In remarkably clear and unnuanced language, Alan Greenspan told the Financial Times a few days ago: “I still believe there is a greater than 50 percent probability of recession” in the United States. The former Fed chairman added: “That probability has receded a little and I think the probability of a severe recession has come down markedly.”
Others disagree. Some say we are already in a recession. Others say that the threat of recession has passed.
Honestly, I don’t care much about this debate for several reasons. First, the pain being felt by so many Americans – higher gas and food prices, tighter credit, disappearing student loans, lost jobs, and more – is just as real whether we are in, still headed for, or successfully avoiding a “recession.”. Second, recessions are generated and cured by market forces. That’s why, by the time we know officially that we’ve been in a recession, it tends to be over. Third, all the fuss about the status of a recession continues to distract us from the structural problems of our economy.
Unlike recessions, we can be reasonably confident that those structural problems are both long-lived and not self-correcting. They have to do with public policy and institutions, not market forces. For example, back in the 1970s the Nixon administration delinked the dollar from gold, implicitly committing US to run trade deficits as a means of providing liquidity to the world (our excess of imported goods is offset by the export of dollars). So long as we were the world’s largest creditor, those deficits mattered little. The biggest challenge was to recycle first the petrodollars and now the sinodollars, too. We have succeeded so well that the
So, my fear is that Dr. Greenspan may be proved right. The threat of recession may recede, the dollar may strengthen, imported petroleum prices may come back down from stratospheric heights, firms may begin hiring again. If all that happens, we will of course breathe a collective sigh of relief. But will we have begun to address our structural problems? Not even close. All we will have done is to postpone the day of reckoning.
If one political party or the other comes up with big ideas to reorient our economy, it may reap rewards for many elections to come. How ironic that neither McCain nor Obama has shown much fluency in such matters. For that matter, a lot of professional economists do no better, and the media are hopeless. But this is why we have elections. Four out of five Americans believe the country is headed in the wrong direction. Let’s hope the diminished threat of a severe recession is not enough to satisfy them.Charles Blum