Asthe first working week of the Bush administration opens, the chatter in Washington and New York is about recession. The Wall Street Journal's Alfred Malabre Jr. reminds us this morning that "a new recession is widely expected to arrive late this year or soon thereafter." The New York Times' Robert Hershey reports today on the widespread political nostrum that Presidents should arrange to "have their recession" in the first year of their terms, to get it over and done with. On the other hand, Barron's found the idea circulating on Wall Street that the GOP wants to do well in the 1990 state elections, to prevent gerrymandering after the 1990 census, thereby increasing GOP seats in the Congress. Thus, the new administration wants to avoid the recession Malabre says is due late this year or next.
The assumption, of course, is that a recession must come sooner or later, once in five years as a rule of thumb, making one way overdue after seven years of expansion. Every Sunday it seems someone on David Brinkley's show (George Will, Hodding Carter, Tom Wicker) is scoffing at the very notion that "the business cycle has been repealed." Money World's Adam Smith is another regular scoffer.
There is a business cycle, of course, and it can't be repealed. But it is important to understand that it is theoretically possible to go forever without a recession, even as the business cycle does its cycling. A business cycle is not the same as an economic cycle, except when the economy has only one business. An economy that produces only apples will have busts and booms according to the state of the world supply and demand for apples. An economy that produces apples and oranges can have apples booming while oranges are busting, and vice versa. The U.S. economy, encompassing dozens of business sectors, can expand as far as the eye can see even as the individual sectors have their ups and downs. A business cycle is represented graphically by a sine wave. An economic cycle in a mature economy is represented by a biorhythm wave — several sine waves out of sync. Chemicals, paper and steel can be up while petroleum, semiconductors, and autos are down. The ups and downs are rarely the same, each sector having its own rhythm and amplitudes.
The reason economists have confused business and economic cycles in recent decades has been the dominance of demand theory on policy. When monetary policy is chosen to drive production, growth is inevitably accompanied by inflation and growth has to be interrupted by government policies to end the inflation. All business sectors are squeezed at once. In supply theory, which now dominates, fiscal policy drives growth and monetary policy arrests inflation. Commodity prices that rise because of increased real demand, as opposed to inflationary expectations, are nothing to worry about because they simultaneously invite new productive capacity in those commodities.
The good news is that the core of the Bush economic team understands this as do most of the Fed governors. Even Alan Greenspan, a lifelong business cycler, is beginning to make distinctions that push his ideas of inevitable recessions further into the future. The President's chief economic advisor, Michael Boskin, knows the difference, and so does Richard Darman at OMB, both of whom see recessions flowing from policy error, not exogenous, uncontrollable animal spirits. Business cycles can't be fine tuned. The U.S. economy, though, is diverse enough to be managed without recession for another seven years and more.