Catherine Rampell: Biden can convince us recession isn't 'inevitable' - Insurance News | InsuranceNewsNet

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June 27, 2022 Washington Wire
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Catherine Rampell: Biden can convince us recession isn’t ‘inevitable’

Herald-Dispatch, The (Huntington, WV)

Recession is “not inevitable.”

So declares the Biden administration, using careful phrasing repeated over and over by the president and senior officials.

They’re technically right, at least in the short term. But they should still be doing much more to stave off the growing risk of recession and to prepare for its likely fallout.

Recent surveys of economists, executives and U.S. consumers show mounting pessimism and growing expectations of recession in the next year or so.

These worries aren’t appearing out of nowhere.

Inflation measures have come in much hotter than forecast even a few months ago, in part because of unexpected shocks — including war, Chinese factory lockdowns and U.S. outbreaks of the avian flu. The Federal Reserve will need to raise interest rates more aggressively to get price growth under control. In so doing, it might accidentally push the economy into a recession, as has happened before when the Fed has tightened financial conditions to tame inflation.

It’s challenging to administer just enough medicine to cure the patient, yet not enough to kill it.

On top of the very real risks that have darkened the economic outlook lately, the Biden administration is probably also worried that all this talk of recession can become a self-fulfilling prophecy.

If consumers and businesses become increasingly gloomy, they might act in ways that reflect that pessimism: cutting back on spending, laying off workers, delaying investments, canceling orders. Then they see everyone else cutting back, grow more nervous and retreat further.

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

This is why White House officials, and to some extent Fed officials, are trying to project cautious optimism. They’re emphasizing the good things in the economy, such as solid job growth, and talking up the economy’s resilience.

Striking the right tone in this pep talk is tricky. If policymakers are excessively cheerful, they sound tone-deaf to people’s suffering. That can hurt them politically. Worse, if they play down the risks haunting the economy, or appear unrealistically optimistic, they can sound untrustworthy. This can hinder their ability to intervene effectively later on. Credibility matters.

All these considerations are likely why the administration settled on saying recession is “not inevitable.” It allows them to acknowledge people’s pain and fears, while providing some room for hope. It’s probably the least-bad framing of the problem possible.

But least-bad rhetoric is not enough. What matters more is what they do.

The administration must use whatever tools available to reduce pricing pressures so that the Fed doesn’t have to act quite as aggressively — so that everything doesn’t come down to jacking up interest rates. The administration could, for instance, lift trade and shipping restrictions, which could modestly reduce costs for consumers. Or expedite legal immigration, to alleviate labor shortages.

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

Bringing down gas prices, for example, might involve insuring energy producers against downside risks — that is, making it less likely that fossil-fuel companies would suffer from smaller profits or even losses, so that taking on expensive new investments to ramp up output looks less risky to them. How does the administration finagle that, while publicly blasting these same companies for obscene profits and insufficient patriotism?

Meanwhile, because recession already looks more likely, the administration and Congress must do more to prepare for that unwanted outcome — whether it arrives in a few months or remains years away.

That means, for example, modernizing the decrepit unemployment insurance IT system, so that the next time there’s a mass dislocation of workers, federal and state governments can better target assistance. The Brookings Institution recently released a huge volume of these and other lessons learned from the government’s response to the pandemic recession. It’s a useful blueprint for fixes that the president and Congress should be undertaking, now.

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

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