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- It often take months to years to officially declare a recession.
- In a recent paper, a Federal Reserve economist proposed a way to spot and address a recession more rapidly.
- A more timely indicator and an automatic mechanism to respond to it could insulate the
economy from some of the consequences of a slowdown. - Visit Business Insider's homepage for more stories.
The financial crisis began in late 2007, but it wasn't until nearly a year later that top economists officially declared a recession. In previous downturns, the US grappled with similar or even longer lags.
Claudia Sahm may have found a way to change that. In a recent paper, the Federal Reserve economist proposed a means to spot and address a recession more rapidly. A more timely indicator and an automatic mechanism to respond to it could insulate the economy from some of the consequences of a slowdown, the paper said.
Under the so-called Sahm rule, changes in the labor market would be a focus rather than a fixed unemployment threshold. If the three-month average unemployment rate increases a half-percentage point or more above its low over the previous year, according to the rule, the economy is in a recession.
As part of the proposal, Sahm outlined a system that would distribute payments to households once that indicator flashed. Those would be issued by the Treasury Department and equal 1% of consumer spending, which drives more than two-thirds of economic activity.
"A rapid, vigorous response to the next recession in the form of direct payments to individuals would help limit employment losses and the economic damage from the recession," Sahm wrote. "Making the payments automatic by tying their disbursement to recent changes in the unemployment rate would ensure that the stimulus reaches the economy as quickly as possible."
With interest rates historically low, there has been an increasing degree of focus on the potential tools Congress has to fight a recession. An automatic stabilizer could soften the blow of a downturn while households await congressional stimulus measures, which can often face time-consuming political hurdles.
"Fiscal policy is normally very slow to respond to a recession and there is also the risk that policymakers view the US as running out of fiscal space," said Ryan Sweet, an economist at Moody's Analytics. "Automatic stabilizers could help take some of the human error out of fiscal policy."
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