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Growing Pains
Before the presidential campaign, the nation had a pretty good economic debate going.
Should the Fed encourage the economy to grow faster? If so, would the benefits -- aid for everything from income inequality to the deficit to downsizing -- outweigh the inflation risk associated with faster growth?
The campaign has added no more than a lunatic interruption to the debate, like a couple of streakers at the World Series.
The economic irrelevance of the campaign is not entirely the fault of the candidates, as the economy has put in a splendid 1996. The economy has been so hot -- hotter than even the fast-growthers advocate -- that the immediate financial question has been whether the Fed should cool it off. Mr. Dole's oblivious pursuit of a tax cut and Mr. Clinton's push for lots and lots and lots of little government have given an other-worldly character to the proceedings.
Central to the grow-faster discussion is the decline in the overall growth rate of the American economy since 1970. From 1890 to 1970, growth averaged 3.6%; in the last 25, only 2.6%. The fast-growthers want a return to the 3.5% range, and view the 2.5% rate as a hair shirt imposed the Fed's neurotic fear of inflation.
To me, the data support a different opinion: while the Fed's modern era intervention has slowed the overall rate of growth, it has also dramatically reduced the frequency and severity of recessions. Fast growth breeds not just the risk of inflation, but also invites a return to the "boom and bust" experience of earlier American days, now largely forgotten.
The decline in overall growth actually began shortly after World War II. Of the 57 years 1890-1947, eight enjoyed 10%-plus annual growth, and another three topped 15%; in the 46 years since 1947, the economy has failed to grow as fast as 10% in any year.
On the downside from 1890-1947, one-third (nineteen) of the years were negative: in seven of these, the economy contracted more than five percent, and in another three by 10% or more. Since 1947, there have been only nine negative years altogether: all less than 5%, and only one worse than 2%.
As any wise investor will tell you, you can get higher long term growth by taking higher risks, but only at the cost of some really bad years. However, there is a huge difference between the relative calm with which one can track mutual fund performance, and the human wreckage produced by severe recessions.
In a really bad recession, a contraction of 5% or more, of which no one under 60 has any memory, there are millions of truly innocent victims: the dry cleaner in the town where the leading employer goes broke; the widow's pension and health benefits gone in the bankruptcy; and the prudent farmer wiped out when a speculative commodity fever turns to crash.
A 10% contraction is the stuff of our grandparents' nightmare: financial institutions close; nobody has any money, nor does anyone know how to get any.
Even in today's healthy economy, the obsolete are exposed and downsized, just like the buggy whip makers and slide rule artisans of any era.
It is a whole lot easier for any economic victim to develop a new career in a relatively stable economy than in one prone to free-fall every three years. If stability means slightly lower overall growth, it's a price well worth paying.
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