Position Unlike the Past
The U.S is facing an uncertain economic period with a financial profile unlike any seen in modern US history. With the US debt level close to historical highs in relation to the total economy, economic policy analysts are sounding the alarm that the US government needs to develop a contingency plan—a “break glass” plan—to be ready in the event that a serious economic shock hits the US.
In a recent report, a think tank policy organization has warned that the US government cannot assume that it will have the financial flexibility that it has had in the past in the event of an economic crisis. For decades, the US government has used borrowed money to calm economic crises, but with the high debt levels, can the US government be ready to implement large-scale stimulus spending in the event of another recession or economic shock?
“Break glass” is a phrase used to refer to emergency instructions that are often provided in buildings. In the case of the economic policy, it means being prepared with a set of tools that can be activated in the event of severe economic conditions.
Debt Near Record Levels
Over the past two decades, the level of the public debt has risen substantially. Factors such as increased spending, changes in taxation policies, wars, demographic pressures, and pandemic programs are all contributing factors. Today, the debt level is equivalent to the total output generated by the US economy every year. This has not happened since the post-World War II period.
However, many economists are of the view that the analogy between the post-World War II and the present-day US economy is not appropriate. In the post-World War II period, the US witnessed rapid economic growth and population increase, along with low interest rates in the late 1940s and early 1950s.
The current environment is more complex. The long-term growth outlook is more subdued, the population is aging, and interest rates have risen substantially over the past few years. All these factors can make it more challenging to deal with a high level of debt while addressing emerging economic challenges.
Limited Fiscal Space
The think tank’s report emphasizes that the United States now has less “fiscal space”—the ability to borrow and spend during emergencies without triggering market concerns about government finances.
During the 2008 financial crisis and the economic collapse caused by the COVID-19 pandemic, the federal government deployed trillions of dollars in relief spending.
Those policies played a major role in stabilizing the economy. However, they also significantly increased federal borrowing. As a result, the starting point for the next crisis will be very different.
If policymakers wait until a downturn is already underway to debate stimulus options, the report warns, the response could be slower and less effective.
‘Break Glass’
A “break glass” plan would establish a set of pre-approved policies intended to be triggered in times of economic distress. Rather than having lawmakers negotiate emergency legislation during a crisis, often in a highly politicized environment, a “break glass” plan would establish a framework in advance.
The emergency measures might include temporary tax cuts, expanded unemployment benefits, support for vulnerable households, and financial support for cash-strapped state governments.
Another key element might be programs offering emergency credit support for businesses during financial disruptions, in order to prevent a wave of layoffs or bankruptcies from spreading through the economy.
The idea is to be able to respond quickly and predictably in response to economic signals indicating a sharp downturn in the economy.
The Role of Automatic Stabilizers
Some economists think that automatic fiscal policies can provide the base for such a plan. These policies are designed in a way to expand when the economy is in recession and contract when the economy is improving.
For example, the amount of unemployment benefits can rise when the rate of unemployment in the country crosses a certain threshold. Also, payroll taxes can reduce when the economic recession is severe enough to reduce consumer spending.
In addition, federal support for states can rise when the states are in recession, thus protecting the states from reducing their budgets and pushing the recession into a worse state.
As these policies are based on economic indicators and not politics, they can provide support more quickly and consistently.
Courtesy Of Cathy Taylor ( Flickr CC0)Concerns and Criticism
However, despite the advantages, not all people agree with the concept of pre-planned emergency spending.
Some economists believe that the U.S. has the capacity to borrow because U.S. Treasury debt is the most respected financial instrument in the world. The demand for these instruments is usually high in uncertain economic times.
Some economists believe that emergency spending could cause the deficit to rise if the triggers are not set in the right way.
Some people also believe that there is a political aspect to the debate. In order to set up the “break glass” system, there has to be bipartisan agreement on when to trigger the emergency spending and how it will be phased out eventually.
Preparing for the Next Shock
Despite these issues, there is a notion that the preparation for the crises of the future is becoming very important. The global economy is facing a number of potential risks, ranging from instability in the global financial markets to geopolitical issues and climate change.
These crises have the potential to cause economic shocks that will demand immediate action from the government.
The best time to develop emergency policy responses is before the crisis strikes. This is according to the report from the think tank. Waiting until the markets start experiencing crises can result in delays and policy responses that are not as effective as they could be.
A Debate That Is Just Beginning
For now, the concept of a “break glass” economic plan remains more a proposal than a concrete initiative. However, the underlying concern about whether or not the United States is heading into uncharted economic territory with historically high levels of debt is gaining more attention from economists and experts who study the nation’s budget.
The extent to which these warnings will be heeded remains a mystery for now. What is certain is that when the next economic shock occurs, it will be a test of the government’s fiscal limits.
Should that moment come around, having a well-thought-out plan in place for emergencies can be the difference between a manageable economic downturn and a far more crippling economic situation.
By William Hernandez
Journalist for Vlixx Magazine, reporting on news from around the world, ensuring timely, accurate, and detailed information to keep the public informed and educated.
Sources:
Bloomberg: Staggering US Deficits Call for a Debt-to-GDP Limit
Featured Image Courtesy of Gage Skidmore Flickr Page – Creative Commons License
Inset Image Courtesy of Cathy Taylor Flickr Page – Creative Commons License
