily in 2020. Meanwhile, there are clouds on the economic horizon.
— John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears Saturdays in the Monroe Times.
