Let's Not Panic and Ruin the World
You can't move these days without bumping into an economic pessimist. "Recession in America looks increasingly likely," said the Economist magazine on Nov. 17. Two days later, in the International Herald Tribune, Nobel Prize winner Paul A. Samuelson brought up the specter of the Great Depression. And then, on Nov. 26, former U.S. Treasury Secretary Larry Summers wrote in the Financial Times that, "the odds now favor a recession that slows growth significantly on a global basis."</br></br>The pressure on policy makers to do something is intense. Not only is there a desire to see the government get even more involved in the housing loan market -- witness the Bush administration's plan to freeze starter rates -- there is also tremendous pressure on the Fed to make another large 50 basis-point rate cut in attempt to alleviate credit-market problems.</br></br>This desire for government intervention to fix problems that grown adults have created for themselves is dangerous. Constantly counting on the government to save the economy undermines confidence in free markets, conditions people to believe they don't have to live with bad decisions, and creates a willingness to take imprudent risk. Actions to stabilize the economy in the short term can destabilize it in the longer term, and set the stage for even more intervention to fix the new problems at a later date.</br></br>Moreover, all this pessimism makes serious economic problems less likely. If it really happens, a recession in the next year could be the most anticipated ever. That fact alone makes it improbable. Recessions usually surprise the consensus. When a recession is expected, the odds of rapidly rising inventories, excessive investment, or a surprise drop in new orders are reduced.</br></br>In the past, when manufacturing was a larger share of the economy and inventory control was less exact, recessions often began abruptly, sometimes on the heels of very strong growth. Today, with services a larger share of the economy, and technology speeding up information flow, the economy tends to glide more gently into recession. Given this, all the doom and gloom seems unnecessary.