SAN DIEGO — The mood among economic forecasters gathered for their annual meeting last weekend was dark. They warned each other about President Trump’s trade war, about government budget deficits, and, repeatedly, about the inability of central banks to fully combat another recession should one sweep the globe anytime soon.
Among the thousands of economists gathered for the profession’s annual meeting, there was little celebration of Mr. Trump’s economic policies, even though unemployment is at a 50-year low, wages are rising and the economy is experiencing its longest expansion on record.
Underlying their sense of foreboding was a widespread sentiment that the current expansion is built on a potentially shaky combination of high deficits and low interest rates — and when it ends, as it is bound to do eventually, it could do so painfully.
Those concerns were echoed on Wednesday by economists at the World Bank, who called the worldwide expansion “fragile” in their latest “Global Economic Prospects” report. The report forecasts a slight uptick in growth in 2020 after a sluggish year bogged down by trade tensions and weak investment. But it said “downside risks predominate,” including the potential escalation of trade fights, sharp slowdowns in the United States and other wealthy countries and financial disruptions in emerging markets like China and India.
“The materialization of these risks would test the ability of policymakers to respond effectively to negative events,” the report by the bank, which is led by David Malpass, a former Trump administration official, stated.
The bank’s warnings echoed the fears expressed by many economists in San Diego, both in small research-paper presentations and in ballroom discussions of the clouds on the global economic horizon.
Trade tensions have cooled at least temporarily between the United States and China, but they are escalating across the Atlantic as European nations begin to impose new taxes on technology companies that are largely based in the United States. Mr. Trump has already threatened tariffs on French goods in retaliation for a tech tax and many analysts worry that separate trade talks between the United States and the European Union could end in a tariff war. Manufacturing is mired in a global slowdown, with the sector contracting in the United States. At a packed room in San Diego last week, researchers presented estimates that tariffs imposed by the United States and China — which remain in place despite the recent truce in trade talks — have reduced wages for workers in both countries already.
The American economy appears to have grown by a little more than 2 percent in 2019, though the statistics are not yet fully compiled. That is likely to be the slowest rate of Mr. Trump’s presidency, and well below the growth Mr. Trump promised his economic and regulatory policies would produce.
The World Bank estimates growth in the United States will slow to 1.8 percent this year and will slip to 1.7 percent next year. That would be nearly the lowest annual rate since the last recession ended in mid-2009. The bank said the forecast reflects fading stimulus from Mr. Trump’s signature 2017 tax cuts and from government spending increases he has signed into law.
The cuts, and to a lesser degree the additional spending, have helped push the federal budget deficit to nearly $1 trillion a year, even as unemployment lingers near a half-century low. Fiscal deficits remain high in several other wealthy nations, particularly given how far into an economic expansion those countries are.
Interest rates have been dropping across advanced economies, thanks to long-running trends like population aging. That leaves central banks — which usually stoke growth by making borrowing cheaper — with far less conventional power in a recession.
Economists have been “going through the stages of grief” as they accept that such low rates are likely to prevail, John C. Williams, who leads the Federal Reserve Bank of New York, said at the weekend’s gathering.
After the 2007 to 2009 recession, economists speculated that the conditions that plagued developed nations — low growth, low inflation and low interest rates — would be short-lived. Scars were still healing after the worst downturn since the Great Depression, they thought.
That view has slowly been replaced by a more pessimistic one, as the field acknowledged that economic gains are likely to remain muted across advanced countries. In 2019, the Fed had to step back from plans to hike rates further and cut borrowing costs instead, leaving their policy rate at less than half of its 2007 level and underlining just how diminished the new normal looks.
“It’s clear that more was, and still is, going on,” said Janet L. Yellen, the former Federal Reserve Chair, speaking at the event. “Although monetary policy has a meaningful role to play in addressing future downturns, it is unlikely to be sufficient in years ahead for several reasons.”
Ms. Yellen emphasized that government spending would need to play a larger role in combating future downturns, calling for stronger automatic stabilizers, which increase government spending when the economy weakens and tax receipts fall. There is no imminent sign that Congress is ready to enact such policies, but hope for government action was a constant refrain in San Diego.
Sluggish growth in worker productivity has held back the economy, Valerie A. Ramey, an economist at the University of California, San Diego, said. She called on lawmakers to increase spending on infrastructure and research and development in order to spur a productivity acceleration.
Ms. Yellen, who assumed the presidency of the American Economic Association at the meeting, oversaw its program of panels and presentations, assembling a lineup that included several papers assessing damage from tariffs and the trade war. She said she and her colleagues rejected four proposals for every five that were submitted, choosing some that showed the benefits to advanced economies of attracting immigrants, particularly highly skilled ones, in stark contrast to Mr. Trump’s hard line on immigration to the United States.
Few of the papers presented assessed Mr. Trump’s tax law, and none of them argued, as Mr. Trump’s advisers did at similar conferences in recent years, that the tax cuts were supercharging investment.
In an interview on Saturday morning, over a buffet breakfast in a hotel restaurant with a view of the swimming pool, Ms. Yellen said that she had a reason for picking the sessions she did, calling low interest rates the macroeconomic “issue of our times.” She said she shared other economists’ concerns about trade and economic policy in the current environment.
“You do see a number of sessions in the program about this,” Ms. Yellen said. “I organized the program, and I think it’s not an accident you’re seeing it. I think it’s very important.”
Ben S. Bernanke, who was Fed Chair during the 2007-2009 recession, told the conference that a juiced-up monetary policy arsenal should be enough to combat the next downturn.
But “on one point we can be certain: The old methods won’t do,” he said. The Fed will need to use bond-buying and other tricks to supplement rate cuts.
And even economists’ most hopeful takes had a gray lining. Mr. Bernanke’s relative optimism hinged on the idea that interest rates would not continue to fall. Ms. Yellen’s hope for the future turned on greater activism from politicians to fight recessions.
If those things do not happen? The United States could look more like Japan, a nation where inflation has slipped much lower, rates are rock bottom and the budget deficit much larger.
In good times, said Adam S. Posen, president of the Peterson Institute for International Economics, that may not be the worst outcome. In a recession, though, the nation’s example may offer bad news. In the years since the financial crisis, Japan has rolled out an extremely active economic policy — both monetary and fiscal — to move its inflation rate back up, and it has succeeded only in averting outright price declines.
“It is wise to be cautious, and not assume that they will be as effective as we think,” Mr. Posen said of monetary policies. “We need to think about different ways of doing fiscal-monetary coordination.”
And while some economists, such as Harvard’s Lawrence H. Summers, extolled high fiscal deficits as a necessary weapon against slowdown or recession, others, such as Harvard’s N. Gregory Mankiw and Kenneth Rogoff and Stanford’s Michael J. Boskin, presented research warning that high levels of government debt could crimp growth going forward.
Those papers echoed warnings that those economists issued earlier in the expansion that did not come to pass. But they argued that the large amounts of federal debt that has accumulated in the meantime poses a threat. In other words, the economists warned, it is only a matter of time.
Source: NYT > Business
