Are you worried about your pension, job, or the economic viability of the country? You probably should be.
If you are teaching economics this fall, an article by Neil Irwin in the New York Times (What Will Cause the Next Recession? A Look at the 3 Most Likely Possibilities) can be the basis for organizing your entire curriculum with students conducting research and analyzing Trump economic policies and potential pitfalls. The article appeared in the Sunday Business section. Irwin has an M.B.A. from Columbia University, where he was a Knight-Bagehot Fellow in Economics and Business Journalism, and is a senior economics correspondent for The New York Times.
Key points raised by Irwin:
- “The economic expansion in the United States celebrated its ninth birthday last month. If it survives another year, it will be the longest on record.”
- The economy is going gangbusters right now, but eventually something will kill it.
- The last two recessions started with the popping of an asset bubble.
- Corporations have loaded up on debt over the last decade, spurred by low interest rates and the opportunity to increase returns for shareholders. The rise in debt loads overseas, especially in emerging markets, is even greater.
- The economic risks of the trade war with China and other trading partners and the risk that the Fed will “miscalibrate” interest rate policy.
- The seeds of the next downturn have almost certainly already been planted. The question is which of them will grow into a problem big enough to matter. Each one could make the others worse, meaning the next recession might have multiple causes.
I think the economic situation is even more precarious than Irwin describes.
- The cyclical economic pattern tends to be that the longer an economy expands, the steeper will be the decline that follows. Two examples are 1929 (Great Depression) and 2007 (Great Recession).
- Inflated stock market prices and over-investment in high-end urban real estate stimulated by zero interest rates are the next bubbles waiting to burst. Stock prices climbed to record highs even when the economy was stagnant as companies used borrowed money to bid up the value of their own stock. Major cities around the world have seen the mushrooming of up-scale high-rise housing and office buildings, many that remain empty, as the wealthy shifted money away from no-growth investments into supposedly safer areas.
- It is hard to predict what will prick an economic bubble, but something always does, and when it does, there is a cascading economic collapse. The Great Depression followed a sharp decline in stock market prices. A recession in Japan and a ruling against Microsoft in an anti-trust case probably bust the dot.com bubble in 2000. Exposure of unsupported mortgages and mortgage-based derivatives burst the housing bubble in 2008 and led to the Great Recession.
- Lower interest rates and tax cuts have been used in the past as tools to minimize a recession and to promote a recovery but they will not work this time because they have already been used to fuel the current economic growth.
- Working people and their families have minimal reserves to weather an economic downturn because wages, adjusted for inflation, have been stagnant since 2013 and have actually declined since 2016. An economic downturn accompanied by hardship would accelerate as people are unable to pay off personal debt or meet mortgage payments.
- Irwin does not discuss the global debt of countries which is also at astronomical levels. They borrowed at zero interest but must repay in U.S. dollars. Because of a strong U.S. dollar and the declining value of their currencies, they would have to repay their debts at a premium. In addition, because of the generally low interest rates since 2008, to secure marginally higher returns, corporate investors poured money into riskier loans on world bond markets. These bonds form a House of Cards waiting to collapse.
- Irwin does not discuss potential panic caused either by expanded war or a climate catastrophe. These are harder to predict but always are background threats to economic viability.
- My underlying concern is what I call a “Crisis of Over-Capacity,” a chronic problem with global capitalism. The world today has the ability to produce far more goods than people with money can possibly use. Companies and nations with state-directed economies have invested in productive capacity that they can never utilize. Essentially, those investments, fueled by zero-interest loans, are worthless, and these companies and national economies (China?) could fail. While the stock market bubble was the immediate cause of the Great Depression, an underlying cause was over-capacity and worthless investments. That round of over-capacity was “resolved” by the immense destruction of World War II.
Donald Trump takes personal credit for any uptick in an economic indicator. When the media or economists express concern, Trump shouts “fake news.” It is impossible to predict how he will react to a severe downturn, but we can be sure he will blame everyone else for his mismanagement of the economy.
Follow Alan Singer on Twitter: https://twitter.com/ReecesPieces8
