Two Charts That Show How Ill-Prepared We Are for the Next Recession

Writing recently for Project Syndicate, Brad DeLong offers some sobering thoughts on our readiness for the next recession:

If a recession comes anytime soon, the US government will not have the tools to fight it. The White House and Congress will once again prove inept at deploying fiscal policy as a counter-cyclical stabilizer; and the Fed will not have enough room to provide adequate stimulus through interest-rate cuts.

Running the economy hot has produced some good numbers in the short run, but warning signs are beginning to accumulate. Although there is no natural life-span for a business cycle, this one has already been the longest on record, measured the previous peak of December 2007. It is only prudent to give some thought to our preparedness for the next recession — or our lack of it.

Let’s start with the monetary side. The Fed’s primary tool for fighting recessions is to cut its key interest rate, the federal funds rate, in order to encourage lending and maintain liquidity of the banking system. However, for that tool to work well, the rate has to be high enough before the downturn starts to make room for significant cuts.

The following chart, in which gray bars show recessions, allows us to compare the present situation with business cycles of…