History tells us that we are overdue for an economic recession.
Now, History with a capital “H” is not our infallible overlord. Its insights can be imprecise and confusing. Nevertheless, while there is much debate about what causes the business cycle, few deny its continued existence. The economy waxes. The economy wanes. And it does the latter — slip into recession, I mean — every five years or so, on average, since World War II.
The Great Recession technically began in late 2007 and ended in the summer of 2009. So here we are, at the close of 2015, having experienced a longer-than-average recovery from the country’s last downturn. The current recovery has been extraordinarily weak by historical standards, actually, which may help to explain why we haven’t slipped back into recession yet. Indeed, in some communities it feels like the Great Recession never ended.
Still, sooner rather than later, it is probable that America’s already anemic growth rate will slow to zero, or turn negative. The economic, fiscal, and political consequences will be significant, here in North Carolina and around the country.
In Washington, President Obama and the Congress have obviously done little to prepare for the shock. The federal government has run cash deficits of about 3 percent of GDP for each of the past two fiscal years, rather than paying down the debts accrued during the massive budget deficits of 2009 (9.8 percent of GDP), 2010 (8.7 percent), 2011 (8.5 percent), 2012 (6.8 percent), and 2013 (4.1 percent). The total federal debt held by the public is currently estimated at 75 percent of annual GDP, a level exceeded in American history only during the wartime years of the mid-1940s.
Most states aren’t permitted to run operating deficits, thank goodness. And some have gone beyond just balancing their annual budgets to prepare for the next fiscal storm, by paying down existing debts and building up their savings accounts.
North Carolina has done both. State government has paid off a multi-billion-dollar debt to the federal government for unemployment insurance and reduced its total long-term debt — including state bonds and other obligations — from $7.5 billion in FY 2012-13 to $6.9 billion in FY 2014-15. As for cash, the state’s main savings account contains $1.1 billion. There is also a $186 million Medicaid reserve plus a current surplus of General Fund revenue over spending of $572 million (including cash rolled over from last year).
Depending on how you measure it, in other words, state government has ready reserves equal to between 6 percent to 8 percent of its total annual budget. Many local governments across North Carolina have also paid off debts and built up reserves to the target minimum of 8 percent or above.
If even a mild recession were to develop during the coming year, businesses would lose sales and workers would lose jobs. Government revenues would fall short of projections and government expenditures would shoot up for such programs as Medicaid, unemployment insurance, and college subsidies. The nation’s leaders would look even more feckless than they do now. The nation’s voters, already frustrated by misgovernment in Washington, would erupt in fury.
North Carolina would weather that storm better than most states, perhaps, but it would be a storm nonetheless. As I have argued many times, it is impossible to wall off the state’s economy from the national one. Federal fiscal and monetary policies predominate. International trends are increasingly decisive. If the national economy went south, North Carolina’s jobless rate would soar, as well. Our income growth, although currently tops in the Southeast, would stop cold. Our electorate would also go from seething to furious. The electoral results could be just as dramatic.
I have no idea whether such a scenario will come to pass in 2016. But it certainly could, and history suggests it may even be better than a 50-50 proposition. This is one reason why I don’t have a confident prediction about who will win the 2016 elections for president, governor, Congress, and other offices. A recession could change everything.
John Locke Foundation chairman John Hood is the author of Catalyst: Jim Martin and the Rise of North Carolina Republicans.