Friday, April 4, 2008

Could "Talking Down" the Economy be a Good Thing?

Many politicians and pundits have been accused of "talking down" the economy for political gain. That is, exaggerating problems and using terms that don't really apply to the current situation to try to influence the general public's perception of how the economy is doing.

Technically, a recession is two consecutive quarters of negative growth. There's a couple of weeks' lag time between the end of a quarter and when the results are published. Since we haven't recorded even one quarter of negative growth yet, we won't know if we are currently in a recession until July of this year (assuming the first quarter was negative). This allows plenty of time for speculation and pronouncements.

A case in point may be President Bush Sr's re-election bid in 1992. We were in a recession at the end of '91. Hyperbole was the rule of the day. "Worst economy since the great depression...yadda, yadda, yadda") Statistically speaking the recession was shallow and short, actually ending in Spring of '92. However, it takes a couple of months to get the data that confirms what's happening in the economy. By the time people realized the recession was over and we were growing again, the election was also over.

All of the politically motivated hyperbole and the consequences thereof may actually have a positive effect in the long term. Our tolerance for economic pain has dropped substantially in the past few decades. Unemployment of 5% or less used to be considered "full employment" and many suggested we would never achieve it. Now, 5.1% unemployment is unacceptable. In the 70's inflation was in double digits, now 2.5% inflation is "out of control". It wasn't that long ago that a 30 year fixed interest rate of 8% was a bargain. Today, 7% would spur calls for impeachment and resignations. The politically motivated hyperbole has actually raised the bar for economic performance. This has been transferred to the business world due to the fact that politicians have very little power to change what's happening in the market place, except to the extent that they can influence the behavior of the players. They actually have to enable commerce and free trade, often by reducing taxes and regulation. This isn't a giant shift in philosophy, it's job preservation, but works almost as well.

A key component in this dynamic is the explosion of the number and variety of information outlets available to everyone. People become aware of, and respond to information much more rapidly than ever before. The task before incumbents today is to ensure that if first quarter growth is negative, second quarter growth is positive. In other words, this recession has to end before it even technically qualifies as a recession.

Not a bad challenge I think. Politics may be ugly, but every once it a while it can produce positive results. Elected officials may not always believe in or trust the free market, but they can understand that if it gets sick, they get fired. So like it or not, they have to take care of it.

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