March 25, 1997
"Sometime, Somewhere, a Recession Will Strike"
San Jose Mercury News
By Timothy Taylor
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WHENEVER THE economy experiences a long expansion, congenital optimists start
chirping about how recession has become obsolete. This was true in the later part
of the 1960s, when even a number of professional economists believed that their
clever mastery of economic policy had abolished recession. Of course, this was
right before a triple-whammy -- recession, inflation and unemployment -- rocked
the economy in the 1970s.
In the late 1980s, Reaganite optimism encouraged the belief that uninterrupted
economic growth had now arrived. This was just before a combination of recession
and higher unemployment swept George Bush out of the White House. Now, since the
last recession bottomed out in March 1991 and the U.S. economy has been expanding
for six full years, the optimists are burbling again.
Mind you, I am not predicting that because the present expansion has lasted
six years, a recession must be lurking around the corner. ''Expansions do not
die of old age,'' noted the most recent Economic Report of President Clinton's
Council of Economic Advisers. ''Instead, they are brought to an end by specific
(if unpredictable) factors, such as a runup of inflation followed by a tight monetary
policy; weak financial institutions and lack of credit; or a buildup of inventories.''
Since the economy now has low inflation, near-record levels of profitability
for banks and financial institutions, and low levels of business inventory, no
recession seems nigh. At some point, however, the economic weather will turn gloomy.
One survey found that 60 percent of professional economic forecasters predict
a recession by the end of 1998.
Now, before the next recession arrives, is a good time to think ahead about
the consequences. One impact will be on the budget deficit. As the economy slows
down, tax revenue declines and greater use of the social safety net drives up
expenses. A moderate recession would raise the deficit by about $100 billion,
according to estimates from the Congressional Budget Office.
Most economists agree that a higher deficit caused by recession should simply
be allowed to occur. After all, it wouldn't make sense for the government to drag
down an already recessionary economy by choosing that time to balance the budget
with spending cuts and tax increases.
The foolishness of such an attempt is a strong argument against a constitutional
amendment to require balancing the budget on an annual basis.
The next recession will also wreck the recent welfare reform. A recession will
bring higher unemployment, which will make it very hard to satisfy the new legal
requirements that a high proportion of welfare recipients move quickly to jobs.
In addition, every recession raises the need for welfare spending. Under the recent
welfare reform, states are responsible for welfare funding. But in a recession,
state tax revenues will fall, and states are generally forbidden to deficit-spend.
The federal government has a contingency fund to support state welfare spending
during the next recession, but it has only a third or less of what will be needed.
Something will have to give.
Finally, the next recession could rattle the teeth of the stock market. If
a recession causes the stock market to level out or decline for a time, will the
new investors of the last few years remember their sensible and prudent intentions
about investing for the long haul, through ups and downs? Or will they sell and
run, further depressing the market?
A dropping or wavering stock market need not cripple an economy. Remember,
the U.S. economy cruised past the stock market crash of October 1987 with scarcely
a bobble. But it certainly doesn't promote economic growth, either.
A certain inability to believe in the next recession may be impossible to uproot.
Back in the 1920s, despite the fact that the economy had suffered a deep recession
in 1920-21, and then shallower recessions in 1923-24 and 1926-27, there were still
those in '28 and '29 who couldn't believe in the possibility of another recession,
let alone a Great Depression. But if we accept that another recession is coming,
sooner or later, we're less likely to make panicky mistakes when it arrives.
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