The Case for A Recession
Economist Bill Helming runs a small consulting service in Shawnee Mission, Kans. His clients include major food companies, banks, supermarket chains, feed-lot operators and farmers. Of 80 economists surveyed recently by the Blue Chip Economic Indicators-a newsletter that follows economic forecasts-Helming is the gloomiest. He's predicting recession. In 1990, unemployment would average 6.5 percent, up from March's 5 percent. And the economy's output of goods and services (gross national product) would drop 1.5 percent.</br></br>What this country could use is a modest recession to reverse rising inflation. Chances are you won't read that elsewhere. In polite society, almost no one admits that recessions are inevitable and sometimes desirable. What's unmentionable, though, happens to be true. Outside of wartime-when people may tolerate wage and price controls-periodic recessions have been the only practical way of containing inflation. It's a truth worth remembering as the 1980s' economic expansion (now in its seventh year) enters its final stages.</br></br>There are multiplying signs of strains. By every indicator (consumer prices, producer prices and labor costs), inflation is increasing. Since last spring the Federal Reserve has raised short-term interest rates more than 3 percentage points. Although unemployment remains low, some of the zip is going out of the economy. Auto sales are dropping. Home buying is declining and increases in retail sales have been small. But the Fed does not say for a moment that it's trying to engineer a recession, and few private economists dare predict one.</br></br>Analysts like Helming are the exceptions. The typical forecaster anticipates a relatively harmless slowdown. Of the forecasts regularly followed by the "blue chip" newsletter, the average calls for economic growth (the increase in GNP) of 2.7 percent in 1989 and 1.7 percent in 1990, compared with 3.9 percent in 1988. This is what the Fed says it wants: in the"What this country could use is a modest recession to reverse rising inflation." current jargon, a "soft landing" that will somehow disarm inflation.</br></br>On paper, the strategy could work. In practice, the odds are against it. The process by which inflation relents is no great mystery. Higher unemployment relieves pressures for steeper wage increases. Excess inventories, idle factory capacity and ample supplies of commodities (such as grains, metals and chemicals) weaken price pressures. If slower growth doesn't produce these conditions, inflation almost certainly won't abate. It could get worse. That's the danger, because both consumer prices and labor costs are already advancing at a rate of about 5 percent annually.