The June 3, 2002, issue of The Nation heralds the 2001 Nobel Laureate Joseph Stiglitz as a "rebel with a cause." That characterization is certainly a stretch for an economist, who is former senior vice president of the World Bank and who adheres to orthodox Keynesian doctrine, the dominant economic paradigm of mainstream political and economic theory for the past 50 years.
American business, once held in high regard and master of all it surveyed during the frenzied booming 1990s, suddenly finds itself cast upon the rocks. The economic cycle of boom and bust is fascinating stuff. Its essential elements are repeated endlessly throughout the dusty pages of financial history. All of this makes Murray Rothbard’s book, The Panic of 1819, particularly interesting, timely, and enlightening.
The headlines of the business pages have been trumpeting the arrival of recovery now for months. How do the experts decide when recession has turned to recovery? By looking at the data, which come in packages labeled in various ways: the GDP, the leading indicators, the unemployment rate, industrial production, housing starts, commercial borrowings, office vacancy rates, and a host of others. If these tend in the negative direction, we are said to be entering a recession. If they move in a positive direction, it is said that we are recovering.
The standard interpretation of the Panic of 1837 and subsequent recession blamed state bank monetary inflation abetted by President Jackson's removal of the federal deposits from the Bank of the United States.
The policies the Fed cooked up during the mid-1990s that brought on the unsustainable boom (mistakenly called the "New Economy") are also the policies that Greenspan employed in the last year, ostensibly to give us a "soft landing." The government is now engaged in a number of foolish regulatory ventures that certainly will make economic life more difficult as we seek to climb out of this latest downturn.
Economists are fond of writing open letters to politicians in attempts to lead them down "proper" policy paths. In 1930, a thousand economists signed an open letter to President Herbert Hoover asking him not to sign the infamous Smoot-Hawley Tariff. Hoover signed it anyway, creating one more disastrous policy mistake that ultimately created the Great Depression.
According to the popular view, the revival of some important economic indicators has raised the likelihood that the aggressive lowering of interest rates by the Fed will invigorate the economy. The irony is that the very same loose monetary policies that are expected to energize the economy in fact undermine its main source of strength.
Since it takes some time to say for sure that we are in recession, by the time we know we are in recession, we are already most of the way through it. This time, it took eight months--from March until November 2001--to determine we were in a recession. Here we are, in December 2001, and there are some signs that we may soon start to recover.
Prior to the Keynesian era, recessions were called panics and had durations of about three months. The shortness in duration reflected the lack of interventionism by extra-market authorities. Today, recessions last much longer, as the bad idea that the state should manage the economy has become legitimized.
Is there any merit to the popular definition of recession? Why must it be two quarters of negative growth and not one, or perhaps three? Frank Shostak gives another view and assesses the prospects for recovery.
