The May jobs report indicated that the labor market is still solid, even if there are some concerning signs like the rise in unemployment among Black women and the sharp fall in labor force participation. Whatever problems the Trump administration's policies on tariffs, immigration, and funding science might be causing; to date they do not seem to have pushed us into a recession.
Nonetheless we do need to recognize that we always have a risk of a recession, if not now, then at some point in the future. This fact is worth mentioning because we need to consider this risk in the context of the budget bill passed by the House which the Senate is now considering.
If some version of the House bill passes without major changes, we are looking at annual deficits of close to $2 trillion or nearly 7.0 percent of GDP. If the economy falls into a recession, reduced tax collections and increased payouts for unemployment insurance and other programs will raise the deficit by another 1.5 to 2.0 percentage points of GDP. This means that we could be staring at annual deficits that are close to 9.0 percent of GDP, or more than $2.5 trillion.
The question to be concerned about is whether in that context Congress would be prepared to pass a stimulus to boost the economy out of recession, knowing that this will raise the deficit even further. Big stimulus packages were crucial for lifting the economy out of recession and getting the unemployment rate down in both 2008-09 and again in 2020-21.
We can hope that a future recession will not be as severe as these last two, but even a more typical recession can still push the unemployment rate above 6.0 percent, putting millions of people out of work. At least as important, when the labor market weakens, workers have less bargaining power. They are less able to quit jobs they don't like or that pay poorly.
Also, the economy can be very slow to rebound from even a mild recession without some additional stimulus. Following the 1990-91 recession we did not get back to the pre-recession level of unemployment until six and a half years. We had the crash of the housing bubble and another recession before getting the unemployment rate back down to levels close to what we saw before the 2001 recession. Automatic stabilizers like unemployment insurance are great for helping workers get through the recession and limited the downside, but by themselves they will not get us back to full employment.
As a result, they are less able to get wage gains that keep pace with inflation. This is especially the case for workers at the middle or bottom of the wage distribution, who are dependent on a tight labor market for the ability to secure real wage gains.
In posing the question about whether Congress would be willing to spend the money needed to boost the economy out of recession in a context where the deficit is already large, I am not asking about what is the right policy. I know what I would recommend, but Congress is not likely to be turning to me for advice on how to deal with the next recession. That is reason for asking now what Congress is likely to do when we get in this situation.
There is also an important point about the country's economic stability that really needs to be asked in the context of this budget bill. Many of us have been dismissive of the risks of large debts and deficits because the United States, as the world's strongest economy, did not have to fear investors fleeing from its debt and the dollar.
There is less basis to be confident about this point in the current political climate. The Trump administration is showing complete contempt for the building blocks of the science and technology that has made us the world's leading economy. The arbitrary cut off of billions of dollars in research funding, and the slashing of future budgets, will drastically slow the pipeline of innovations that have been a major driver of economic growth.
Attacking the university system and the inflow of foreign students will deprive the country of the sort of talented and hardworking individuals who have contributed enormously to making the United States a technological leader. On top of this, we now have an administration that boasts openly about awarding and denying massive government contracts for political purposes rather than merit.
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