The longest-ever economic recovery will end — here's what we can do to prepare

The longest-ever economic recovery will end — here's what we can do to prepare
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The June jobs report marked a significant milestone for the current economic recovery, which is now tied for the longest-ever expansion in American history. And, assuming a recession does not begin this month, it will soon break the record.

We owe this record-long expansion to extraordinary actions by the federal government, including Congress and the Federal Reserve. After rebounding from the Great Recession, our economy is now poised to eclipse the expansion of the 1990s.

But as any student of history knows that all economic expansions eventually come to an end. While the job market rebounded from tepid gains in May – adding 224,000 new jobs in June according to the Bureau of Labor Statistics – the inverted yield curves and rapid movements up and down in the stock market, have been interpreted by some as signals that the next downturn could arrive faster than anticipated.

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Which is why it is imperative that we start planning nowIn fact, good times are exactly when we should be taking steps to ensure we’re prepared for the challenges that lie ahead.

Among the most important questions we need to begin answering are: Are we ready to fight the next downturn? If not, what steps should policymakers, including members of Congress, take now to mitigate the damage once the next recession strikes?

We know recessions have devastating effects on individuals, families and firms, and can cause long-term economic damage if not counteracted. Protecting the economy and households to limit the impact of a downturn is a core responsibility of government.

 In previous recessions, including the Great Recession, the U.S. responded with strong monetary policy accompanied by fiscal policy measures. Indeed, historically, monetary policy has been policymakers’ first line of defense because they can deploy it quickly to reduce volatility and stabilize the economy at the first sign of a downturn. For example, the Fed lowered interest rates by more than 5 percentage points during each of the past seven economic downturns.

Because of its unusual magnitude and duration, the Great Recession required the extensive actions taken by the Fed to be matched by large fiscal actions in order to counteract the financial devastation. The sweeping fiscal policies enacted by Congress included an enhanced federal share of Medicaid spending, direct payments to individuals and updates to the unemployment insurance system, including bonus payments and repeated extensions of benefits.

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But to fight the next recession, that policy mix must change. Given how low interest rates are already, the Fed’s ability to reduce rates further to fight a future downturn will be limited. With interest rates still under 3 percent and unlikely to be raised in the near term, the government will have to rely more heavily on fiscal policy tools to mitigate downturns and support recoveries. 

Leaning harder on fiscal policy could result in a much slower response to the next recession. During the Great Recession, new legislation was required for many of the fiscal responses. That translated to slower and less sustained outcomes.

To expedite the impact of fiscal policies, it is imperative that Congress act now and begin to craft and enact stronger policy options before the next downturn occurs.

We’ve been working with some of the nation’s top economists to identify actionable policy proposals that include specific steps Congress can take to prepare. Chief among those proposals is to expand and strengthen automatic stabilizers, or policies that inject money into the economy in a downturn and withdraw stimulus when the economy is strong. By increasing demand in the economy when times are bad, such measures will play a critical role reducing the depth and duration of future downturns.

Everything from direct payments to individuals (in the form of tax rebates or direct checks) and aid to states to large-scale infrastructure projects and a more robust social safety net will all go a long way toward helping affected families while boosting spending.

Although we already have some automatic stabilizers in place, such as our tax system, the unemployment insurance system and other safety nets, they must be improved. Congress has taken discretionary actions in most recessions, creating models for additional automatic stabilizers that could be built into the system today. Taking a more proactive approach to fiscal policy would ensure a more effective response when consumer spending falls and companies reduce hiring. 

Although politics and time constraints played outsized roles in our nation’s response to the Great Recession, we learned what an even greater impact fiscal policy could have achieved. 

To mitigate the effects of the next recession, it is imperative that Congress begins crafting and enacting thoughtful fiscal policy responses now — before the window of opportunity closes.

Heather Boushey is the executive director of the Washington Center for Equitable Growth. Jay Shambaugh is the director of The Hamilton Project and a senior fellow in Economic Studies at the Brookings Institution.