Paul Krugman says America faces a “greater recession” without new stimulus. Is the US already in one?

In a recent opinion piece in The New York Times, economist Paul Krugman claimed that the United States is headed for a “Greater Recession” without a new round of stimulus or government support for the economy.

Krugman’s comments come as agreement has still not been reached between Democrats and Republicans over a new stimulus package, which has seen President Trump proposing his own solutions, which some say are unworkable and potentially harmful.

Yet, the foundations of the “Greater Recession” may already be present. States are currently facing historic budget deficits, small businesses are being forced to close and millions of Americans are struggling to find the money to pay their rent, buy food and other essentials.

Without support from the federal government, Krugman claims, the economic malaise brought about by the coronavirus pandemic is likely to get worse.

Krugman’s diagnosis

In his piece, Krugman disputes the claims of some Trump-administration figures, such as Larry Kudlow, the Director of the National Economic Council, who claimed recently that the US was still on track for a “V-shaped recovery.”

A “V-shaped recovery” occurs when an economy declines but rapidly recovers back to its former level and continues its growth. Currently, the only projected major world economy to come close to such a recovery is China.

Krugman pushes back against these projections, arguing that the US faces a deep crisis with the relief provided by the first stimulus package having now expired. Krugman believes that the end of such relief will lead to a subsequent drop in consumer spending.

He sees a “substantial ‘multiplier’ effect,” where drops in consumer spending and tax revenue will lead to spending cuts, beginning a cycle of even further falling incomes and spending cuts.

However, Krugman does not leave the blame for this projected “Greater Recession” at the door of the coronavirus pandemic.

Rather, unlike the first coronavirus-induced shock which was largely weathered by the stimulus, Krugman believes the coming shock will be “entirely self-generated, brought on by the fecklessness of President Trump and … Mitch McConnell, the Senate majority leader” and the lack of agreement over new support for the economy and the American people.

Stimulus inaction

The debate over the next round of stimulus has continued in recent weeks without agreement, even as the Financial Times, echoing Krugman’s concerns, has stated that the US is headed toward a “fiscal cliff” as the first stimulus package ends.

Democrats and Republicans are divided on key questions regarding the next stimulus package. In the wake of this division, President Trump has attempted to put forward his own solution, signing a series of executive orders and memorandums earlier this week.

These solutions proposed by Trump stop short of a full stimulus package put forward by Congress and, as Krugman argues elsewhere, may actually cause more harm than good.

Trump’s solution proposes to defer payroll taxes – the obligations by employees to pay a certain amount of tax toward Social Security on each paycheck – by about 6.2%.

Krugman has argued elsewhere that this solution is a non-starter. Instead, Trump’s deferment of payroll taxes is “the hydroxychloroquine of economic policy” and does little to address the startling projection that “consumer spending is about to collapse, bringing the whole economy down with it.”

The “Greater Recession”

In some senses, however, the “Greater Recession” forecast by Krugman is already here and its effects will plague the US for some time.

Recent reports have shown that small and medium-sized companies in the US have witnessed a complete wipeout of their profits from the second quarter of 2020 as a result of the pandemic, while larger multinational corporations have largely managed to weather the economic downturn. Around 50% of the US workforce is employed by small businesses.

Elsewhere, the Urban Institute’s State and Local Finance Initiative has projected that state budgets could, as a result of the COVID-19 pandemic, drop by as much as US$200 billion, as personal income taxes and sales taxes are wrecked by rising unemployment and lower consumer spending.

Data by the State and Local Finance Initiative has also found that between March and May of this year 34 states suffered at least a 20% drop in revenue compared with the previous year. And those were the months in which Americans were propped up by stimulus checks from the government.

Both Republican and Democratic local leaders have recognized the financial collapse that appears to be awaiting state and local governments across the country. The Republican Governor of Maryland, Larry Hogan, declared that the budget crisis caused by the coronavirus on states is “three times worse than the Great Recession,” comments that came as Maryland cut US$190 million from higher education funding to begin making up deficits, with a further US$1.45 billion in cuts proposed for 2021.

Elsewhere, the Democratic Governor of California, Gavin Newsom, has already drawn up a contingency budget if the state does not receive further aid from the federal government. This contingency budget would see state workers furloughed and funding for state universities, courts, schools and community colleges all slashed. Newsom has declared that “The federal government has a moral, ethical and economic obligation to help support the states.”

As Krugman argued in his New York Times piece, these cuts will only serve to create a “multiplier” effect, whereby the crisis becomes cyclical and inescapable without federal aid.

President Trump has already signaled his disapproval of any direct aid to states facing a budget crisis and the American Legislative Exchange Council, an organization of conservative lawmakers across the country, wrote in a recent letter opposing aid for local budgets, arguing that as “the American people are being forced to make difficult but fiscally responsible decisions during the pandemic … states need to do the same.”

But it is not just state budgets or small businesses that face impending difficulties. Household and individual budgets are becoming tighter and tighter as government stimulus fades and Americans are left on their own as a result.

One survey by Bloomberg noted that some 30 million US households in July reported not having enough food to eat over the course of that week, the highest figure since the survey began several months ago. Evidently, Americans are suffering in the present, even as a deeper recession potentially awaits.

Although Krugman has warned that the US faces “a worse slump than 2007-2009, overlaid on the coronavirus slump” without further government aid, for many, the “Greater Recession” is already here. And here to stay for some time.

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