It must be tough to be a Millennial. Just as they started becoming aware of politics and the bigger picture of life, the Great Recession hit. Suddenly, a wet blanket of pessimism fell over their lives and hurled them into long lines of unemployment. For good reasons, the cost of college suddenly seemed ridiculous compared to what jobs you might be able to get with a degree.
Over the last year or two things have started to look a bit better, just enough to allow our ambitious young to climb out of the dungeon of pessimism and negativity. Bravely they dodge doomsday professors like yours truly who tell them how much Millennials are going to have to spend of their lifetime income just to pay interest on the federal debt…
Just as the future looks a bit brighter – it is time for the next recession to hit.
That’s right. Barely have we emerged from the worst macroeconomic experience since the Great Depression before it is time for another downturn. We will see the first clear signs of it no later than a year from now, just in time for the November 2016 election.
And just in time for another class of college graduates to hit the job market.
But why broadcast this bad news now?
A very good question, indeed. This news is important right now because Congress just got back from its vacation. They have two very important economic items on their agenda: the debt ceiling and the 2016 budget.
There is a very real risk that Congress will raise the debt ceiling without much fanfare or strings attached. If that happens, it opens for yet more frivolous federal borrowing – and thereby an even higher pile of debt for future taxpayers to pay interest on.
There is also a very real risk that Congress will pass a budget where, for the first time, Uncle Sam spends more than $4 trillion in one year. With more credit to spend from, and with more to spend that credit on, it is a safe bet that Congress will continue its fiscal business as usual.
That is a bad idea on any day. Paying regular bills on borrowed money is as irresponsible when government does it as when the rest of us do it.
But for two reasons the situation is even worse now.
First, in last week’s column I pointed to a troubling long-term trend in the U.S. economy. Since the 1960s our average annual GDP growth has fallen by half, from a bit over four percent to just about two percent. This means that the economy is not very well prepared for a new recession: the more slowly the economy grows in “good” times, the deeper it will fall into the next recession. During the Bush Jr. presidency our average annual GDP growth was 1.8 percent; even if the next recession probably will not repeat the last one, that number gives a hint of just how bad things can get.
By contrast, right before the Millennium recession in 2001 our GDP was expanding at about four percent. Consequently, the recession was short and shallow.
Secondly, our federal debt is now greater than GDP. But it gets worse. Suppose the White House’s own Office of Management and Budget correctly forecasts the federal deficits for the next few years. Suppose also that GDP continues to grow at less than 2.8 percent per year (a rather safe bet, unfortunately).
If so, the debt will start growing faster than GDP during next year. That will make global investors very nervous, because it means that the ability of American taxpayers to just keep up with interest on the debt will slowly weaken over time.
And now for the final punch: when the next recession hits, GDP growth slows down again, and may even fall into negative-growth territory. The gap between the ability of taxpayers to fund government and the growth rate in federal government spending will widen rapidly.
It is hard to imagine a more perfect debt-crisis storm. When it makes landfall, it will shock-raise interest rates to levels that will send waves of panic through mortgaged homes and families with high credit card balances. It will bring business investments to a halt and send millions of Americans back into unemployment.
All that on top of a regular recession.
There is only one way to avoid this macroeconomic hurricane, and that is for Congress to:
- Hold firm on the debt ceiling;
- Refuse spending increases in non-essential government programs;
- Refuse tax cuts; and
- Pass a resolution in favor of a well-designed balanced budget amendment.
Taken together, these four actions by Congress would have both a direct fiscal impact on the budget and an indirect effect of boosting investors’ confidence in the U.S. government. This package would signal that the era of runaway borrowing is coming to an end.
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