Heading for Recession?

James K. Glassman | August 4, 1998

The Washington Post, Tuesday, August 4, 1998; Page A15

There's an old joke that economists have predicted 10 of the last three recessions. Lately, however, they haven't been predicting any -- and that's troubling.

No one knows what the economy will do, but when the experts see growth to the far horizon, it's time to worry. Calamities, by definition, are unexpected.

I think a case can be made that the economy is beginning to slow significantly, and while it's far from certain that a recession is imminent, smart politicians would be preparing for one. They aren't, and the negligence is surprising.

In fact, more than the Lewinsky scandal, a recession is both the best hope of Republicans for recapturing the White House and the best hope of liberal Democrats for recapturing their party.

Instead, politicians heading into the November elections are disturbingly bipartisan. Both sides figure that, with peace and prosperity, their incumbents will cruise to reelection, so there's no sense taking controversial -- that is, principled -- stands.

But prosperity is now in question. On Friday, the government reported that gross domestic product increased only 1.4 percent in the second quarter. That's a severe decline from 5.5 percent GDP growth in the first three months of the year.

Quarter-to-quarter GDP figures are notoriously volatile, and as recently as the third quarter of 1996, GDP growth was a mere 1.0 percent. But that figure was an anomaly. The world is very different today; thanks to a severe crisis in Asia, global fundamentals are turning sour.

Japan, the world's second-largest economy, is mired in recession with little hope of recovery soon. GDP fell 5 percent in the most recent quarter, and industrial production was off 19 percent. The Japanese unemployment rate is at a record high, and bad debt at banks is estimated at $1 trillion.

Deflation, a decline in the price level, threatens to sweep the world. Food prices have fallen by nearly one-third from last year to the lowest point since 1993. Lower prices for commodities -- as for finished goods -- are usually a good thing, but if, because of weak demand, prices keep falling, companies can't make profits, and they soon start laying off workers and going bankrupt. Consumer demand drops further, and a full-fledged recession, or even depression, is the result.

The cure for a deflationary collapse is not obvious. Japan has tried cutting interest rates, reducing taxes and boosting public-works spending, to no avail.

Now, U.S. firms are feeling the head winds from Asia. Earnings growth in the second quarter for the large public companies was just 4 percent -- the slowest since 1991, the last recession.

Perhaps the best harbinger is the stock market itself. Since July 17, it has dropped more than 6 percent. A big market decline would be a double whammy, pinching corporations and making Americans, who now count stocks as the number one source of wealth, feel poorer and less apt to spend.

With all these dangers, where are the politicians? At the very least, you would think Republicans would be prepared to say to Democrats: "This slowdown is the result of your president's policies. If he hadn't been preoccupied with scandal and if he hadn't taken us down the wrong road, the economy would be booming."

Of course, to criticize the President Clinton for taking the wrong road, Republicans would have to make the case for the right road. This, they have not done. Nor have traditional Democrats to the left of Clinton.