What Could Stave Off a Recession
A consumer crunch now seems inevitable. The housing market is in free fall, and home-equity loans, which many people used as piggy banks, are becoming more expensive and harder to get. Now big credit-card issuers such as American Express (AXP) and Citigroup (C) are reporting a rise in delinquencies, which will lead to tighter lending standards. The net result will be a squeeze on consumer credit that could bring even irrepressible shoppers to a halt.
But there's a surprising force that could keep the bottom from falling out of the economy: the $3.5 trillion health and education job machine, which created 640,000 new jobs in the last year alone. Propelled by aging baby boomers and rising student enrollments, hospitals and schools are still hiring while almost everyone else is cutting back.
Could adding more nurses, teachers, and hospital orderlies really hold off a recession? The answer is yes—with an asterisk. What people don't realize is that health and education combined make up the single largest source of jobs in the U.S., employing 28 million people, or about 20% of the total workforce. What's more, government funds support many of these jobs, either directly or indirectly, making them less subject to the business cycle.
The hidden danger now is that fading tax revenues may cause state and local governments to cut back on their funding for schools and medical care. That could weaken health and education spending just as the consumer slump hits—a double whammy that could send the economy into recession.
DON'T COUNT ON EXPORTS
Unfortunately, other potential sources of economic strength are not nearly as promising. For example, business investment won't be a big help to economic growth in 2008 as many U.S. companies rein in their technology purchases. And don't count on exports to bail the U.S. out, even with the weaker dollar. With European growth apparently slowing, demand for American-made goods overseas could slacken as well.
By contrast, the demand for education and health-care workers is still rising. Just a few years ago, in 2002, the Education Dept. published projections showing that elementary and high school enrollments would peak in 2005. Now the number of students is 2 million above its supposed high and still heading up. The same is true for enrollment in higher education.
In fact, health care and education have accounted for about 63% of total job growth since the last business cycle peak in March, 2001. Together they have created 3.7 million jobs. By comparison, the next biggest source of new jobs, the leisure and hospitality industries, added only 1.7 million.
So far the expansion of health care and education appears to be just enough to counteract the drag from the housing bust and the consumer crunch. Consider this: Banks, mortgage brokers, and other credit intermediaries have added roughly 350,000 jobs since 2000. Even if all those workers were fired, that would just be equal to seven months' growth in health and education.
But what if the economy still begins to slide into recession? Then policymakers have several choices if they want to try fiscal stimulus. They can offer tax cuts, like President George W. Bush did during his early years in office. They can provide aid to homeowners facing foreclosure or high energy prices, as Hillary Clinton has suggested.
Or policymakers can do something different: boost outlays on education and health. Remember that in the 1930s, John Maynard Keynes forcefully advocated the idea that government spending could bolster the economy in a downturn. Today, increasing federal health and education grants to the states, while politically controversial, could be a quick and effective way of slowing the cutbacks in jobs when tax revenues turn down. If so, Keynes could be back—and coming to schools and hospitals near you.