A recession is likely, but not certain, over the next four years. If Hillary Clinton is elected and cajoles Republicans in Congress to go along with a significant portion of her economic agenda, the odds and consequences of real damage are significantly higher.
The current economic recovery is one of the longest but weakest since World War II. Growth at 2.1 percent has not been enough to resurrect family incomes to pre-recession levels or create enough good paying jobs. African-Americans have recouped much less of their lost income than Hispanics, Asians and Whites.
As globalization and digital technologies change where Americans work—more in finance and other services and fewer in manufacturing and commodities—these forces greatly advantage workers with degrees from top universities, colleges of engineering and other applied arts, and high school graduates with technical training from our better community colleges and more legitimate private programs. Those advantaged groups would be better able to weather another recession, further exacerbating inequality.
Recessions can happen for one of three reasons.
First, mechanisms inside the economy could instigate a negative feedback cycle. For example, rising sales beget excessive optimism and cause manufacturers to build more cars and houses than can be sold several months from now. A glut of unsold products forces layoffs, consumers become pessimistic and stop spending, and the stock market tanks.
Such a scenario is much less likely these days because modern supply management—real time monitoring of store sales and products in the wholesale pipeline—permits businesses to much more closely monitor and anticipate the pace of demand and overproduce with less frequency. And a service economy is much less inclined to overproduce than one anchored in manufacturing.
Finally, a domestic policy mistake disrupts financial markets or some other critical cog in the economy. For example, the Federal Reserve raises interest rates too quickly, regulatory authorities again ignore or mishandle festering problems at the banks, or the new administration imposes too many new tax and regulatory burdens too quickly on an economy growing too slowly to accommodate those.
The Justice Department has suggested it pay a $1.4 billion fine and restitution for its role in the mortgage securities scandal at the center of the recent financial crisis.
This whole episode lay bare that the largest bank in Europe’s largest economy has a balance sheet still burdened by dodgy securities and bad loans and is almost as badly run as it was before the crisis. In varying measures, these problems plague other banks on the continent.
American regulators may believe Dodd-Frank regulations make another global financial panic much less likely, but growing evidence indicates these regulations have been so crippling and expensive to the ordinary operations of U.S. banks that they may be as vulnerable as ever.
A Hillary Clinton administration would likely double down on these regulatory measures—its advisers seem to believe that writing telephone book sized new rules is the answer to market instability and miscreant behavior. But Deutsche Bank has wide interconnection with banks around the world, including our venerable towers of finance in Manhattan, and Wells Fargo’s recent transgressions demonstrate how inclined bank executives still find ways to cheat customers to juice profits and their bonuses.
Similarly, ObamaCare, states and cities raising minimum wages and new federal overtime rules, and the disincentives to work imposed by build out of the social safety have imposed inefficiencies on labor markets and dramatically raised the cost of hiring new workers. Consequently, the ongoing recovery has been noticeably absent of many new jobs—Mr. Obama has created 15 million jobs whereas over a recovery of comparable length President Ronald Reagan created 20 million in a smaller economy.
Mrs. Clinton holds a substantial lead among likely voters. If Congress permits her to expand ObamaCare, impose a $15 percent minimum wage, finance broader subsidies for child care and college tuition, and impose other regulatory burdens—for example, federalize the California Fair Pay Act—those actions would likely cook the goose.
The slow recovery would die under the weight of halting job creation and rising unemployment.
The bottom line: For African-Americans, women and others still reeling from the recession things will get even worse.
Peter Morici served as Chief Economist at the U.S. International Trade Commission from 1993 to 1995. He is an economist and professor at the Smith School of Business, University of Maryland.