Heading for Recession?


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.

This negligence is no surprise. Throughout the past decade, both parties have sacrificed principle to ad-hoc-ism. It is hard to decide whether to embrace or to dismiss a policy unless you have solid beliefs to measure it against. Neither side has such beliefs. Thus, for example, we see Republicans backing more regulations on medical insurance, and Democrats supporting corporate welfare programs.

In 1960, the late Barry Goldwater wrote, "I have little interest in streamlining government or making it more efficient, for I mean to reduce its size. I do not undertake to promote welfare, for I propose to extend freedom. My aim is not to pass laws but to repeal them."

Which politicians, on either side, could voice principles so clearly and stick to them? Perhaps Rep. Mark Sanford (R-S.C.). Perhaps Rep. Barney Frank (D-Mass.). Not too many others.

Politicians with principles would have been making consistent arguments, so that, when bad times struck, they would be ready with an answer (and, if they could not resist, an "I told you so").

Principled Republicans could say: "The best way to cope with the inevitable ups and downs of command-and-control economies around the world is by making our own economy more free—and our companies more flexible and agile. Do that with a simple triumvirate: less onerous regulations, freer trade and, as an imperative with our budget surplus, much lower taxes. Otherwise, we will be swept into the Asian vortex."

Principled Democrats could say: "The Fed must end its tight-money policy now, or it will create a severe recession. The Treasury's romance with lower growth to help bondholders now threatens to wreck the economy. We must use the unprecedented surplus to relieve the suffering of Americans who have been left out of this prosperity and to rebuild the nation's infrastructure—in a boost to an economy that could collapse at any minute."

Instead, silence and ad-hoc pronouncements reign as the economy heads south. And those few politicians who firmly believe in a different course are blowing a golden opportunity.