Economic Undertakings

Biden can convince us recession isn’t ‘inevitable’ – InsuranceNewsNet

Recession is “not inevitable”.

So says the Biden administration, using cautious language repeated time and time again by the president and senior officials.

They are technically right, at least in the short term. But they should still do much more to ward off the growing risk of recession and prepare for its likely fallout.

Recent surveys of economists, executives and WE consumers are showing growing pessimism and increasingly expect a recession in the next year.

These concerns do not arise out of nowhere.

Inflation measures turned much hotter than expected just a few months ago, in part due to unexpected shocks – including war, Chinese factory closures and WE bird flu epidemics. The Federal Reserve will have to raise interest rates more aggressively to control price growth. Doing so could accidentally push the economy into a recession, as has happened before when the Fed tightened financial conditions to control inflation.

It is difficult to administer just enough medicine to cure the patient, but not enough to kill him.

In addition to the very real risks that have clouded the economic outlook lately, the Biden administration is likely also concerned that all of this recession talk is becoming a self-fulfilling prophecy.

If consumers and businesses grow increasingly gloomy, they could act in ways that reflect this pessimism: cut spending, lay off workers, delay investment, cancel orders. Then they see everyone else shrinking, getting more nervous, and backing off more.

This negative feedback loop can generate a recession, regardless of what the Fed, Russia or even COVID-19 does.

That is why White House officials, and to some extent Fed officials, are trying to project cautious optimism. They emphasize the good things about the economy, like solid job growth, and talk about the resilience of the economy.

Finding the right tone in this pep talk is tricky. If policy makers are overjoyed, they seem deaf to people’s suffering. It can hurt them politically. Worse, if they downplay the risks haunting the economy or appear unrealistically optimistic, they may appear untrustworthy. This can hamper their ability to intervene effectively later on. Credibility matters.

All these considerations probably explain why the administration has decided to say that the recession is “not inevitable”. This allows them to recognize people’s pain and fears, while allowing them to find hope. This is probably the least bad possible framing of the problem.

But the least bad rhetoric is not enough. What matters most is what they do.

The administration needs to use every tool available to reduce price pressures so the Fed doesn’t have to act so aggressively — so it doesn’t all come down to raising interest rates. The administration could, for example, lift trade and maritime restrictions, which could slightly reduce costs for consumers. Or speed up legal immigration, to alleviate labor shortages.

The administration dragged its feet on these and many other helpful measures, alas, and wasted valuable time and resources on anti-“profiteering” messaging that plays better off the Democratic base. In fact, their populist, anti-corporate rhetoric might have made it politically harder for the party to take action that could help reduce inflationary pressures.

Lowering gas prices, for example, could involve insuring energy producers against downside risk – that is, reducing the likelihood that fossil fuel companies will suffer from lower profits or even losses, so that undertaking costly new investments to increase production seems less risky for them. How does the administration go about it, while publicly denouncing these same companies for obscene profits and insufficient patriotism?

Meanwhile, because recession already seems more likely, the administration and Congress must do more to prepare for this unwanted outcome – whether it is months away or years to come.

This means, for example, modernizing the decrepit computer system of unemployment insurance, so that the next time there is a mass dislocation of workers, federal and state governments can better target assistance. The Brookings Institute recently published a huge volume of these and other lessons learned from the government’s response to the pandemic recession. It’s a useful plan for the patches that the president and Congress should be undertaken now.

Biden is right: we must not give in to fatalism. He and policymakers must reassure Americans that economic collapse is not inevitable. The best, most credible way to convince us? Demonstrate that the government has the competence and capacity to respond to a crisis – both today and if (or, really, when) the economy gets worse.