Jay Shambaugh on the tools to fight the next recession

Episode Summary

Executive Summary: The episode argues that the U.S. should prepare automatic fiscal stabilizers before the next recession, because discretionary stimulus is often too slow and political cycles delay action. Jay Schambau emphasizes triggers tied to unemployment, broader safety-net support, and prebuilt infrastructure and state-aid mechanisms to reduce downturn severity, inequality, and austerity risks.

Main Topics: Why recessions need preplanned fiscal responses (Priority: 5/5): The discussion opens with the case that recessions are predictable in broad form but hard to fight quickly once they begin, so policy should be designed in advance rather than improvised during political gridlock. Lessons from the Great Recession (Priority: 5/5): Schambau uses 2007-09 to show how delayed discretionary stimulus arrived too late because elections, lame-duck politics, and disputes over policy design slowed Congress. Automatic stabilizers vs. Fed policy (Priority: 5/5): The conversation contrasts fiscal tools such as unemployment insurance and SNAP with monetary policy, arguing the Fed may have less room to cut rates in future downturns and cannot fully substitute for fiscal support. Trigger-based policy design (Priority: 5/5): The guests explain how automatic triggers can start and stop aid based on timely indicators like the unemployment rate, reducing political lag and helping policy phase out when recovery takes hold. Inequality and targeting (Priority: 4/5): The episode explores how different stabilizers affect different groups, noting that safety-net programs are more targeted than broad tax cuts and can help cushion low-income households and communities. State aid, Medicaid, and infrastructure as stabilizers (Priority: 4/5): Ideas include making federal Medicaid support for states automatic, and scaling public infrastructure funding up during recessions when projects are already designed and construction capacity is slack. Additional reforms beyond the book’s proposals (Priority: 3/5): The discussion briefly expands to possible future measures such as TANF-based job subsidies, higher-education support, student-debt deferrals, and permanent expensing rules for business investment.

Key Arguments: Discretionary stimulus often arrives too late because politics and elections delay action, as seen in the Great Recession. Automatic stabilizers reduce the need for Congress to act in real time and can be built into programs that already adjust with the economy. The Fed will likely have less policy space in the next downturn, so fiscal policy must share the burden. Unemployment rate changes are a timely, reliable trigger for recession response because they are released quickly and revised little. Safety-net programs like SNAP and unemployment insurance are among the most effective automatic stabilizers and can also reduce inequality. State balanced-budget rules make state cutbacks pro-cyclical, so automatic federal support for Medicaid or other state spending could prevent deeper recessions. Infrastructure spending can be made countercyclical by keeping a standing pipeline of vetted projects and increasing funding during downturns. Automatic triggers should govern both when programs start and when they phase out to avoid premature austerity. Policy design should remain flexible enough to add recession-specific measures depending on the cause of the downturn. Dynamic scoring could show that shorter recessions reduce fiscal costs, partially offsetting headline spending increases.

Data Points: Great Recession start: December 2007 - Schambau dates the start of the recession and contrasts it with the later fiscal response. Major stimulus timing: Late February 2008 - He says the large discretionary American Recovery and Reinvestment Act came well after the recession had begun. Federal Reserve rate cuts in prior recessions: At least 5 percentage points - Schambau notes the Fed has historically had room to cut rates by about five points in the last seven U.S. recessions. Current policy rate mentioned: About 2.4% - Used to argue the Fed may not have five percentage points of room in the next recession. Consumption share of spending: Close to 70% - He cites household consumption as the dominant share of the economy, explaining why consumer retrenchment worsens recessions. Unemployment trigger threshold: 0.5 percentage point above its recent low - Claudia Somme’s SOM rule is described as signaling a recession when the 3-month moving average of unemployment rises by half a point from its low. Trigger smoothing window: 3-month moving average - Used to smooth noise in the unemployment rate before triggering automatic responses. Infrastructure program baseline suggestion: $2 billion a year - Andy Howitt’s proposal keeps a standing program alive in normal times so it can scale up in recessions. Infrastructure recession expansion: $10 billion - Illustrative increase in funding during a recession under the proposed countercyclical infrastructure model. Climate/other promo timing: From September 24 - A later promo mentions Climate Week in New York beginning around this date. 2030 target horizon: 5 years - A promo references corporate climate pledges and the limited time left to meet 2030 targets.

Pivotal Quotes: "Upskilling boards from outside perspectives I think is essential." — Sarah Eystead: Opening promotional clip about boardroom risk on The Next Five podcast. "Data and analytics can strengthen your ability to manage risk by identifying your vulnerabilities early." — Sean McGovern: Opening promotional clip about boardroom risk and risk management. "There are geopolitical and regulatory pressures that healthcare providers have." — Pam Joshi: Opening promotional clip about boardroom risk in healthcare.

Implications: For policymakers, the message is to build recession responses now, not during crisis. Automatic triggers, safety-net expansions, and preplanned state and infrastructure aid could soften downturns, limit inequality, and reduce the odds of austerity arriving before recovery.