Why this recession is different
The recent congressional elections illustrated how difficult it is to discuss economic policy in the United States. While the President kept telling us that inflation is lower and interest rates are going even lower, his Democratic opponents had concentrated on the jobless rate. Both had hold of at least a piece of the truth.
The comments that follow do not actually deal with this recession. One might note in passing, however, that there will be a legitimate debate for years as to whether the President pursued the right course in cutting taxes so drastically, albeit over a three-year period. Had the tax cuts been less, it will be argued, the budget deficit would have been less. The financial markets would have been less scared, and interest rates would not have stayed high for 18 months into the President's term.
As far as that goes, it makes good criticism. But bringing down interest rates was not all that the economy in early 1981 needed. The inflationary expectations that had come to be taken for granted over the past 15 years had to be lessened, if not eliminated altogether. Regardless of the mistakes that one can claim were made in setting fiscal policy, or the difficulties the Fed had in targeting money supply, what would have ended the speculation in real estate, or the seemingly endless cycle of wage boosts, if the economy had not been put through some pain?
That this final statement could not be made by any politician hoping to get reelected is endemic to the short-run goals which the American political system (as well as many other democratic ones) nurtures. It is also highly limiting to the growth of public understanding. For, the main need at the moment is not to assess blame for this particular recession but to understand that this business cycle is different from the seven others since the end of World War II. The United States is adjusting to two phenomena unique to this period - the need to share the production of many goods once considered almost proprietary to the US, and to deal with the serious financial problems of major portions of the developing world. Neither is a purely domestic problem, but each will affect the timing and extent of the coming economic recovery.
To be specific on the first point: The troubles of the automobile industry and segments of other industries serving it (such as steel, rubber, and glass) are not limited to the domestic business cycle. The auto industry is well along in the race to become a global industry, but there will be fewer firms at the finish line. While many cars are made and sold abroad by the American companies, the public is more aware of the number of foreign-made cars being sold here. Whatever the precise reasons, the combination of competitive pricing, the right size and pleasing design, and public perception of better quality have given imports such a place in the market as to make it unlikely that the domestic industry will have the kind of recovery it has had from other recessions.
As for the problems of developing countries, it is fashionable today to blame the large banks for making ill-founded foreign loans. The fact is that many nations, up through the 1970s, were making rapid strides to join the lowest ranks of the industrial nations. Growth rates may have been extrapolated too simply from recent experience, and the collapse of export commodity prices plus the continuing high price of imported oil (invoiced in US dollars which have remained high) are critically affecting the ability of many nations to service their foreign debt. It is a testing time for international financial cooperation , and whether the combined formal and informal network of financial structures built up over the postwar period are sufficient to weather the crisis is not yet foreclosed.
However, even with a ''happy'' outcome, many large banks seem destined to have the loans of foreign nations on their books for longer than first estimated and probably at somewhat concessionary terms. To an extent not yet clear, this is likely to limit the ability and willingness of the banking system to finance the next domestic cycle.
These problems need to be seen in proper perspective. Economic relationships continually adjust, but to the public eye they do it in quantum steps, as in the dissolution of the postwar Bretton Woods system in 1971 or the temporary ascendancy of OPEC in the period beginning in late 1973. The need to share US production and the development of many other nations are both signs of partial success in achieving such noble post-World War II goals as sustained economic growth, freer markets, and expanding world trade and investment. But the moment of adjustment is particularly acute right now, as it coincides with a domestic downturn and a change of philosophy regarding the proper role of the federal government.
The issue is less whether the tax cut was too small, too large, or too late, or whether this year's tax increase was the right thing. The issue is certainly not over the Federal Reserve's conduct of monetary policy. The issue is much broader. Can the US successfully develop successor industries that will also match its declining industries in terms of jobs? Can domestic and foreign economic policy guide its banking system through the transition to a slower, noninflationary growth path that still offers the third world a politically realistic way to service its foreign debt? We did not hear much about these more complex issues in the last few weeks of the campaign. But they are two important elements the public should be aware of before it can grasp why this recession is different and why the recovery will be limited - unless, that is, there is genuine progress on these points.