“As we approach the 10th anniversary of the global financial crisis we should recall how we got there. In 2003-07, the US government pursued fiscal expansion and financial deregulation – an approach that, even at the time, was recognized as likely to constrain the government’s ability to respond to a recession. If the US continues on its current path, no one should be surprised if history repeats itself. (Jeffrey Frankel, US will lack fiscal space to respond when next recession comes, August 28, 2018)

History suggests that, when it comes to economic policy, the time to get your fiscal house in order is when the economy is doing well. In other words, the time to prepare for the next downturn is when the economy is firing on all cylinders.

As matters currently stand, the US economy is close to firing on all cylinders. The current expansion almost matches the ten-year expansion of the 1990s. The economy recently grew very strongly, 4.2% annualized in the second quarter and 3.5% in the third. Unemployment is at a near record low, corporate profits are soaring, investment spending is on the upswing, and the economy is projected to stay on a steady 2% plus growth path for at least another year or two.

However, the federal budget is deeply in the red, and the deficit next year is expected to top $1 trillion. The Trump Administration’s large tax cuts and expenditure increases made matters far worse.

As economists Christine and David Romer recently pointed out, countries with higher debt to GDP ratios have less ability to offset negative economic shocks when they occur.

That is, countries with low debt ratios can successfully apply anti-recessionary fiscal policy measures much more aggressively than those with less fiscal room. (Why Some Times Are Different: Macroeconomic Policy And The Aftermath OF Financial Crises, October 2017)

Although it is difficult to pinpoint the exact timing of the next economic downturn, the odds are that it is not too distant in the future.