Wednesday, May 28, 2008


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 US has become – thanks largely to relentless trade deficits, a stupid tax system and overreliance on imported energy – the world’s biggest debtor.

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


  1. Your posting sounds a lot like something Robert Reich might write:

  2. If this was intended as a compliment, thanks. However, as I reread Reich's interesting op ed, I'm struck by how different our approaches are. Reich wants to tinker with the tax code and labor law to help "give Americans enough buying power to keep the American economy going." That's an example of the thinking that I wrote to warn against. My approach is to change the shape of the economy by fundamental tax reform (built around a consumption tax), realignment of Asian currencies, greatly expanded domestic production of energy, some form of universal health care, and intelligent infrastructure investment -- in short, a coherent national strategy to compete in the global economy. Reich wants to "increase the wages of the bottom two-thirds of Americans," but his answers become irrelevant in the absence of expanded investment in goods-producing industries and a revision of the terms of trade so that American-made goods and services are again competitive in the world economy. If we fail to do this, the ever larger debt burden we are incurring will eventually cause the dollar to crash and inflation to soar until we regain some sort of equilibrium. I opt for fundamental change now to avoid that outcome at a time of our creditors' choosing.

  3. Comparing you with Reich was intended as a compliment. I meant you two are similar in that you both recognize that tax incentives for the very wealthy do little to stimulate the economy because they spend a smaller percentage of their income on goods and services. If America is to have a consumption tax, it will hit the most disadvantaged hardest because they pay a much greater percentage of their income on food, gasoline, clothes, etc. than "A-Rod."

  4. Our tax system is the most important set of incentives and disincentives, both for individuals and corporations. That system needs to be changed in a fundamental way to move the country in the right direction. If all we do is add a consumption tax, the consequences for working people would be disastrous. That's why we need a fundamental tax reform built around a consumption tax. That will give us the trade advantages we need while simplifying the tax code AND making the system more, not less, progressive (so that richer folks pay more then poorer ones). In my view, nothing less will do.