Experts might not be able to predict the how, when and why of America’s next recession exactly, but that doesn’t mean we can’t try to prepare for the job loss and money stress of an economic downturn. For individuals, saving can be one of the best safeguards—even though that’s not how most people operate. Instead, individuals and governments tend to spend when times are good.
Here are two ways you can help improve your money outlook, along with three government policies that elected officials should be thinking about right now.
You Can Build a Good Credit Score: In 2015, the Consumer Financial Protection Bureau found 45 million Americans—one in five adults—have negligible or zero credit history. These “credit invisibles” (a group disproportionately made up of younger consumers, African-Americans and low-income individuals) are especially vulnerable in a recession. A lack of credit history can be grounds to deny someone employment, electricity, a cell phone or housing.
Jose Quiñonez, founder of the San Francisco nonprofit Mission Asset Fund and a 2016 MacArthur “Genius,” has a way to help more Americans build a good credit report. The approach could be used in communities across the U.S., rural and urban.
Quiñonez’s method is built on the informal lending that’s already happening outside of banks. Lending circles (also called lending clubs, tandas or sous-sous) are a group of people—say, a dozen neighbors—who commit to contributing a set amount of money each month into a pool. Each month, one member gets to withdraw the cash. If everyone in a club of 12 pays $100 per month, then everyone will receive a $1,200 lump sum once in the rotation.
These zero-interest loans can be a lifeline for individuals who can’t get a bank loan during a recession (or even during a boom), but traditionally the main way to build credit in the U.S. has been by borrowing and paying back bank loans. Quiñonez’s work elevates lending circles to make sure these communities are accounted for. “This informal lending was taking place, but it was not being reported to credit bureaus,” he says.
Mission Asset Fund, which Quiñonez launched in 2007, right on the precipice of the last recession, works with lending clubs and files paperwork with credit bureaus so that members’ participation in a positive lending exchange doesn’t fly under the radar. MAF has helped boost thousands of credit scores by an average of 150 points.
You Can Track Your Cash: For the tech savvy who just aren’t good at saving, go digital. Apps like MoneyFellows and Qapital automate the savings process. For savings 101 help, try the Federal Reserve Bank of Boston’s video games based on popular hits like Farmville and Angry Birds, which have reported success in promoting financial literacy.
Officials Can Help Americans Save: Post-Great Recession recovery may be incomplete and uneven (check your state’s financial health on our map: “See How Ready Your State Is for the Next Recession”), but almost every U.S. state now has a “rainy day” fund in excess of 2007 levels. We can’t say the same for most American households—but what if we could?
Sidecar accounts, or personal rainy day funds, could be a nationally backed tool that allows employees to put aside money through their company payroll, like many already do with a 401(k), to build savings for emergencies.
Recommendations from a 2016 Bipartisan Policy Center report on improving the personal savings of Americans made their way into legislation that passed the Senate and currently sits in the House of Representatives. Shai Akabas, an expert on retirement and personal savings at the Bipartisan Policy Center, expects the so-called Retirement Enhancement and Savings Act to pass later this year. Then it might not be long before we see sidecar accounts appearing in legislation too. He says that there’s momentum in D.C.: “I believe that we could see bipartisan legislation on rainy day accounts introduced this Congress.”
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Officials Can Help Americans Move to Work: Americans aren’t moving like they used to. Migration rates have been steadily declining in the U.S., across all income brackets, for the last 40 years. That means people in the states slowest to recover from the last recession—many in the Rust Belt—are still struggling while jobs go unfilled in other states.
President Trump suggested in late 2017 that more Americans need to not “worry about your house” and instead pick up and resettle closer to where the jobs are. He hasn’t yet offered details, but there are policies that could help. To be sure, though, it’s not easy. A program of government-assisted worker relocation would be inordinately expensive and likely a nonstarter in Washington. The last time something similar was attempted, in the 1960s, President John F. Kennedy (and then President Lyndon B. Johnson) faced fierce backlash from rural areas that stood to lose population on account of a worker-relocation program. Some critics lambasted the program as a type of cultural genocide being carried out on pastoral America.
“To admit that workers have to move and that your community is going to decline, that’s kind of like having a seriously ill relative and the discussion over stopping care,” says Kevin Leicht, a professor at the University of Illinois who studies the history of labor migration. “In Illinois and Iowa, that’s simply not going to be a popular option.” Still, now’s the time, not during a recession, to plan along these lines. “It’s preferable for the government to help people stay in their homes during the recession,” says Leicht. “But when the recovery starts, it’s right about then that this kind of plan needs to be discussed.”
Officials Can Help Americans More With Debt: A more politically feasible route for experimenting with new policy might be through the Federal Reserve. After the last recession, the Fed played a key role in stimulating a moribund economy, which it primarily did by purchasing trillions of dollars of toxic assets—mostly mortgage-backed securities—that belonged to the country’s largest banks, as a means of generating more interbank lending.
To this day, the Fed continues to prop up lending in the housing sector by spending tens of billions per month on mortgage securities. Some economists wonder if the Fed should channel more money to other parts of the economy and not focus too much on the housing sector. “Why is mortgage lending in particular the kind of lending that we have some great social interest in supporting?” asks J.W. Mason, a fellow at the left-leaning Roosevelt Institute.
While homeownership has leveled off almost a decade into the recovery, both household wealth and worker wages remain well below pre-recession levels. Mason argues in a recent report titled “Expanding the Monetary Toolkit” that the Fed could think about expanding what kinds of assets it purchases in future downturns and recoveries to include debt such as auto loans, credit card loans and local government bonds. On a small scale, the Fed experimented with this policy to great success in the last downturn. It might be time for a more robust, longer-term expansion of that test.