In the face of rising inflation, the Federal Reserve is trying to cool down the economy, raising interest rates by 0.75 percentage point in June, the biggest increase since 1994. Jerome Powell, the chair of the Federal Reserve, has vowed to try to engineer a “soft landing” — in which demand drops, bringing prices down, without tipping the economy into a recession and throwing hundreds of thousands of Americans out of their jobs.
But the Federal Reserve doesn’t have a good track record on pulling off that particular magic trick. Almost every other attempt since the 1950s to reduce inflation by tightening monetary policy has ended in an economic downturn. In congressional testimony late last month, Mr. Powell admitted that a recession was “certainly a possibility.”
“A slowing economy,” Wendy Edelberg, the director of the Hamilton Project at the Brookings Institution, told me, “is always, in my mind, at risk of going into a recession. It’s just hard for an economy to slow smoothly and without pain.”
Even if the Fed pulls it off, there are plenty of other economic risks that threaten to send us into a recession. The surge in spending that fueled rapid economic growth after the initial pandemic lockdowns stems from pent-up demand created by the combination of Americans staying home and receiving financial assistance from the federal government. But both of those engines are slowing, and with them consumer spending is likely to slow, too — as discretionary spending already has in response to inflation. Not to mention the risks posed by the war in Ukraine and ongoing supply chain snarls.
Given everything that is happening, it is quite probable, if not assured, that the country is headed for an economic downturn in the near future. That makes now the time to prepare so that as few Americans as possible suffer. And there are plenty of things lawmakers can do if they are able to find the political will to act.
Perhaps the program most obviously in need of changes is unemployment insurance. Congress acted to shore up the program in the early days of the pandemic, expanding benefit eligibility to people typically left out, like tipped restaurant workers and gig workers, adding weeks of benefits and increasing them by $600 a week. Without those emergency actions, however, many Americans would most likely have gotten very little pay for a paltry number of weeks — or been unable to qualify at all.
A big problem with unemployment is that it’s not truly one cohesive program, but 53 different ones that vary state to state and territory to territory. “Really your economic security depends on where you live,” Rebecca Dixon, the executive director of the National Employment Law Project, said. States set their own rules for who qualifies, how big benefits are and how long they last. In Mississippi, for example, maximum benefits are $235 a week, compared with $974 in Massachusetts. Congress should set a robust floor for all of those rules. All states used to offer at least 26 weeks of compensation; that could be mandated and even increased. Benefits have to grow as wages do, or they will fail to offer enough of a stopgap to keep workers from slipping into destitution after losing their jobs.
It is crucial to put changes like these in place before a recession so that the program can shield us from financial calamity. But people lose jobs all the time even in a dynamic economy, and they need a baseline of support to turn to until they get back on their feet. “We make temporary stints of unemployment personal financial crises for families in ways that other countries really don’t, and it hurts a lot of people for no real benefit,” said Sharon Parrott, president of the Center on Budget and Policy Priorities.
The federal government also has to step in and fund the system better. Right now it’s up to states to raise taxes enough on employers in good times to ensure an adequate fund in bad times, but that’s often a hard sell. “It pits employers and their taxes against working people,” Ms. Dixon said. And, of course, as Ms. Parrott noted, “Employers like low taxes.” Lawmakers often respond by lowering taxes and failing to refresh unemployment funds ahead of the next downturn.
“That makes them more reluctant to be more generous when the economy needs the unemployment insurance system to be more generous,” Dr. Edelberg said. The federal government backstops the program, but states have to pay the money back, often leading them to choose between raising taxes and cutting benefits, and many have gone with the latter. If the federal government took over more responsibility for the funding, the incentives would align toward a system adequate enough to support people under all conditions.
More federal money could also help states upgrade their outdated technology systems, which kept crashing at the start of the pandemic. Even changes as small as ensuring that the application sites work on mobile phones or having ways for workers to reset their pins without receiving a new one in the mail could make the system more accessible, especially when thousands of people need to call on it at once.
“We really just need to sit down and take a look and fix it,” Ms. Dixon said of the unemployment system. “It’s not working.”
Another emergency action Congress took early in the pandemic was expanding eligibility for tax credits to make the health insurance that is available on the Affordable Care Act exchanges more affordable. Medicaid and the Children’s Health Insurance Program also stopped kicking people off for fluctuations in income and personal circumstances, contributing to a 23 percent increase in enrollment in both after two years of declines. If those efforts were extended and the government ensured that people could get Medicaid in states that have refused to expand it, fewer people would be at risk of losing access to health care when economic disaster strikes. “You wouldn’t have to come in and try to do quite so much on an emergency basis,” Ms. Parrott said. “You would have an automatic way to shift people into different kinds of coverage during a recession.”
And then there are income supports like the child tax credit, which was expanded last year to reach all families up to a certain income threshold and send monthly payments based on their children’s ages. The payments helped reduce poverty and financial instability. They expired at the end of last year, but if they were extended permanently, it would mean that “when a recession hits and many more people have no income, the full credit is available to them,” Ms. Parrott said, keeping their families from falling into poverty.
Better still, if it’s an established program that has already enrolled those who are eligible, that makes it easier for Congress to send more money to them in a recession. “It provides a stable and predictable source of income in good times or bad,” said Hilary Hoynes, a professor of economics at the University of California, Berkeley. “It just provides a floor.”
One important overarching change would be to mandate that some of these programs respond automatically to changing economic conditions. Turning them into so-called automatic stabilizers, or benefits that kick into higher gear when the economy flatlines without Congress taking any action, would ensure that a robust safety net is available to catch everyone no matter what the overarching political situation is.
Food stamps already work this way, to some extent. The Supplemental Nutrition Assistance Program is an entitlement, which means that as more people experience financial hardship and become eligible, the federal government steps up its spending to make sure they can get benefits. “As your earnings drop down, you automatically gain eligibility, or your benefit increases,” Dr. Hoynes said. Unlike, say, the rigidly block-granted Temporary Assistance for Needy Families cash assistance program, SNAP increases quickly and robustly in a downturn.
Still, in both the Great Recession and the pandemic, Congress had to act to increase food stamps to battle such extreme income losses. That could instead be mandated: As the unemployment rate rises, SNAP benefits could automatically increase by certain percentage points. Eligibility restrictions could also automatically loosen to keep families who have suddenly lost income fed while injecting quick stimulus into the economy.
Unemployment insurance could automatically add weeks as unemployment shoots up, given that people will be more likely to be out of work longer in a weak economy. The program already has extended benefits that are meant to be triggered by unemployment reaching certain levels in each state, but those levels are set so high that they rarely, if ever, are met. Rental assistance similar to what Congress offered last year could receive an influx of funding when tenants face mass eviction. More federal funding for Temporary Assistance for Needy Families could automatically be sent to states so that they could help more people. Federal aid to state and local governments could flow based on decreases in taxable income that drain their coffers.
The important thing is to do these things now, not in the middle of an epic economic meltdown. “It is very, very hard to stand up a program in the middle of a crisis,” Dr. Edelberg noted. During the pandemic, rental assistance took months to actually reach tenants as states scrambled to create portals and programs. The Paycheck Protection Program botched many parts of its rollout. “Putting this infrastructure in place ahead of time is critical,” she said.
An adequate response to financial hardship shouldn’t depend on the political alignment of Congress and the White House, but right now it does. Republicans may have been motivated to back the initial rounds of Covid relief because they controlled the Senate and White House and risked shouldering the blame for a poor response. The nature of the crisis was also so widespread and so urgent that it prompted lawmakers to act quickly. Once Republicans were out of power in 2021, however, they refused to vote for any further stimulus. “My worry is that with Congress being so divided, in the next recession they may not be able to agree,” Ms. Dixon said.
The barriers standing in the way of congressional action are not hard to see, however. Once a crisis passes, it’s difficult to get lawmakers to focus their limited attention on fixing systems to be ready for the next one. All of the early pandemic enhancements to unemployment insurance, for example, have expired, and reforming the system didn’t even make it into the ultimately doomed Build Back Better package. Lawmakers may enjoy the opportunity to swoop in during hard times and vote to make changes as a way to show they’re being responsive, an opportunity that would diminish if our systems were set up to respond on their own.
“Congress wants to be seen as saving the day,” Ms. Dixon said. “But increasingly we run the risk of them not being able to agree on what that looks like, and working people are the ones who will suffer.”
Bryce Covert (@brycecovert) is a journalist who focuses on the economy, with an emphasis on policies that affect workers and families.
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