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U.S. Poorly Equipped to Handle Next Recession

In a paper posted earlier this month, the Committee for a Responsible Federal Budget (CRFB) asks whether the federal government has sufficient 'fiscal space,' which is "the flexibility of a government in its spending choices, and, more generally, to the financial well-being of a government," according to Wikipedia.

More specifically, CRFB says, "the United States is more poorly equipped to handle the next recession than it was to handle the most recent one. This reality is even more troubling because the Federal Reserve has less monetary space due to already-low interest rates and a very large Federal Reserve balance sheet."

Here is what amounts to the paper's executive summary:

"The national debt increased dramatically during and after the Great Recession, rising from 35 percent of Gross Domestic Product (GDP) in 2007 to 66 percent by 2011. Though that recession was uncharacteristically large, debt has also risen in every other recession since 1970 by an average of 5 percent of GDP.

"In past recessions, the country has had reasonably low debt levels, allowing us to withstand automatic increases in debt as unemployment rose and incomes fell, while also having flexibility to adopt fiscal stimulus measures to boost the economy.

"Since 1970, there has been a recession every 5 1/2 years on average. Though it is impossible to predict the timing of the next recession, the fact that one has not occurred in the last 7 years suggests one is likely on the horizon. Unless there is a dramatic reduction in debt, we will enter the next recession with the highest debt level in nearly 70 years (and higher than any time prior to World War II).

"This has led to legitimate concerns about the available “fiscal space” in the United States, or the federal government’s financial capacity to respond to emergencies. While there is not a single definition of fiscal space and it is impossible to know the precise amount, the United States clearly has less fiscal space today than it did a decade ago and is projected to have less in the years to come.

"As a result, the United States is more poorly equipped to handle the next recession than it was to handle the most recent one. This reality is even more troubling because the Federal Reserve has less monetary space due to already-low interest rates and a very large Federal Reserve balance sheet.

Our simulations show that in ten years, a recession could lift debt levels to within 8 to 17 percentage points of GDP of the country’s all-time record high debt levels set after World War II, leaving less capacity for fiscal stimulus than was available during the Great Recession.

"In order to create the necessary fiscal space, policymakers should enact an agenda that slows the growth of federal debt while accelerating economic growth."

Note especially the spreadsheet (Figure 1) on the first page showing debt before and after recessions as a percentage of GDP. In the recession of 1973-1975, debt increased only 2%. After the recession of 1980, debt increased 3%. Debt increased 9% after the recessions of 1981-1982 and 1990-1991, and debt increased 2% after the recession of 2001. However, debt increased 31% after the so-called Great Recession of 2007-2009, increasing from a pre-recession level of 35% to a post-recession level of 66%.

CRFB concludes, saying:

"Having sufficient fiscal space is important to give the federal government flexibility to respond to emergencies and other needs. It is difficult to know how much fiscal space the United States currently has, but the recent run-up in debt has put the federal government in mostly uncharted territory. For that reason, it has become at least a little more likely that the federal government’s fiscal capacity will not be sufficient when substantial new borrowing is needed.

"Lawmakers should work to reduce the current projected high level of debt (as a percent of GDP), rather than letting it rise unsustainably, in part to help provide enough fiscal space to respond to new needs and emergencies. Even reducing the future debt relative to the economy may create more fiscal space today by re-assuring markets and policymakers about the long-term sustainability of the country’s fiscal situation.

"High and rising levels of debt can tie the hands of policymakers, making it more difficult for the government to respond to important national needs, particularly during an economic downturn. President John F. Kennedy once said, “the time to repair a roof is when the sun is shining.” The time to fix the debt and to ensure we have the fiscal space to respond to emergencies is now."

The 5-page paper includes several embedded links.

If you have a few minutes, take a look at the CFRB paper cited above. Then write your member of Congress. Tell them your position on the national debt. Contact information is available at the Library of Congress' Congress.gov. Taxpayers living in Virginia's Arlington County can contact:

  • Senator Mark Warner (D) -- write to him or call (202) 224-2023
  • Senator Tim Kaine (D) -- write to him or call (202) 224-4024
  • Representative Don Beyer (D) -- write to him or call (202) 225-4376

Ask for a written response. And tell them ACTA sent you.

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