U.S. Lacks Ammo for next Economic Crisis

Policy makers worry fiscal and monetary tools to battle a recession are in short supply

As the U.S. economic expansion ages and clouds gather overseas, policy makers worry about recession. Their concern isn’t that a downturn is imminent but whether they will have firepower to fight back when an economic crisis does arrive.

Money has been Washington’s primary weapon in the decades since British economistJohn Maynard Keynes proposed aggressive government spending to battle the Great Depression. The U.S. generally injects cash into the economy through interest-rate cuts, tax cuts or ramped-up federal spending.

Those tools could be hard to employ when the next dip comes: Interest rates are near zero, and fiscal stimulus plans could be hampered by high levels of government debt and the prospect of growing budget deficits to cover entitlement spending on retired baby boomers.

Few economists believe the U.S. is near recession. The economy seems to have regained its footing after a first-quarter stumble, and Federal Reserve officials are considering whether to raise short-term interest rates for the first time in nearly a decade to ensure the economy doesn’t overheat.

Even so, looming threats are a reminder that the slow-growing global economy is just a shock away from peril. Japan’s economy contracted in the second quarter and Europe recorded lackluster growth. China’s slowdown, meanwhile, appears more severe than global policy makers initially realized and a currency devaluation there might spur trade frictions.