Lollipop Economics

Excellent op-ed in yesterday's Washington Post from Robert Samuelson. An excerpt:

Superficially, the case for "stimulus" seems plausible. In December, the unemployment rate rose from 4.7 percent to 5 percent, a huge one-month increase. Jobs are not keeping pace with the growth of the labor force. Lawrence Summers, Treasury secretary in the Clinton administration, has proposed a $50 billion to $75 billion stimulus to be enacted in the next few months...

All this sounds sensible, but it stumbles on a stubborn dilemma. Folks, we have a $14 trillion economy. A one-time stimulus (rebates aren't permanent tax cuts, and grants to states would probably be temporary) of $75 billion or $100 billion is too small to do much. If the economy is in serious trouble, something much larger is needed. But if the outlook is not so dire, then a modest stimulus plan is mostly political symbolism.

I'm very much inclined to agree with Samuelson on this point, but its another part of his article that merits most attention:

The truth is that there's a touch of hysteria to much current economic commentary that is, as yet, unjustified by what's actually happened to the economy. Yes, the housing slump is vicious, but at its peak, housing was only 5.5 percent of the economy, and the present slump is still only the fourth-worst since World War II.

Whether a recession occurs -- a determination made by academic economists, usually after the fact -- probably won't affect most people. Economist Richard Berner of Morgan Stanley expects a "mild and short" recession, with peak unemployment of 5.6 or 5.7 percent in early 2009. According to economist David Wyss of Standard & Poor's, the average unemployment rate of the past 50 years is 5.6 percent. This would be a setback, but not a disaster.

Samuelson is calling attention to something we should all be cognizant of, and that is the fact that our recessions are becoming more and more like "blips" on the map than major detours. Professor Mark Perry includes an excellent visual of this phenomenon on his excellent Carpe Diem blog:


Bottom Line: Is the age of recession over as we know it? Of course not, but they are looking more and more like mean-reversion incidents than full blown economic contractions.

HT: Mark Perry