Economic Perspective: Do We Need a National Rainy Day Fund?

MARY WALDEN:

“Today’s program asks if we need a national rainy day fund. Mike, many economists are predicting a recession will hit the economy next year. If this happens, it will likely reduce tax revenues to the federal government and cause federal borrowing to increase. Is there a way to prevent this?”

MIKE WALDEN:

“Well there’s no way to prevent this from happening if we do have a recession next year, but over the long run we could institute something called a rainy day fund at the federal level. This is simply a situation where the federal government would put away some money into a savings account, if you will, every year, and then they would draw on that money when there’s a recession and when tax revenues go down.”

“Therefore they wouldn’t have to either cut services or increase tax rates. Now states have been doing this for a long time. In fact, North Carolina has a very substantial rainy day fund, and many think that the next time we do have a recession North Carolina is going to be in very good shape because they can draw on that money and not have to cut services and not have to raise tax rates.”

“The federal government has never had a rainy day fund, and so when a recession hits they either have to borrow more, or they either have to tax more or cut services. Now what would it take to get a rainy day fund at the federal level? How big would it have to be? I’ve done some number crunching, and I estimate that if the federal government put away $200 billion a year into a rainy day fund, not for the next recession but for the recession after that, that would be sufficient to tide us over.”

Mike Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.