To Avoid a Recession, Pass These Two Bills, Economist Says (2024)

If the government does not pass the Wyden-Smith tax cut bill currently in the Senate and the defense spending package that funds U.S. aid to Ukraine and Israel, the U.S. economy could risk falling into a recession. Those two bills would inject much-needed stimulus into the economy as it recovers from its recent slumps. Without them, the United States would fall into a recession.

“If the tax cuts don’t pass and we don’t get the defense bill, then yes, we will continue with the call for recession,” Lazar said. Fortune in an email.

On more than one occasion, Lazar predicted that the United States was heading toward a recession. In an appearance on Fox Business earlier this month, he warned that the upward trend in productivity data might conventionally be considered good news, but it was actually a warning sign. “The acceleration we’ve seen in productivity is actually much more typical of an economy that actually enters a recession,” he said.

Recent productivity gains (and the U.S. economy is enjoying a productivity boom in relative terms since the second quarter of 2023) have stumped most economists, because they are welcome news after a prolonged period of declines. , but they tend to occur during periods of recession. . Lazar argues that companies are preparing for a possible recession by being too focused on productivity, rather than expansion. That means reducing hours worked and slowing the pace at which they hire new employees. There is evidence to support Lazar’s claim. Research from the Bureau of Labor Statistics found that productivity increased in the last three economic recessions.

Piper Sandler and Lazar predict a bearish 0.5% drop in the GDP growth rate in 2024. But with a fiscal stimulus package, which includes the two bills, they believe that figure will become a growth rate from 1%. Economists expect a so-called soft landing that would see inflation continue to fall without a rise in unemployment. If those two things happen, the economy would also manage to maintain a “worst-case unemployment rate” below 4.5%, according to the note, written by Lazar and Jake Oubina, senior economist at Piper Sandler.

The forecast of a 0.5% drop in GDP is somewhat pessimistic compared to others. The Congressional Budget Office expects GDP to grow 1.5% this year. Last week, S&P Global took an even more optimistic view, raising its GDP growth forecast from 1.5% to 2.4% for 2024.

Lazar has explained that his call arises from the belief that the recessionary impacts of the Federal Reserve’s rate hikes have not yet been felt. “On average, it takes 10 quarters for a Fed tightening cycle to push the economy into a recession,” he told Fox Business. “We’re just entering that time period.” He mentions “lags” in monetary policy, referring to a famous observation by economist Milton Friedman about lags in the effects of monetary policy.

The Federal Reserve first began raising rates in March 2022, about two years or eight quarters ago. Since then, it has raised rates tenfold in one of the most rapid and dramatic tightening cycles in history.

The two bills would help boost the U.S. economy by creating a surge of business activity. Tax cuts for businesses would allow them to have more cash on hand, which would ideally be spent on major investments. While the military spending bill would create a windfall for the defense sector that would provide much of the weapons used to supply America’s allies.

If one or both bills fail to pass, the economy could still stay away from a recession, even because of some other favorable policy measures, Lazar says.

If President Joe Biden succeeds in implementing his student loan forgiveness plan, that could help boost consumer spending. It’s not enough on its own, but it could help tip the balance. “Student loan forgiveness is gradual, in and of itself, and is not crucial to avoiding a recession,” Lazar tells Fortune.

The idea is that borrowers would have more disposable income if they no longer had to make debt payments, thus boosting the economy. The effects on the economy could be notable, with people who had their loans canceled spending 3% to 6% of their new money on purchases they otherwise wouldn’t have made, according to the Federal Budget Committee. Responsible.

The other mitigating factor, which Lazar is “watching very closely, is the pace at which CHIPS Act grants are being awarded.” Chipmaker GlobalFoundries became the first to receive such a grant when it received $1.5 billion to fund factories in Vermont and New York. The subsidies could skyrocket to $7.5 billion if the other four companies (Intel, Samsung, Taiwan Semiconductor Manufacturing and Micron Technology) that applied for them received theirs. “The funds will not be spent immediately, but, at the margin, they will increase business confidence and, in turn, incremental spending on capital investment and employment,” Lazar and Oubina write.

In the meantime, however, the U.S. economy may have to depend on the fate of the two bills currently moving through the legislature.

There is a 50-50 chance that tax cuts will be approved

Although the tax bill faces a difficult challenge, according to Lazar. She says the chances of the tax cut bill passing in the Senate “are between 40% and 50%,” citing an analysis by Piper Sandler’s D.C. policy team, Andy Laperriere and Don Schneider .

The bill is unlikely to be an immediate priority at this time. Especially as Congress works to pass a bill to fund the government, which risks shutting down on Saturday.

The Wyden-Smith tax cut bill overwhelmingly passed the House of Representatives by a vote of 357 to 70 in favor. The House sets the bill at $78 billion. Although Piper Sandler’s note estimates that the bill cost about $136 billion. This round of tax legislation was considered bipartisan because it combined an expansion of the child tax credit and tax cuts for businesses. “Something for everyone,” says Lazar.

Among the 70 no votes were both progressive Democrats concerned that it would expand tax cuts for corporations and Republicans concerned that immigrants would be eligible for the expanded child tax credit. He now faces a tough challenge from Senate Republicans over the same issue. In the Senate, the bill faces an uncertain future in which it will collide head-on with election-year politics. Republicans will stubbornly refuse to pass any bill that could bolster Democrats’ electoral prospects in November. While Democrats might be reluctant to spend political capital on a bill that is not a top priority, lest they lose control of the Senate.

Most of the cuts for companies would come for qualified spending on research and development conducted within the U.S. Those would amount to about $83 billion of the bill’s costs, according to Lazar and Oubina’s memo.

Ukraine aid would be spent in the US.

Meanwhile, funding for Israel, Ukraine and other United States, which would cost $95 billion, would stimulate a significant amount of domestic economic activity. Of the roughly $60 billion allocated to Ukraine, about two-thirds ($38.8 billion) will be spent in the United States on factories that make munitions and other defense assets.

President Joe Biden reiterated this point on Tuesday. “While this bill sends military equipment to Ukraine,” he said, “it spends the money right here in the United States of America, in places like Arizona, where Patriot missiles are built; and Alabama, where Javelin missiles are built; and Pennsylvania, Ohio and Texas, where artillery shells are manufactured.”

The added military spending would lead to an increase of approximately 0.3% in US GDP, according to Lazar’s note. That bill also faces a tough road, this time in the House, where it’s unclear whether it will get enough support from Republicans to move forward. House Speaker Mike Johnson (R-La.) did not bring the bill to a vote earlier this month before the House went into a two-week recess that ended Wednesday.