Submitted by Joseph Crason, Former Director of Global Economic Research, Alliance Bernstein
Is it possible for a policy recession to occur when successive rounds of policy-stimulus have worked to extend the economic cycle and the policy-fuel runs out or cannot be provided in the same scale? We may soon find out.
The current stance of monetary and fiscal policies is at odds with the economic cycle. The economic cycle is the longest in the post war period, running now for 123 months. Long cycles, with dwindling amounts of resources as is evident with the jobless rate at 3.5% the lowest in 50 years, have been associated with no policy support.
For example, there were two other economic cycles (1960s and 1990s) that also ran well over 100 months in length and at the end of both cycles the US budget was in surplus. Yet, nowadays the federal budget is not only in deficit, but the scale of the deficit is increasing.
The Congressional Budget Office estimated that the budget deficit for fiscal year 2019, which ended on September 30th, totaled $984 billion, or 4.7% of GDP. The budget deficit has increased by over $300 billion over the past two years, largely due to the 2017 tax cut. Companies used most of their portion of the tax cut to buy back their own stock, lifting equity prices in the process.
The monetary side of the policy apparatus is also misaligned when compared to long cycles. At the