DANIELLE KURTZLEBEN, HOST:
Cardiff Garcia, hello.
CARDIFF GARCIA, HOST:
Danielle Kurtzleben of the NPR POLITICS PODCAST and formerly a very frequent co-host of THE INDICATOR, welcome back.
GARCIA: It's been a while.
KURTZLEBEN: Thank you. I've missed you guys.
GARCIA: Yeah, you've been covering, you know, trivial things like elections and their consequences. But it's good to know that you're back (laughter).
KURTZLEBEN: Just the people that are going to run the country, no big deal. I'm fine (laughter).
GARCIA: That's right. What have you brought us today?
KURTZLEBEN: I have brought you a bummer. I have brought you sadness.
KURTZLEBEN: I have brought you a message. Cardiff, recession is coming.
GARCIA: Oh, I think a lot of people are going to be surprised to hear that given that amazing jobs report from Friday.
GARCIA: Also, GDP growth, pretty good right now. What's going on?
KURTZLEBEN: I know. I totally get that. But, listen, I'm not saying recession is coming tomorrow. I'm not saying it's coming in the next month. But I'm saying there's reason to think that recession is at least somewhat likely to be on the horizon, as in in the next couple of years. And we'll get to that.
But here's what I'm here to talk about. As it turns out, we might be in a really bad place to deal with it when it comes. There's a good case to be made that the levers that we usually pull to stop a recession just won't work this time or at least won't work as well as they have in the past.
I'm Danielle Kurtzleben.
GARCIA: And I'm Cardiff Garcia. Today on THE INDICATOR with Danielle, how well can we handle the next recession? Because it's never too early to start thinking about it - right after the break.
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GARCIA: OK. So recently, there have been some - I wouldn't say red flags, but maybe yellow flags that a recession might be on the way within the next couple of years. For example, there are some surveys of economists and businesspeople saying that they do see one within the next two years. Plus, of course, my beloved yield curve, an old favorite of ours...
KURTZLEBEN: Everyone's beloved yield curve, come on.
GARCIA: (Laughter) Yeah, and a recession predictor as well, has flattened. It's not calling for a recession just yet, but it has been getting closer to that in the last year or so. It's a bit scary.
KURTZLEBEN: Right. So I'm sitting down here in Washington, and I'm seeing those indicators. And then I'm looking around and saying, OK, the Fed, Congress, the White House, what sort of ammo could they lob at a recession? And I started to think to myself, I don't know if we have that much. So I called up someone smarter than me on this, Mark Zandi - he is the chief economist at Moody's Analytics - to see if my instincts on this were correct.
First things first, does that seem right to you?
MARK ZANDI: Yeah, it does. It does. I mean, there is just a lot less room to maneuver than is typical leading up to a recession for sure.
ZANDI: Oh, should I be recording at this point or not?
KURTZLEBEN: Oh, yes, absolutely. Yeah, start recording the - yeah (laughter).
ZANDI: Oh, OK. OK. (Laughter) OK.
GARCIA: Always be recording (laughter).
KURTZLEBEN: (Laughter) I need to just tell people that right off the bat.
GARCIA: (Laughter) Yes.
KURTZLEBEN: But, you know, eventually - all right - he started recording, so then we really started talking. And we talked about the tool kit that we have as a country to deal with a recession. So OK, recession hits. I asked him, what do we do first?
ZANDI: The best way, the typical way, is to let the Federal Reserve manage it.
GARCIA: OK. So potential recession fix number one, that would be monetary policy - the Federal Reserve.
ZANDI: That means let the Federal Reserve lower interest rates to try to help support the economy. And that generally has worked in recessions in the post-World War II period.
GARCIA: So the Fed uses short-term interest rates as a kind of accelerator pedal for other interest rates throughout the whole economy. The idea here is to encourage more borrowing, more economic activity and, of course, to speed up the economy. Unfortunately, though, that accelerator pedal is already kind of close to the floor, so to speak.
ZANDI: Just for context, you know, if you go back and think about typical recessions, the Fed generally cuts interest rates by 4 or 5 percentage points in downturns, in a typical downturn. Right now, the Federal - the interest rate that they control is at 2.5 percent. So that just indicates how little cushion room they have to maneuver here.
KURTZLEBEN: And that's what the Fed did in response to the last recession. It lowered interest rates by around five points. And it kept them really low, as in around zero, for a really long time.
GARCIA: Yeah. And when the Fed needed even more juice for the economy, it tried another monetary policy fix, something called quantitative easing, which you may have heard shorthanded as, quote, unquote, "printing money." The idea here was that by buying Treasury bonds in the economy, it would lower long-term interest rates directly as well. But again, there's just not a ton of room to cut those long-term rates either.
KURTZLEBEN: So OK, monetary policy, check. We've gone through what we could do on that front. But if that doesn't work, there's something else we can try. Recession fix number two, fiscal policy - spending money. We tried this during the Great Recession with that great big stimulus package you might remember, and it did help. It kind of softened the blow.
GARCIA: But there's maybe a potential problem with trying that now here as well, which is that the U.S. has more debt right now than it has had in the past.
KURTZLEBEN: Right. And not only that, but it's only projected to go up and up in the future for a lot of reasons. Health care spending is only going to go up, especially as we have all of these Boomers getting older and going on Medicare. Not only that, but we passed those tax cuts in 2017, and those are projected to add to the debt as well.
ZANDI: We just don't have the financial cushion that we have historically. And investors are going to demand compensation for the greater risks that they're taking. That means higher interest rates.
KURTZLEBEN: Now, a couple of really important caveats here. One, it's true that right now, our rising debt levels don't seem to be causing those problems that Mark was talking about right there. At least, it's not happening yet. Two, economists do disagree about how much of a threat debt is to the economy.
GARCIA: Yeah, super contentious. Leaving that aside - because we're kind of putting the cart before the horse here - fiscal policy is where political problems also pop up. So even if economists might argue about the appropriate size of deficits, deficits do tend to spook politicians, the lawmakers. And that might keep them from taking action.
KURTZLEBEN: And you're up in New York, Cardiff. I don't know if you've been watching. But it's not (laughter) really certain that Washington could agree on what to do because they haven't been able to agree on anything lately.
GARCIA: Yeah. By the way, the government, not open at the moment.
KURTZLEBEN: (Laughter) Yes, another thing you may have seen.
ZANDI: So there isn't a lot of room here if we do get into a kerfuffle. The economy is going to have to get - perhaps do it on its own.
GARCIA: OK, so what is the likelihood that the House and the Senate can agree with each other and then agree with the president on some sort of boost to the economy and to do it in short order to fight off a recession? Eh...
GARCIA: (Laughter) ...Is my answer.
KURTZLEBEN: Eh is exactly the correct answer.
KURTZLEBEN: I mean, that feels about right. But OK, so fiscal policy - that was our second thing. So let's look at that last thing Zandi said there, the economy doing it on its own. Let's look at the private sector. Could it handle another downturn?
GARCIA: And one problem here is corporations, some of which have brought on a lot of debt in recent years. And that could be a problem if or when interest rates rise because then, suddenly, it makes it more expensive for those companies to pay off their debt. And it gives businesses a tough choice to make.
ZANDI: Do I either make my debt payment, or do I cut investment in jobs - you know, pull back? And they're very likely to cut back on jobs and investment, so that means that just exacerbates the recession. The downturn will be more severe.
GARCIA: And we would add one more problem here, which is that when interest rates start going down in response to a recession, companies may still not be tempted to borrow even more money just because they have so much debt already.
KURTZLEBEN: Right, very good point.
GARCIA: Yeah. So this in combination all sounds pretty bad.
KURTZLEBEN: Yes, it does. But, Cardiff, I'll give you one at least a little bright, kind of dim bright spot that Zandi mentioned.
GARCIA: Oh, good.
GARCIA: Off brand (laughter).
KURTZLEBEN: (Laughter) I know. I'm bringing the sadness.
KURTZLEBEN: But one tiny bit of not quite sadness - households. Households have really cut down on their debt from where it was before the Great Recession. So at least in this one important way, Americans are in at least a somewhat better place than they were before our last really big, really painful downturn.
GARCIA: Yeah, true. Although, it's worth mentioning that not every household is the same. So for example, there's a lot of Americans who could still suffer quite a bit in a downturn. And just to give you one example, 4 in 10 Americans say they would not be able to come up with $400 in an emergency without either borrowing the money or selling something. But they don't have it in cash. They don't have it in savings. That's quite a staggering figure. It's one we've cited before.
KURTZLEBEN: Yes, absolutely. So those households, you can imagine, would be really hard off in a recession, potentially. So yeah, long story short, it's not like there's ever a great time to have a recession. But if one comes in the next couple of years, it could be an extraordinarily bad time for it.
GARCIA: Wow. Danielle, all your excellent political coverage, I think, is putting you in a bummer of a mood (laughter).
GARCIA: We always love having you back. And honestly, we don't care what mood you're in. Thanks so much for this.
KURTZLEBEN: Aw, shucks. Yeah, thank you.
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GARCIA: This episode of THE INDICATOR was produced by Constanza Gallardo. It is edited by Paddy Hirsch. And THE INDICATOR is a production of NPR.
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