Michael Bennet's Recession Plan: Federal Reserve and Automatic Stabilizers

The presidential campaign of Michael Bennet did not set fire to the world. But with a new plan released Wednesday, he became the first candidate to tackle a critically important topic that had not been addressed in the campaign so far: how to prevent and recover from the next recession .

Dozens of different aspects of public policy affect the economic well-being of average citizens. But in practice, the influence of the business cycle is quite overwhelming. The presidency of George W. Bush was an economic disaster for most Americans because it started with a small recession, had a fairly weak recovery in the abdomen, and then ended in an economic crisis. . giant recession.

Under President Trump, on the other hand, so far, the typical family has benefited from an increase in salaries and incomes and is in a better material situation than under President Obama – not because of political initiatives Trump has been doing business, but simply because of slowness, The sustained recovery that began during the second year of Obama has been successful.

Beyond dollars and cents, the state of the labor market has profound implications for everything from criminal justice to racial equity through the performance of the higher education system. However, even though politicians show interest in all of these topics, few have directly addressed the fundamental question of how to use fiscal and monetary policies to create the general economic conditions in which progress could be made. to be realized.

Bennet's program is not surprising from a conceptual point of view, but it is based on cutting-edge thinking about what is likely to work. And this highlights a subject that tends to make or break presidencies without attracting the attention it deserves in political debates.

Automatic stabilizers to cure recessions

Fiscal stimulus – the measures taken by governments to increase the budget deficit and increase the flow of money into the economy – is a proven and proven way to stabilize the economy.

But the Congress's policy of doing the job is at best delicate.

As a result, one of the most effective tools to combat the recession is what is known in practice as automatic fiscal stabilizers – stimulus programs automatically put online when the economy collapses.

When the labor market falters, for example, more people become eligible for SNAP benefits. This has humanitarian and child protection benefits, but also prevents the job market, weaker, from creating secondary and tertiary slowdowns in the grocery and the l & # 39; s sectors. 39; agriculture. Similarly, social security benefits continue to affect retirees, even though the payroll tax revenues that pay them tend to collapse. If the program were structured to limit expenditures based on incoming incomes, job losses would reduce seniors' expenditures, leading to more job losses and more.

Bennet wants to extend the fiscal stabilizers considerably in several ways:

• Increase the benefits of SNAP by 15% during a recession and automatically allow the federal government to assume a larger share of unemployment insurance when a state's unemployment rate is high.
• Make Medicaid and CHIP federal spending more generous during a recession so that state governments do not have to respond to recessions by firing teachers and increasing college tuition to fund the safety net of health care.
• Create an "Accelerated Infrastructure Fund" – a special cash reserve that states and local governments could use in the event of an economic downturn if they planned projects in advance.

But the most interesting idea of ​​the Bennet platform is perhaps the simplest: approve the proposal of the Federal Reserve economist Claudia Sahm to defeat everyone when the unemployment rate rises.

Traditionally, policymakers have been concerned that this type of program is not well targeted – by sending much of the change to relatively affluent households that do not necessarily need the money and may not even spend it. The experience of the Great Recession, however, has convinced many people that the issue of technically optimal targeting is less important than solving the problem of finding quick, feasible and politically viable ways to stimulate the economy.

Sending checks to everyone is a powerful stimulant for the economy. If you need more help, it is very easy to send larger checks. And the fact that everyone getting a check means that you could potentially avoid some of the political pitfalls of stimulus programs that create disputes about who "deserves" help.

The other side of the coin is that it is difficult to have an effective economic recovery without a Federal Solidarity Reserve.

A central bank that gives priority to workers

The basic work of the Federal Reserve – trying to ensure that neither unemployment nor inflation gets too high – is essentially a kind of balance.

But over the last generation, the unemployment rate has often far exceeded what the government's economists see as the sustainable level and has rarely been lower. During the same period, high inflation has never been a problem. In itself, it's a good thing. But in the context, this is a sign that monetary policy is unbalanced – it is systematically missing its target in one direction rather than another.

Bennet acknowledges it and says "we need a monetary policy that prioritizes the typical American worker" by being more willing to take risks on the inflation side in order to take full advantage of full employment.

The president does not control monetary policy directly, but Bennet is strongly committed to appointing members of the Federal Reserve Board who share this direction (which the Obama administration has done appropriately) and calls for the creation of a national commission to assess whether formal changes are needed. be done within the framework of the Fed to achieve this goal.

In fact, I guess it takes relatively little formal change here. The Fed's professional staff knows how to fight unemployment more effectively, but for almost ten years, it has felt that neither the people appointed to the presidency on the board of directors, nor the elected officials of the country did not really want that to happen. Trump has changed this perception to a certain extent, and a successor who thinks clearly and forcefully about it could make a big difference by simply making smart appointments.

A debate that Democrats should have

A refreshing suggestion about Bennet's proposal is that the appointment of Federal Reserve Board members is a real power of the President. And while presidential appointments to the Fed may be stalled in the Senate, the president still has a lot of deference for this type of appointments. A White House that is committed to finding skilled falcons and full employment will be able to be part of it, but one that does not care about that will not do it.

Fiscal policy proposals are more stringent, but at least we can imagine that it is subject to bipartite legislation, Bennet's safety net concepts being balanced by more favorable corporate tax measures. .

More specifically, the management of macroeconomic conditions is an essential non-discretionary element of each president's work. And precisely because disagreements on fiscal stimulus are not The main axis of partisan political conflict in the United States is a subject on which the ruling Democrats disagree on a plausible principle.

In short, this is the kind of thing that should be part of the primary debate of 2020. Bennet threw the glove in offering a plan, and that's a good plan. The other contenders should join him.