Senator Elizabeth Warren (D-Mass.) is confident the next economic recession is right around the corner — and she thinks she has a plan to stop it.
Warren is one of 24 Democrats running in the 2020 presidential primary. While several candidates have claimed that President Donald Trump is riding the coattails former of President Barack Obama‘s thriving economy, none have gone as far as Warren in predicting a massive economic recession.
Here are five things to know about Warren’s recession prediction and her plan to stop it.
Warren predicted the 2008 recession.
While working at Harvard as a professor, Warren predicted that subprime loans could collapse the economy. Subprime loans were loans given to people with poor credit for a rate well above the prime market rate for large purchases, such as a home.
In a book she wrote in 2003, the senator noted that subprime loans were driving up costs that low-income families wouldn’t be able to maintain.
“In the overwhelming majority of cases, subprime lenders prey on families that already own their own homes, rather than expanding access to new homeowners. Fully 80 percent of subprime mortgages involve refinancing loans for families that already own their homes. For these families, subprime lending does nothing more than increase the family’s housing costs, taking resources away from other investments and increasing the chances that the family will lose its home if anything goes wrong.”
At the time, Warren noted that an increase in nationwide credit card debt signaled that Americans were not able to make ends meet. She claims the same situation is playing out now.
She claims Trump is leading America to another recession.
As IJR previously reported, Warren believes President Trump is guiding the United States off an economic cliff. She highlighted several areas in which she claims Trump headed in the wrong direction.
The president’s trade negotiations with China have been a point of stress for the U.S. economy. Both sides have been leveraging tariffs against each other, causing turmoil in many areas of the economy, including agriculture and manufacturing.
In Trump’s first 30 months in office, he added nearly 500,000 manufacturing jobs, adding 314,000 more manufacturing jobs than Obama did in the preceding 30 months. Still, Warren warns that Trump created a “manufacturing recession” because, in the second quarter of 2019, manufacturing production declined slightly, with many placing the blame on Trump’s negotiations with China.
Our country’s economic foundation is fragile, and a single shock could bring it all down. Trump's reckless behavior makes that shock more likely. Financial markets and experts agree: We face a serious risk of another recession by the end of 2021—maybe even by the end of 2020.
— Elizabeth Warren (@ewarren) July 22, 2019
In addition to her warnings about Trump’s “reckless behavior,” Warren noted that household debt — which includes credit cards, student loan debt, and other liabilities — is skyrocketing in the U.S. She blames the high cost of living to fund things like childcare and housing. Today, Americans hold more debt than they did immediately following the 2008 recession.
She also warns that corporations are taking on high-risk loans to fund their operations, similar to the subprime loans that individuals were opting to use during the housing bubble.
Corporations are deeply in debt and taking risky loans, spreading that risk throughout our financial system. These high-risk loans look a lot like pre-2008 sub-prime mortgages: poorly underwritten and with minimal protections, packaged up and sold to investors.
— Elizabeth Warren (@ewarren) July 22, 2019
Warren has a plan to stop the next recession.
In her typical fashion, Warren released a plan which she believes could prevent this recession.
Her plan addresses the nationwide household problem, as well as slapping regulations onto corporate lending.
As for household debt, Warren includes:
- a $15 minimum wage;
- student loan forgiveness up to $50,000;
- tuition-free education from pre-kindergarten through a four-year degree;
- free universal childcare;
- support for workers unions and businesses where women make up at least 40% of the board;
- expanding affordable housing with a federal investment of $500 billion in new construction.
Beyond household costs, Warren would crack down on corporate lending by bolstering regulation through the Financial Stability Oversight Council.
Is this plan necessary?
No one can guarantee how the economy will be functioning next week, let alone years down the road. The Trump administration, for example, argues that the economy is booming and couldn’t be further away from a recession.
White House Economic Advisor Larry Kudlow predicted that the U.S. economy would continue its trend of 3% growth — a growth rate some economists didn’t think was possible following the Obama presidency.
Outside the administration, many are starting to doubt that the U.S. would enter a recession in the next couple of years.
Scott Clemons, the chief investment strategist for one of the largest private banks in the U.S., Brown Brothers Harriman, told Forbes, “We see no earnings recession coming at us. The highs in the S&P are similar to where we were in October. The economy is a bit better, interest rates are lower and the likelihood of a very aggressive Fed is remote. All of that is supportive of growth. No recession next year.”
Could her plan backfire?
An economic recession means that economic growth was in the negative for two consecutive quarters, meaning production is down and jobs are at risk.
While Warren’s plan aims to counter a catastrophic collapse of personal or corporate debt, her plan could cause some of its own economic stress.
Her $15 minimum wage proposal, for example, has been analyzed by the nonpartisan Congressional Budget Office. The CBO found that a $15 minimum wage could kill as many as 3.7 million American jobs and cut the average net income for the American family by $9 billion.
Additionally, the U.S. government will have to pay for the other elements of her plan, including universal childcare and student loan forgiveness. Warren plans to pay for these policies using her “Ultra-Millionaires” wealth tax, which the Mercatus Center — a center-right think tank — claims would “almost certainly be anti-growth.”
Although the wealth tax could generate as much as $2.75 trillion over 10 years, the revenues would likely not fully cover these programs, plus the “down payments” for the $93 trillion Green New Deal and the $32 trillion Medicare for All programs she also promised.