Thursday, August 30, 2012

How the Republican Risk-Shifting Agenda Would Cause a Recession

With the national convention winding down, there is a lot of talk about the way the Republican party’s agenda revolves around sex. Initiatives in criminal law, science, health care, culture, and elsewhere seem to have been engineered together with the hidden purpose of making sex more of a problem for the ordinary person. But the Republican agenda is not purely about sex. Sweeping all the sex-related initiatives aside for the moment, you are likely to notice that much of what remains is about shifting risk — specifically, reducing the risks that government and big business take on by transferring most of that risk to ordinary middle-class families and individuals.

The need to reduce the burden of government is perhaps a credible rationale, but it is clear that the whole range of consequences have not been considered. Key among them is that risk-shifting to workers and consumers is recessionary in nature. If Republicans do away with unemployment compensation, for example, this reduces both consumption spending and work force participation. Unemployment compensation covers much of the risk of losing one’s job, and without it, a significant number of people — millions — would be moved to decide that taking a job and joining the work force is too risky. At the same time, everyone who has a job would feel the need to keep additional savings to guard against future income loss. Saving means spending less than you earn, and this reduction in consumer spending translates almost directly to a slower economy.

It is a similar story with the phase-out of Medicare, new restrictions on access to health insurance, repeal of workplace safety rules, eliminating food safety inspections, and dozens of similar proposals in the Republican agenda. In general, forcing workers and consumers to take on new risks leads them to seek ways to reduce their risks in other areas. The perception of excessive risk leads a person to become more reluctant to take or continue with risks. People try to stay in or near their comfort zone or their idea of how risky and chaotic they think their lives ought to be. So how do you reduce risk, once you have decided to do so? People reduce the risks associated with the commercial system mainly by participating less in the commercial system: borrowing less, working less, spending less. Any form of reduced participation tends to lead to reduced economic activity, and reduced economic activity in the aggregate is exactly the defining quality of a recession. Any abrupt shift of risk onto workers or consumers, then, is likely to cause a recession. Attempted on the scale that the Republicans are talking about, it could trigger a depression.

This effect will happen especially easily during the current period of deleveraging, when people are trying to reduce their exposure to risk by reducing their debts. Deleveraging shows that people already worry that their personal risk levels are too high. Load more risk onto them at this point, and the macroeconomic consequences could be severe.

The result is the opposite of what the Republicans are promising. They say they want to expand the economy by turning free enterprise loose. Yet expansion is not the result when you turn free enterprise loose into the teeth of a recession. The “free” in “free enterprise” very much implies the freedom to fire workers, close locations, and move jobs to other countries. Indeed, if the current wave of deleveraging were to be compounded by massive risk-shifting from government and big business to individuals, the resulting economic calamity would give businesses few choices other than to cut back wherever they could, or to shut down wherever they could not cut back.