President Donald Trump speaks at a fundraiser in Des Moines, Iowa, June 11, 2019.
Kevin Lamarque | Reuters
Wall Street can’t stop talking about recession fears. The U.S. and China are locked in a trade standoff, corporate earnings growth expectations are at multiyear lows, and the shape of the yield curve has data-focused investors feeling queasy. Bank of America told its clients last month that it sees a 1-in-3 chance of a recession over the next 12 months.
Any such downturn would pose a problem for President Donald Trump, who has made the otherwise strong economy his central argument for reelection next year. Unemployment rates are low and major market indexes have surged: The Dow Jones Industrial Average, for instance, is up more than 30% since Trump took office.
But as signs of economic deceleration mount — and the effects of the Trump administration’s deregulatory agenda and the 2017 GOP tax cut law fade — the president may want to refer to the actions of prior administrations in the modern era as a guide to navigating a tougher economy.
The worst of times
There have been 11 official recessions and 13 presidents since the end of World War II, with each downturn presenting households and investors with a unique set of headaches. Here are some examples.
The recessions of the 1970s tended to center around a systemic and protracted spike in inflation as well as an uptick in unemployment.
The 1973 oil crisis, in which OPEC declared an oil embargo and sent crude prices soaring, helped trigger the 16-month contraction that started during President Richard Nixon’s second term. It bled into President Gerald Ford’s tenure, which began when Nixon resigned in disgrace in 1974 due to the Watergate scandal.
Consumer price growth hit double digits, the unemployment rose peaked at 9%, and real GDP growth declined from a robust 10.3% in the first quarter of 1973 to -4.8% just two years later.
Ford, who at first encouraged a tax increase to help quell inflation, was later forced to change his tune and call for a $16 billion rebate of personal and corporation income taxes to help jump-start the economy. Congress passed the income tax cuts in the Tax Reduction Act in March 1975, although Democrats forced the president into agreeing to an expansion of select government programs.
Ford lost the 1976 presidential election to Democrat Jimmy Carter.
The deep recession that occurred in President Ronald Reagan’s first term is thought to be the result of strict disinflationary policies adopted by then-Federal Reserve Chairman Paul Volcker.
Inflation had more than doubled following the 1973 oil shock. It plagued the Carter administration, reaching a lofty 11.3% in 1979 and 13.5% in 1980. In order to break inflation, Volcker and other Fed officials hiked short-term interest rates to 20% by 1981, drawing historic levels of criticism for their impact on construction, farming and other industrial sectors.
The robust recovery that followed, however, remains a source of debate among economists, with many giving credit to the stimulative impact of the Reagan-era tax cuts. Those piecemeal tax cuts reduced the highest personal income tax rate from 70% to 38.5%, cut the lowest rate from 14% to 11% and increased the highest capital gains tax rate from 20% to 28%.
The Great Recession of 2007–09
A more recent example of White House action during times of economic turmoil came about 10 years ago, when the subprime mortgage crisis fueled a broader collapse in the nation’s largest banks and dragged the globe into what many economists consider the worst economic downturn since the Great Depression of the 1930s.
Real GDP fell $650 billion, the unemployment rate peaked at 10% and household net worth fell $11.5 trillion.
A combination of legislation crafted under outgoing President George W. Bush and Barack Obama, who was elected in 2008, included massive stimulus initiatives such as the American Recovery and Reinvestment Act and the Troubled Asset Relief Program.
Advocacy for such bills is just an example of how few tools are available to the White House during economic duress, Nathan Sheets, chief economist at PGIM Fixed Income, said in an email.
“Most of the options are broadly ‘fiscal policy,’ and result in larger government budget deficits, but there are lots of different flavors,” Sheets wrote.
But relying on collaboration with Congress could prove tricky for Trump, especially with 23 Republicans in the GOP-controlled Senate and all of the House up for reelection in 2020. If Democrats win both chambers but fail to claim the White House, the likelihood of any major policy breakthroughs could prove a tougher goal.
“During the financial crisis, the government provided incentives for investment and sought to support the housing market,” Sheets continued. “In addition, the government provided a major bailout for the auto sector, as well as the never-to-be-forgotten ‘Cash for Clunkers’ program. All of these are examples of activist fiscal policy at work.”
The economist added that direct increased expenditure, such as a new infrastructure program, would also work to boost GDP.
To be sure, the cause of, and remedy for, any individual recession are out of the hands of any single policymaker and more often a function of cyclical market trends.
But in addition to large spending bills, presidents can push for temporary or permanent tax cuts, as Reagan did in the 1980s.
“All of this is in addition increased spending on various ‘automatic stabilizers’ such as unemployment payments,” Sheets added. “During the financial crisis, an important part of discretionary fiscal policy was a decision to extend the duration of unemployment payments. I’d guess that this would be done again.”
Such automatic stabilizers spring into action when incomes slip, reducing tax liabilities and broadening eligibility for transfer programs, such as food stamps and unemployment insurance, which help buttress income. Those stabilizers temper the economy when it overheats and raise the bar for government aid.
What remains to be seen, Sheets warned, is just how effective any government invention would be in light of already-steep deficit spending.
“The recent expansion of the deficit does complicate the decision of whether to provide stimulus and, if so, what to provide. … During a recession, we could easily be looking at a return double-digit deficits,” he wrote.
Though the economist said he didn’t think that would blunt any crisis remedies, it “does mean that we’d be in an even deeper fiscal hole once the recession abated.”