How bad could economy get? Hold on!

Marketplace Staff Mar 25, 2008

How bad could economy get? Hold on!

Marketplace Staff Mar 25, 2008


Kai Ryssdal: Fresh from his behind-the-scenes role in orchestrating the bailout of Bear Stearns, Henry Paulson will speak in public tomorrow. He’ll take the podium for a speech to the U.S. Chamber of Commerce in the morning.

Question is what more can the Treasury Secretary possibly say that we haven’t already heard?

He’ll surely talk about the credit squeeze and the housing market and what the White House is doing to turn ’em around. Probably won’t say too much about new regulations for Wall Street and it’s a safe bet the “R” word won’t pass his lips.

Commentator and economist Susan Lee says we could do worse than a garden-variety recession.

Susan Lee: No question the economy is at a crossroad.

So what if I give you a choice? We could have either a short, even steep, recession or a long bout of stagflation, that combination of stagnant growth and high inflation.

Before you answer “Oh, OK, stagflation; how bad could it be?,” let me suggest exactly how bad it could be.

The country had a decade of stagflation in 1970’s. Economic growth was lackluster while inflation skyrocketed at double-digit rates, peaking at a little under 15 percent. Unemployment was also ruinously high and real per capita income actually fell in three of the years of that decade. Not a pretty picture.

Worse, the cure for that bout of stagflation was, as it always is, a nasty recession. When the Fed finally crunched down on money and credit to bring down inflation, the economy tanked. Between 1981 and 1982, unemployment peaked at over 10 percent. And the economy shrank about 3 percent in 16 months.

Now consider a garden-variety recession. Looking at recent history, the average recession lasts less than a year, unemployment averages 7 percent and the economy registers modest declines of 1 to 1.5 percent. Unpleasant, sure, but not as unpleasant as stagflation.

So, you’d think the Fed would be trying to avoid stagflation. No. For the past 8 months, policy has aimed right at it. The Fed has been madly lowering interest rates — six times since last September. Now granted, the Fed hopes that low interest rates and acres of money will bail out the economy, but, at the same time, it ignores powerful signs of inflation.

Commodity prices, like wheat, are streaking out of sight, oil and gold prices have hit record highs, and the dollar is too weak to maintain its parity with the Swiss franc.

And, so, maybe it’s time to offer two cheers for a recession.

Ryssdal: Economist Susan Lee lives in New York City.

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