The recent gyrations in the stock market and the uncertainties surrounding American trade policies with China and other parts of the world have raised the question of when the next recession will inevitably follow the current economic recovery from the 2008-9 financial crisis. In the face of a future economic downturn, some economic policy analysts are already making the case for central banks to use negative interest rates to dampen and shorten the impact of any economy-wide decline in output and employment that may be ahead.
Not surprisingly, much of the speculation concerning the power of government to mitigate, if not prevent, an economic downturn surrounds the usual debates over the potentials of monetary and fiscal policy. Harvard University economist Kenneth Rogoff, in a recent article, “Central Bankers’ Fiscal Constraints” (January 4, 2019), downplays the efficacy of taxing and spending tools, and highlights, instead, the continuing crucial role of monetary policy and interest rate manipulation.
The Limits on Implementing Fiscal Policy
With nominal interest rates in the United States and some other places around the world still at historical lows (even in the face of recent Federal Reserve rate increases), Rogoff points out that many central bankers hope that more direct fiscal policy will carry the weight of countercyclical activities in the face of any serious recession that may come.
But he points out that in the American system of government, there is little immediate flexibility to enable agreement upon and introduction of tax cuts or spending increases that might be effective in holding back the recessionary trends in a timely fashion. Fiscal changes must work their way through and be passed by Congress, then signed by the president, and finally implemented by various government agencies. The entire process normally can take a long time, during which a recession could get increasingly worse.
Besides, the political and ideological conflicts and controversies among Democrats and Republicans have become even more divisive in recent years. Thus, Rogoff says, any agreement about who should benefit from any tax cuts and on what programs increased government spending should be directed would not be easily or quickly resolved. All this would prevent fiscal policy from taking the lead in fighting the next recession.