The Self-Inflicted Recession

The Next Downturn Will Be Political—and Tough to Escape

The New York Stock Exchange building in New York, May 2010 Lucas Jackson / Reuters

The United States is in its 11th year of uninterrupted economic expansion, unemployment has hit a historic low, and growth, while decelerating, still hums along. Yet anxiety about the next recession seems to mount with each new tariff or tweet that President Donald Trump lobs at China as part of his trade war—and for good reason. The president’s policies are clearly hurting tradeable sectors of the U.S. economy, especially manufacturing, which must contend with the double whammy of U.S. tariffs on imported inputs and Chinese tariffs on exports of finished goods. U.S. producers of vehicles, electronics, and agricultural goods, among other things, are all scrambling to disentangle their supply chains from China. But doing so is costly and complicated, and many of them are suffering as a result.   

The trade war may not be enough to tip an otherwise healthy U.S. economy into recession. But if it does, the United States will be in a uniquely bad position to fight its way out again. The country is almost certain to enter the next downturn with historically high levels of public debt. That is worrying because governments in this position have historically failed to apply enough fiscal stimulus—that is, boost the economy through increased government spending as well as indirect measures like tax cuts—to counteract recessions. At the same time, short-term U.S. interest rates are already relatively low, meaning there will be limited room to cut them—the other main tool that governments have to battle downturns. 

Both problems—the trade war and the lack of preparedness to offset its potential downsides—share an important commonality: they are self-inflicted wounds, own-goals resulting from fateful policy mistakes that have been at best unchecked and at worst supported by a majority in the U.S. Congress. By definition, all recessions are market failures. But the next one may be a government failure as well. And a government that causes a recession is probably not a

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