As we begin the year 2023, inflation is down, but that is the end of the good economic news. The threat of a recession still looms which could result in job losses and budget cutbacks that will bring pain to many Americans.

(Above, l-r): Dr. Wendy Edelberg, Director of The Hamilton Project and a senior fellow in Economic Studies at the Brookings Institution. Former chief economist at the Congressional Budget Office; Dr. George Fenton, Senior Policy Analyst at the Center for Budget and Policy Priorities (CBPP); and Dr. Rakeen Mabud, Groundwork Collaborative Chief Economist and Managing Director of Policy and Research. (EMS)

At an Ethnic Media Services briefing, Jan. 20, experts – Dr. Wendy Edelberg, Director of The Hamilton Project and a senior fellow in Economic Studies at the Brookings Institution. Former chief economist at the Congressional Budget Office; Dr. George Fenton, Senior Policy Analyst at the Center for Budget and Policy Priorities (CBPP); and Dr. Rakeen Mabud, Groundwork Collaborative Chief Economist and Managing Director of Policy and Research – discussed answers to questions like, How long would this recession last? What populations will suffer the most? What areas of the economy will be most affected and which ones will be resilient? And how will new political realities affect policy and legislation both at the federal and state levels?

Q: We hear a lot about inflation being down which is a good thing. Does that mean everything’s going to be okay or did Fed policy result in an economic squeeze that will bring job losses and a recession?

A: “We really do not know whether there will be a recession in 2023 or not. When it comes to the type of work that we do at the center on budget which focuses on refundable credits, the child tax credit, earned income tax credit, our most important anti-poverty programs, this is all the more reason in the face of so much uncertainty after an extraordinary period made of historical crisis coming out of this pandemic to have a firmer foundation of economic security with policies like that,” said Dr. George Fenton.

“The forecasts are evolving. Mark Zandy at Moody’s Analytics currently has it at 50-50 odds of seeing a recession in 2023 or not,” said Dr. Fenton.

“One of the reasons why I think the economy needs to slow is that partly given all the fiscal support and partly just because household balance sheets have been strong, and the economy has bounced back in many ways from the depths of the pandemic. We are spending as households, and even in very broad strokes as businesses. We are spending as if there wasn’t a pandemic. Yet labor force participation is still significantly below expected,” said Dr. Wendy Edelberg.

“In absence of the pandemic we have maybe a million-and-a-half, two million fewer workers than I would have expected us to have, so something’s got to give. Those two things are not compatible with each other.

“Broadly speaking, the economy’s got to slow or something miraculous needs to happen to labor force participation, but I think we now have enough evidence under our belts that that looks increasingly unlikely.

“There were about 225,000 net new jobs in December of 2022. Despite all our concerns about where the economy might be headed, we still have a very strong labor market, like December 2022 is just not that long ago.

“The labor market is just unsustainably strong now, something that makes perfect sense. We’re still recovering from what was a very large drop in employment so some of that makes sense but somehow we’re going to have to get from point A, where we currently are, to point B, where our economy looks like it’s on more stable footing, and getting from point A to point B is going to mean slowing and whether or not that means a year of bumping along at modestly positive growth or few, just a handful of quarters at some slightly negative growth, that’s certainly the difference in whether the headlines are going to say recession, but it’s not going to feel very different to the average person.

“This slowdown is going to be focused in the goods sector which has just been abnormally strong, and it is finally starting to come back to earth. That means the goods sector feels like it’s in recession right now, it is contracting and it kind of needs to contract in the U.S.

“Regardless of what these numbers look like in aggregate, the goods sector is probably going to feel a whole lot weaker than the services sector, even if we’re in recession I would not be surprised if we continued to see pretty good growth in the services sector as people continue to come back to face-to-face services,” Dr. Edelberg.

“We are not out of the woods. The Fed has increased interest rates seven times over the last year. They’re likely going to be going back for more at the next open markets committee meeting, end of January,” said Dr. Rakeen Mabud.

“Powell, chair of the Federal Reserve, has admitted that we have not yet felt the full effects of these rate hikes, and there is a significant risk that the Federal Reserve pushes our economy into a needless recession which would throw millions of people out of work, slow down wage growth, and cause immense financial, immense economic pain.

“You cannot have a healthy economy unless the people who keep our economy going, workers, families, consumers, we all hold many of those identities. Unless all of us are doing well and Powell really needs to recognize this and put people over his war against prices,” said Dr. Mabud.

“Employee America put out an interesting blog post that looked at past cases of where unemployment rose by a percentage point in a year. The FED is currently forecasting about 4.4 percent unemployment for 2023. Employment America’s analysis found that every single time that has happened, one percent unemployment, we’ve had a recession.

“These are real lives we’re talking about. These are real people’s jobs, these are real people struggling to put food on the table, and what concerns me is that these rate hikes fail to address the underlying causes of what is driving higher prices today.

“The reason we have higher inflation today is not because people have too much money in their pockets or because they’re spending too much. Sustained consumer demand is something that keeps a healthy economy humming along.

The reason we have inflation is because we have a system that was built by, and for big corporations, that has utterly failed to meet the needs of people in a moment of crisis.

“This is the same reason we had empty shelves at the beginning of the pandemic.

“On top of this, the same corporations have been able to jack up prices beyond what their production costs would justify.

“The most recent inflation numbers, the CPI report, makes it clear that we don’t need mass joblessness to bring down inflation. Prices can come down without throwing millions of people out of work, and under the bus, and in fact we have other tools beyond the Fed which are more appropriate, given the inflation that we’re experiencing today.

“Workers and families who are already struggling with the burden of high prices should not be asked to shoulder the additional burden of high unemployment. It’s ineffective and it works against the shared goal of really building a sustainable resilient economy that works for everyone,” said Dr. Mabud.

Q: The labor market is too strong. Isn’t being strong a good thing? Can you explain to us why is this bad and why do we need to knock it down, apparently that’s what the FED wants to do so?

A: “A strong labor market is a very good thing and getting the unemployment rate as low as it can go is a very good thing, but it can’t go to zero,” said Dr. Wendy Edelberg.

“The way the Fed thinks about it is that they have two mandates, they want to have employment be as high as it can be in a sustainable way, and they want to have inflation that is stable so they don’t have a mandate that inflation has to be two percent, but they have a mandate that inflation has to be essentially low and stable.

“A net gain of 225,000 jobs in every given month, our economy cannot sustain that. What we have now is as an unsustainably strong labor market.

“What’s important to recognize as we talk about the Fed and its approach is that the Fed is working with one basic main tool when it comes to inflation, it’s working with interest rate hikes, and the way that interest rate hikes work is that you are raising the cost of borrowing, which ultimately has the effect of depressing employment, you’re slowing down how fast people are getting employed, or maybe you’re going to see some businesses start to lay people off or fire people, and you’re going to slow down wage goods.

“Ultimately, the Fed’s main tool on interest rates is going to hit on demand like that’s the side of the economy that this tool can address, but when you take a step back and think about where today’s inflation is coming from, it is not coming from too much demand. It’s not too much demand chasing too few goods,” said Dr. Edelberg.

Q: What are some of the benefits that the government has been offering in the last couple of years that people are likely to lose with the new economic realities in Congress as well as state budgets?

A: “Under the rescue plan, the child tax credit was reformed and expanded in several significant ways. Prior to that, in the United States and today under current law, there are children and families who are deemed too poor to benefit from the child tax credit. That’s about 19 million kids and families who do not qualify for the full child tax credit amount because their parents incomes are too low,” said Dr. George Fenton.

“In 2021, as part of the rescue plan, that was changed so that the child tax credit became what a technical jargon is called fully refundable, which just means that the amount that your family received didn’t depend on how much or whether your parents were working.

“It helped drive child poverty to a historic low which is really that during that crisis not only did child poverty not increase but it was driven all the way down to about five percent lower than it has ever been in the United States, which compared to many peer countries, has a very high child poverty rate.

“The credit was made fully available even to the poorest families. It was expanded from a maximum amount of two to three thousand dollars into thirty-six hundred dollars for the youngest kids, and it was also transformed from a policy that only comes in a kind of complicated way in your refund or is taken out of your tax liability at tax time, into monthly checks for the six months.

In the second half of 2021, as a result we saw hardship decline. We saw low-income family spending this is money on essentials, from Census Pulse Survey data, on things like rent, clothing, utilities, and education expenses.

“At the end of 2021, that policy expired and remains expired, and immediately and unsurprisingly we saw millions of kids were thrown back into poverty consequently.

“In addition to the short-term suffering that that causes, we have compelling research showing that this is going to have harmful long-term effects as well.

“We have studies that show that if you can lift a kid out of poverty, that child is on average going to be healthier, is going to do better in school. It’s more likely to go on to college, to graduate from college and by their late 20s early 30s, are also going to have higher earnings in the long run.

“The child tax credit is already gone. Expanded unemployment insurance protections are also already long gone. There are millions of workers who are thrown back into an employment insurance system that is essentially a failure that does not meet the needs most unemployed workers who are out of work through no fault of their own, looking forward we are fighting for it.

“Based on some provisions in our corporate tax code, there’s a tax break for corporate research and development that expired last year, and the business lobby desperately wants to put back into place. We could possibly see trade between Republicans, who are advocating for business interests, and want this research and development deduction put back into place, and lawmakers who want to expand benefits for families and children,” said Dr. Fenton.

Q: How worried should people on Social Security be about their checks not coming in the mail come March or April?

A: This has something to do with the debt ceiling that we’re supposed to be reaching today, said one of the speakers. The Treasury has enough flexibility for how to pay its bills, how to meet all its obligations of the U.S. government, despite that it can’t borrow anymore because of the debt ceiling. They have enough flexibility to get them through early June.

Given what revenues are probably going to be in June, we’re probably not talking about a full-blown crisis until July or August, but if Congress does not raise the debt ceiling, there will be a day likely in the summer of 2023, when treasury looks at its bank account where it doesn’t have enough money to pay all of that day’s obligations and it has no additional resources and so it’s just has to figure out what to do, said one of the speakers.

The Biden proposal to raise the corporate rate to partly reverse the Trump tax cuts from 21 back to 28 would raise, depending on which window you’re looking at and how you measure it, around a trillion dollars in revenue over the next 10 years.

It’s a tax that corporations would discourage, this sort of rent-seeking behavior and raise revenue to fund the sorts of investments that we need. Our corporate tax system is in need of a massive overhaul because of the way it affects the decisions corporations make with the U.S. economy.