Warren warns of economic trouble ahead. Is she right?
But even economists who like her prescription are skeptical about her diagnosis.
The Democratic presidential candidate published an online essay this week saying that a rise in consumer and corporate debt is imperiling the longest expansion in
Her prediction could help her win over primary voters by tapping into anxieties about middle-class economic stability despite broad gains over the past decade. But Warren's opponents could seize on her warning to undermine her credibility should a crash fail to materialize before next year's election, and some economists sympathetic to her agenda say that — for the moment — her conclusion of a looming recession is overblown.
Warren rooted her concerns about the economy in a
"I don't see a huge bubble on the other side of household debt that is going to savage people's assets," said
Recessions are notoriously difficult to forecast. Warren first warned in 2003 about subprime mortgage lending, yet it was roughly five years later when the
"I went through this back in the years before the 2008 crash, and no one wanted to listen. So, here we are again," Warren said in a brief interview on
At this juncture, families can afford their debt because of low interest rates, and that minimizes the risks to the economy. Households are devoting less than 10% of their disposable income to debt service, down from roughly 13% in 2008, according to the Fed. This doesn't mean that Warren is wrong to conclude that families are burdened by student debt and child care costs, just that data suggests the debt produced by those expenses is unlikely to cause a downturn. Part of Warren's forecast hinges on a spike in interest rates that seems unlikely as most benchmark rates have declined since November.
Warren has assembled a litany of proposals aimed at bringing down household debt, through student loan forgiveness and affordable child care availability as well as a housing plan designed to lower rent costs. She touted her policy agenda — which has propelled her higher in the polls — as ways to avert her predicted crash.
Warren's warning of a downturn is a somewhat unique maneuver for a presidential candidate. Past
Warren also warned this week that an increase in corporate borrowing could crush the economy.
But
"The idea that you're going to have this massive cascade of defaults — it's very hard to see," Baker said.
While the economy may not be entering into a recession, many economic forecasters say growth is still slowing because of global and demographic pressures. Evidence of slowing growth has already caused Fed officials to signal that they plan to cut interest rates at their meeting next week, a form of insurance meant to sustain growth. Trump has repeatedly called for the Fed to make even steeper cuts to improve his economic track record.
But he interpreted Warren's essay as a broader warning about how Trump's efforts to support growth by curbing regulations and attacking government institutions might eventually be destructive.
"It's hard to say what a debt-driven problem would look like until it happens," Madowitz said. "I think it's also reasonable to elevate concern at the moment given how politicized Trump has made apolitical economic institutions like the Fed. That's not a free lunch. It creates real risks, so it's more important than usual to think about what happens if things go bump in the night."
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