DANIEL VAUGHAN: The most obvious, policy-induced recession in history

Until now, we’ve talked about economic conditions or economists’ predictions. All indicators point towards a recession in the US economy, either now or in the future. The Biden administration has stridently denied this possibility, discounting it at every event. But it turns out the White House believes a recession is coming too.

Seven days ago, White House advisors fought on Fox News over recession odds. When Fox News journalists and anchors asked if the White House should pivot policy, they rejected such a premise. That interaction and others prompted Australian observers to say that the White House was apparently entitled to its own facts.

Here’s the problem: if you don’t think it’s going to rain soon, you will not spend your day shopping for umbrellas. According to the Washington Post, the Biden administration has started shopping for their recession umbrellas and ponchos.

The White House prepares for a recession.

In a piece titled, “As recession fears rise, Washington begins to weigh how to respond,” Post reporter Jeff Stein explains how the White House and Democrats in Congress have started thinking about recession. Summarizing the issue, he writes, “Washington policymakers are beginning to confront their limited options for easing the effects of a slowdown accompanied by high inflation – a confounding set of economic conditions that would present starkly different challenges from recent downturns.”

Why are they worried? Because they’ve led us into a high-inflation environment. The toolbox for dealing with a recession would worsen inflation because it requires more spending. Stein writes:

But Washington’s options for providing relief could be constrained by the effort to fight inflation. During the pandemic and the Great Recession, Washington flooded the economy with aid to the unemployed and other cash supports. If enacted now, such policies would risk pushing inflation higher. Meanwhile, with the Fed hiking interest rates faster than it has in decades as part of its battle against inflation, the new federal spending would require additional borrowing at a time when debt is becoming increasingly expensive.

It’s not just Congress and the White House being unable to spend more, though. The issue also exists at the Federal Reserve. To restart the economy during the 2008 Great Financial Crisis, the Fed engaged in Quantitative Easing. The result was pumping billions of dollars into the economy to loosen bank lending. It was the equivalent of an adrenaline shot directed to the heart of the economy.

The Federal Reserve’s catch-22.

Those adrenaline shots never ended, though. The Fed’s emergency quantitative easing measures continued until they started raising interest rates in March 2022. We’ve had an unending easy money train for the last 14 years because the Federal Reserve never understood how to turn off the spigot. Stein notes this problem:

The most difficult challenge in an inflationary recession may be that faced by the Federal Reserve. Typically, when downturns emerge, the central bank lowers interest rates to stimulate demand. But a recession that starts while inflation is still high would complicate that response. … Among the challenges facing the bank is that its balance sheet remains large from its response to covid, limiting the extent to which it can buy assets to prop up spending. Its other major tool — interest rates — would face similar constraints, because any cut to rates to juice economic demand would work against this year’s attempts to contain inflation.

It’s a catch-22. If they fix inflation, we’re headed into a recession, potentially a deep one. If they decide to avoid a recession, policymakers will make inflation worse. What do they choose? So far, they’re focusing on inflation.

Heading into a recession with no tools.

The White House has offered no policy support to aid the Fed in fighting inflation. The White House might as well be an observer of events because they refuse to enact supply-friendly policies that would help alleviate our issues. That was the playbook from Paul Volker and Ronald Reagan from 1980-1982 when they crushed inflation and rebooted the American economy.

Biden has rejected any such playbooks, so we’re stuck with the Federal Reserve fighting inflation with one policy tool: raising interest rates and tightening the monetary supply. Even with Reagan’s supply-side policies, the US economy descended into a double-dip recession. We’re doing none of that, and Biden is telling everyone a recession is a distant fear in public.

Meanwhile, the White House is bringing in experts. The Post reports, “At the White House, some officials recently had informal discussions about potential policy responses to the next recession and the lack of obvious available tools.” The Federal Reserve had done the same, as had members of Congress. Everyone is asking, “What do we do if it rains?”

This will go down as one of the most obvious policy-induced recessions in history. Everyone is ignoring the obvious signs, from the data to the people buying umbrellas for a rainy day. It’s the most obvious thing in the world, and we’re being told to ignore it.