The Joys of Recession

as a subject matter and, in its more than slightly fragile way,
as a
science, has two notable features. There is a plausible
characteristic of the
economy, well supported by both analysis and experience, that
gets relatively
little mention. And there is a related aspect of the economic
system that is
wholly proscribed in all reputable thought and discourse.

The little-mentioned feature is the possibility, even the
probability, of an
underemployment equilibrium--an enduring situation of poor
performance. The
wholly unmentioned fact is that, for a substantial and
politically influential
section of the population, this is wholly acceptable, even good,
and certainly
to be preferred to the relevant remedial actions.

It is three years and some months since the United States economy
slipped into
recession, with other countries of the developed world similarly
affected. But
popular and professional economic attitudes have rejected the
notion that this
is how the economy should be expected to perform. Instead, there
have been
weekly, sometimes daily, predictions of recovery. The notion that
what we now
experience should be taken as normal, if not subversive, is at

That recovery is not necessarily a normal expectation has the
support not alone
of what has happened in these last years but also of prior
experience and a
once-influential current of economic thought. There were the nine
long and dismal
years of the Great Depression, the latter brought to an end only
by the massive
infusion of government fiscal support that came with the war. And
there was the
compelling analytical talent that John Maynard Keynes brought to
bear on that

In the modern economy, Keynes held, there can be a strong desire
to hold liquid
funds--"liquidity preference." This is especially the case if
income distribution
is highly unequal; then individuals and firms are under no great
compulsion to
spend or invest. What is paid out from the price of goods and
services as wages,
interest, rents, and profit does not come back reliably to
purchase goods and
services, as the sacred tenet--Say's Law--had long held. It may
be held unspent.
In consequence, production and employment shrink until they are
sustained by
necessitous consumer spending and associated investment outlays,
and there they
remain. The fact of recession or depression and the accompanying
fear and
uncertainty then strengthen the liquidity preference and thus the
continuing poor

So, with much refinement and some qualification, spoke Keynes. An
number of economists would still accept the point. But in most
popular and much
professional discourse it has lost standing. The economy is
assumed to have
within itself the power of recovery; government action can be
damaging, for it
can impair or destroy the confidence of the financial world. The
financial mind
is a very sensitive thing.

Complementing this professional and political attitude is the
firmly forbidden
fact. It is that many in the modern economy are quite comfortable
with recession,
the underemployment equilibrium, and greatly prefer it to the
measures that might
bring it to an end. In the underemployment equilibrium, prices
are relatively
stable. People on pensions or Social Security find this entirely
agreeable. Many
professionals have similarly secure incomes. They too find relief
from the threat
of inflation. Some smaller businessmen do suffer; others, in
contrast, are
favored by a more eager and tractable labor supply. Farmers, once
a large, even
dominant part of the population, suffered severely in past times
from depression.
Now fewer in number, they are extensively released from worry
about recession by
government-guaranteed prices.

The most relaxed response may well be in the modern large
corporate enterprise.
There, from the corporate bureaucracies, one reads daily of
surplus staff being
shed. No mention is made of the larger number with secure
position and income;
and especially, there is no mention of the wholly agreeable
situation of those
who do the shedding.

The preference for recession, the underemployment equilibrium,
becomes fully
evident when attention is accorded the available lines of
remedial action. The
most benign is to lower interest rates. This, for the banks,
which are the
influential extra-democratic force in the Federal Reserve, means
a lower price
for money--the product that they sell. That is not welcome. Nor
are low interest
rates welcomed by the modern large and now influential rentier
class. A friend
of mine, fresh from several years' service with one of the
regional Federal
Reserve banks, tells of a large flow of letters pleading and
protesting against
moves toward lower interest rates. Better the recession. There is
also a
practical problem. Both the investment response and the consumer
response to
lowered interest rates are highly uncertain. In poor times people
and firms do
not reliably borrow, spend, and invest.

What remains is fiscal stimulus. Tax reduction can be set aside;
its effect is
also uncertain, and it is notably influenced by those whose taxes
might come
down. The one certain course that remains is positive job
creation. Here the
preference for recession is very strong. By its nature, this
enlarges the role
of government. To this there is much opposition on
quasi-religious grounds. And
in a purely secular vein it holds, or is thought to hold, the
threat of higher
taxes at some future date. Better the resistance now.

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In killing the very modest Clinton stimulus package last spring,
Senator Bob Dole
spoke for a very influential constituency--one, it might be
noted, that owed much
to government social and economic initiatives. Social Security,
bank and
savings-and-loan insurance, and farm price supports with marked
effect in Kansas
were what allowed Bob to rise in opposition.

My view on these matters will be reasonably evident. In the
depressive aftermath
of a speculative episode, as after the 1980s, there are certain
curative effects of time. Debt is paid off or defaulted; firms
emerge from
bankruptcy; a new generation emerges in the world of business and
confident in the belief that they were intended by divine choice
to be rich.
Nonetheless, the possibility of an underemployment equilibrium
must now be
accepted. And this being so, there must be stimulative public
expenditure and
employment to break out of it. There is a time for talk of
deficit reduction; it
is when the economy is strong and the speculative mood is strong
in the land. Not

Those who are untroubled by the underemployment equilibrium do
not say so. There
can be no openly expressed preference for a stagnant economy; God
forbid. But let
it be said. This will be a source of discomfort to the
comfortable, a worthy goal
in itself. And it brings us to the hard truth: the modern
economic dialectic is
between those who are quite comfortable with recession, the
equilibrium, and those who painfully, even tragically, are not.
And it is in the
interest of these last that we must embrace the only plausible
remedial action.

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