Can We Avoid A Recession?

Press Release

My favorite definition of recession is the one used by Ronald Reagan: "Recession is when a neighbor loses his job. Depression is when you lose yours." Reagan was correct: Most people define the economy by their own status and fears.

There is, in fact, a technical definition of recession: two straight quarters of declining Gross Domestic Product (GDP). Thus far, it has not happened. Economic growth has slowed and is below forecasts, but it has not stopped.

The problems faced by your government, however, are many.

First and foremost, the U.S. government is a comparatively small player in the overall world economic picture. The personal borrowing and spending decisions of billions of people and businesses overwhelm in scale the decisions of our government.

Another challenge is that, in an integrated world economy, it is difficult to know how great the problem is, or even where it is. It's much like the farmer who goes out to plant soybeans that have already been sold and resold. They are just as likely to be partially-owned by retired teachers in Australia, workers' pension funds in Japan, and, mostly, China, as to be owned by anyone within 500 miles of the farmer.

That doesn't mean that nothing can be done and that we should just wait to be clobbered. But it does mean that, at the margin, we need multifaceted answers.

At this point, we're trying to avoid a recession, not treat the symptoms (e.g., by extending unemployment insurance). If we are to have a substantive recovery, rather than just stall off a recession, encouraging investment in equipment and business expansion is the most essential part of any package. We will never undercut China on wages. We need to compete by making our workers more productive. But, if Americans' recession concerns halt buying, businesses won't invest even if they're given tax incentives.

The solution is the premise of Keynesian economics: throw money at it.

Because of the above complexities, I reluctantly support this proposal at the current time. The fact is that — no one — knows exactly the depth of our worldwide credit crisis. But, in a rapid news-driven era, fears drive expectations, which drive consumer behavior.

Some people who made bad credit decisions and are now failing to pay their loans have tightened the market for those with good credit. We could say, let's just tough it out and let those who made bad decisions pay for those decisions, but the truth is this: we are all going to pay for them because the people who fund our loans, credit cards, and businesses are the same cash markets holding the bad debt.

One last point: the federal government is countercyclical in all this. If the economy declines, it receives less revenue. But expenditures soar, on unemployment, Medicaid, etc. Furthermore, defaults on government loans, such as farm loans, small business loans, housing loans and student loans, dramatically increase during an economic downturn as well.

When you look at the exposure of the taxpayer to the cost of a recession — declining revenue and increasing costs — all of a sudden a stimulus package that uses both supply- and demand-side economics looks like a better risk if it can occur right now, while the markets are still unsettled.

Quite frankly, speed is as essential as anything right now. Passing the package earlier likely would have been a waste. If we're too late, it will be a waste.

The bottom line is that the Senate needs to pass the bipartisan economic growth package this week. Each additional day of waiting increases the chance it will be too late.

Source