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Friday, November 21, 2008

"Recession? Why Worry?"

In an oldie, John Kenneth Galbraith explains why, for many, there is no rush to enact stabilization policy when the economy turns downward:

Recession? Why Worry?, by John Kenneth Galbraith, Commentary, NY Times: Reputable economic attitudes hold that the economic norm is high, if not quite full, employment and a reliable rate of expansion in economic output. Recessions are an aberrant departure from that norm. Correction must come. ...

One must, however, challenge all accepted attitudes on the next point. It is that recession is uniformly adverse in its effect and thus by everyone deplored. A great many people and an even higher proportion of those who have political voice and vote, though perhaps not a majority, find a recession quite comfortable, and certainly more so than the measures that do anything effective about it. This, however, no one dreams of saying.

Economists and all approved economic doctrine have made high employment and economic growth a sacred good. With this no one can openly disagree.

There are the many who live in recession with a wholly secure livelihood and with a lessened fear of price increases, of inflation. They are in no real danger of loss or diminution of income. Present here are the more secure parts of the modern corporate bureaucracy. ...

Similarly secure are many in the professions, professors, needless to say, some public servants, lawyers, doctors and media stars. Also very important is the modern large rentier class. And many who live on Social Security or pensions.

For all these, recessions mean stable or even falling prices and no serious reduction of income. ...

Also, in an economy where services are increasingly important, a recession means a more willing and pliant labor supply, an underclass more available for the unpleasant toil that makes life for the rest of us more agreeable. And for employers.

A recession in modern times is also for many far more attractive than remedial action against it.

The possible positive lines of action against recession are three: taxes can be reduced to enhance the flow of consumer and investment spending, or so it is hoped; interest rates can be lowered to enhance investment spending and consumer purchases of houses, automobiles, refrigerators and electronics, or so it is also hoped; the Government can undertake direct, forthright job creation. This is the holy trinity. Prayer and repetitive prediction of recovery apart, there are no other lines of action.

Tax reduction has its proponents, notably among those who pay the taxes. Unfortunately, its relation to recovery is theoretical. There is the difficult question as to whether the revenues released will be spent or invested; they may be held as cash or unused bank balances. And tax reduction would increase the deficit, concern with which has now reached near paranoiac proportions. Again, better the recession.

Next, there is monetary policy: the reduction of interest rates by the Federal Reserve. This is believed to have a peculiar magic. It calls for no big bureaucratic effort, carries no threat of taxes -- and a special intelligence is taken to characterize those who are associated occupationally with money.

But monetary policy works against recession by reducing interest rates and therewith rentier income. This is by no means welcomed by those who enjoy such income. They are not without political influence. Any talk of an easier monetary policy automatically brings grave and urgent warnings of the danger of inflation. This, too, is a threat to those on stable incomes.

Additionally, there is the sad fact that in a recession monetary policy doesn't work. The elasticity of the response to reduced interest rates is then very low. People and firms spend and invest, or fail to do so, pretty much as before.

Finally, there is direct Government expenditure and employment. For those resting comfortably in recession, this is the worst of all. It could raise prices, risk inflation. Much worse, it promises higher taxes at some time yet to come. ...

We pride ourselves in being plain-spoken, free from cant and certainly from any pathological self-delusion. Given a fact, we face it. Let us now face the fact that for many a recession is a tolerable, even pleasant thing. And let us say so. This will not be popular. There could be indignant denial. That is often the response to unwelcome truth.

    Posted by on Friday, November 21, 2008 at 09:45 PM in Economics, Fiscal Policy, Monetary Policy | Permalink  TrackBack (0)  Comments (16)

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