“Construction spending falls in July.” “Auto sales downshift in August.” “Jobless rate hits 4.9 percent; payrolls plunge.” Recent headlines contain ample evidence that the U.S. economy continues to slow. This is not good news.
However, it may be better for government officials to do nothing than to rush headlong into actions that will do little to help our short-term problems and may well hurt us in the long run. Unfortunately, George W. Bush does not seem to be emphasizing moderation.
The economy has been growing for longer than in any other period since World War II. As of the second quarter of 2001, that growth is nearly zero. When comparable numbers are available for the third quarter, they likely will show that output has decreased. Two consecutive such quarters will constitute a common definition of a recession.
But even if we are in a recession right now, many other nations would love to be in our place. And even if our economy is slowing, most of us are substantially better off than at any time in the last 30 years. A garden-variety recession is not going to put us back where we were 10 or 20 years ago.
Unemployment remains low, despite recent increases. Inflation is well in check. Interest rates for business borrowers are below 7 percent as are many fixed-rate mortgages. Hourly earnings in manufacturing in the Twin Cities are a full dollar per hour more than two years ago. There is no reason for panic.
Recessions are a natural part of economic life, analogous to birds molting or children losing baby teeth and getting permanent ones. They are a momentary halt or step back to tidy the stage before proceeding on to the next act.
Any long expansion engenders optimism that leads to excesses. Some businesses make physical investments that really are not warranted. Banks make loans that cannot be paid back. A recession acts as a cold draft that snaps households and businesses out of a cozy lethargy and calls them back to details.
Prior to 1936, most economists saw recessions as essentially self-correcting events. Businesses and households pull in their horns. Banks might write off some loan, but then return to making loans, though with renewed vigilance. Innovation and growth can continue.
In the 1930s, the world was caught in the Great Depression, a recession that had become deeper and more widespread than usual for a variety of reasons, including bad monetary and trade policies on the part of industrialized nations. An English economist, John Maynard Keynes, argued that governments could take initiatives with taxing and spending policies and with the money supply to stimulate a sluggish economy and return it to growth.
Within three decades, the general public went from broadly assuming that governments could do nothing about recession to assuming that governments could and should do everything. If an economy slowed, government should immediately step in to set things right.
When governments did this repeatedly, there was an unintended and largely unexpected outcome. Both inflation and unemployment tended to rise stubbornly over time. We called this new phenomenon “stagflation” in the 1970s.
Most economists are much more wary today about calling for the government to stomp on fiscal and monetary gas and brake pedals. But politicians, including our president, apparently have been conditioned to believe that economic micromanagement is part of their job description.
The president’s Labor Day speeches to union groups in Milwaukee frankly scared me. He asserted that current economic performance is “not good enough for America … and I intend to do something about it.”
Please, Mr. President, calm down and keep your powder dry! The Federal Reserve has chosen to increase the money supply each time its policy-making Open Market Committee has met so far this year. The effects of such stimulus takes a while to kick in.
Congress has also passed the tax cut you asked for. While your own economic guru, Lawrence Lindsey, does not believe in cutting taxes for the purpose of short-term jolts to the economy, the tax cut is likely to provide some economic stimulus.
It is important not to go any further. We have weathered many recessions. The one that contributed to your father’s losing the 1992 election was over for natural reasons before Bill Clinton even took office. Take it easy, Mr. President, and let things run their course. History tells us that is probably the best course.
© 2001 Edward Lotterman
Chanarambie Consulting, Inc.