Starving off a Recession

Commentary by Pete du Pont

The second most discussed subject in recent days - after who is going to be president - seems to be whether an economic recession is imminent. And the answer is ... your guess and mine are as good as anybody's.

Mass psychology seems to play a part in triggering a recession, and there have been pessimistic reports - especially since the election - about weakness in consumer spending, reductions in factory orders, reduced capital spending by corporations - you name it. Even Dick Cheney says the economy "may well be on the front edge of a recession."

From news reports, it appears that a majority of economists think there will be a recession. Their debate turns now to whether the economy will have a "soft landing" - a gradual slowdown allowing time for adjustment by individuals, businesses and institutions - or a "hard landing" with the economy in a true recession.

The Wall Street firm J. P. Morgan & Co. has already set up a formal "Hard Landing Watch" and several economists are predicting that chances are as much as one in three that we'll have a "significant slowdown" in 2001.

But even though they make a living studying this stuff, economists do not have a confidence-inspiring record when it comes to predicting the future of the economy. As Barry Asmus, senior economist of the National Center for Policy Analysis, says in his speeches, "Economists are very good at predicting recessions. We have predicted eight of the last three."

We shouldn't be too hard on economists, though. The very nature of a dynamic, innovative, free economy dictates against accurate predictions. Recessions seem to come upon us with little warning - so even if there were a magic bullet to stop it, we wouldn't know when to fire that bullet.

A rough definition of a recession is a period of two or more successive quarters of decline in real Gross Domestic Product. The official declaration of the beginning and end of recessions is left to the National Bureau of Economic Research, an independent research institution, and is based on the movement of GDP and a number of other key economic indicators. These key indicators don't always all change at the same time, so some subjective judgment is involved. It also takes time to make the determinations. For example, the 1991-92 recession was over before the 1992 presidential election, but the end wasn't officially determined until after the election, and after Bill Clinton had defeated George Bush, - campaigning in large part on the economy.

To further complicate forecasts, today's economy is not the economy of the past, or even of the early 1990s. The fact that so many dot-coms are biting the dust does not alter the fact that communication and technology have effected major, and lasting, changes in the economy. What impact do the success or failure or business activity of elements of this New Economy have on our overall economy? The answer is that nobody knows.

Even in the old economy, "managing the economy" was probably a misnomer. There's only so much government can do that can help it - and far more that can hurt it. It has already been noted that, for a number of reasons, economists have just as much difficulty predicting the economic future as non-economists. And Alan Greenspan is an economist. Without taking anything away from Mr. Greenspan, who has been a magnificent chairman of the Federal Reserve system, perhaps his greatest contribution to our (up to now) buoyant economy has been the confidence he has inspired in financial circles and in the investing public. They have felt that he is keeping a firm hand on the economic rudder.

Did Mr. Greenspan push interest rates too high in an effort to prevent inflation? Even with the benefit of hindsight, who can tell? After all, this is an art, not an exact science. Luck helps, too.

At any rate, now is one of those times when the government can do something to help. Two things. Congress and the president (whoever he is) can quickly pass a big across-the-board tax cut early in 2001 and the Federal Reserve can reduce interest rates.

Both tax cuts and interest rate reductions have sparked recovery in the past. The problem has been that, with the difficulty of differentiating the onset of a recession from a healthy breather for the economy, neither took effect early enough to prevent there being a recession.

What we need this time is a preemptive strike. Maybe it isn't too late.



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