The Government is Cash Poor and Recession Looks Likely - Here's How to Handle It

In 2017 Republicans in Congress, backed by Donald Trump, pushed through a sprawling rewrite of the Federal tax code. The measure, known as the Tax Cuts and Jobs Act (TCJA), made a variety of changes with the stated goal of increasing US economic growth by injecting more money back into businesses and consumers' wallets. The idea was that the growth effects would offset Federal revenue losses to create a net benefit for the country's bottom line.

The problem is, it hasn't worked.

The first-year results have been so disappointing that even one of the authors of the bill itself has admitted that the tax cuts may not pay for themselves after all. While no serious economist is surprised by this outcome, there's a good chance that many Americans won't be pleased with the way things have worked out. After all, declining federal revenues coupled with worsening economic conditions mean one thing – things are about to get harder for the average American.

With a potential recession on the way and a government hurting for cash, individuals would do well to take it upon themselves to prepare to ride out the coming crunch while they still can. Here's an overview of what they can and should expect, and how best to prepare for it.

Forget About Bank Savings as a Strategy

The first thing that the average person should expect (and have in fact been experiencing already) is some coming decreases in the country's interest rates. As the economy gets worse, the Federal Reserve will act to stimulate it by making borrowing cheaper. For individuals, this translates into lower interest on savings held at banks. Already, some 70% of Americans have bank accounts that are paying less than 2% interest, and that's going to get worse.

To offset that, it's a good idea to shift as much money as possible into higher-yield CDs while they're still available. That will lock in a higher rate through at least a year, which is all but certain to outperform any bank account as the Federal rate declines. Even if conditions deteriorate to the point that pulling out of the CD early becomes necessary, paying the fee will be worth it compared to the alternative.

Don't Count on Government Support

During the last recession, federal and state governments acted quickly to expand social safety net programs to help support people as unemployment rose. Studies after the fact confirmed that many of the social programs that expanded temporarily made a real difference in the lives of those most affected by the downturn. Many people believe that the moves would be repeated if another recession is in the offing – but the government's present financial situation makes that unlikely.\

Consider, for example, that the federal deficit in 2007 (just prior to the recession) was a large but manageable $161 billion. This time around, thanks in large part to the TCJA, the deficit is projected to reach $1.1 trillion by the end of 2019. That means it may be all but impossible for a repeat of the strategy that worked so well in 2008, and Americans may be on their own. That's why it's a good idea to build up a reserve fund right now, while there's still time to do it. It may be all that will separate many people from financial ruin.

Pay Down Debts Now

The one positive outcome of falling interest rates is that there's never been a better time for people to pay down whatever debts they have. People carrying high-interest credit card debt might be able to secure a low-interest personal loan to reduce their monthly burden or accelerate their payment plans, or might be able to get their credit card issuers to lower their rate in response to the current lending climate. With the average American household carrying about $5,700 in credit card debt, now's the time to wipe the slate clean.

The same goes for outstanding tax debts. With tax receipts falling, the IRS is working harder than ever to collect what people owe. That's a big reason why the agency's popular offer in compromise program now has an acceptance rate of around 40%, as more people take action to settle old balances. If things get significantly worse economically, the IRS may become far less amenable to working with debtors so it's a good idea to act before that can happen.

Upskill to Avoid Job Vulnerability

The one thing that's a universal feature of every recession is that companies in almost every sector will resort to layoffs to stem operating losses. Not every industry is affected in the same way, however. Cyclical industries like housing and construction almost always fare worse, as does the retail sector as consumer budgets tighten. Anyone who makes their living in these sectors would do well to prepare themselves to transition into alternate lines of work.

The industries that are most resilient in recessions include education and healthcare, as they provide services that are necessities, not luxuries. The same goes for public-sector employment, as government agencies aren't apt to slash jobs when private sector unemployment is on the rise. With that in mind, it's a good idea to seek training now to move into a less-vulnerable industry. It's a great time to do so, as most common training and degree programs now offer online-only coursework at reasonable prices. It's even possible to earn an online masters in a variety of disciplines for those looking to improve their prospects further.

Don't Wait any Longer

Although no one can know with any certainty when the US will pass the point of no return and enter into recession, it is likely to come sooner rather than later. That means that time is growing short to put the above preparatory steps into action to avoid the worst possible financial outcomes. Of course, there's no guarantee that any amount of preparation will be enough – after all, the last recession was longer and deeper than anyone could have predicted – but that's no excuse to avoid getting ready. So to all Americans taking a wait-and-see approach to their economic future the message is clear: it's time to act now or you'll pay for it later when you can least afford to.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.