Economics
Nowhere to go
Sep 2nd 2010, 20:51 by R.A. | WASHINGTON
BEN BERNANKE, in his recent assessment of the American recovery, shocked some people by declaring that the conditions are still in place for a recovery in 2011. Economic data have certainly been disappointing lately, leading many to extrapolate various downward pointing lines back into negative territory.
But Mr Bernanke has a point. The conditions are in place for a recovery. Primarily because they can't get much worse.
Think about variables like housing sales or vehicle sales. Both are at or near historically low levels. To get a new period of sustained contraction, you'd have to have a scenario in which sales fell below current low levels. If they stay where they are, we wouldn't observe a strong contribution to growth, but neither would we see subtraction from it.
For consumption more broadly a similar argument applies. Savings rates have risen sharply from the pre-crisis level. They may rise a bit more, but to generate a big drag on growth from consumption, they'd have to rise sharply again. Or take trade; second quarter GDP growth was dismal largely because of the huge deterioration in net exports. But few people expect net exports to deteriorate much further from that performance, and many people, Mr Bernanke included, seem to think net exports will bounce back some in the third quarter.
The thing about being at the bottom is that there's nowhere to go but up. That's not strictly true, of course. Things could get considerably worse, but there is no obvious, looming mechanism to make this happen. It would take something unexpected, like a new and dramatic financial crisis. So long as markets aren't panicking, America should avoid a return to recession (if not necessarily the occasional quarterly contraction through recovery). That's one reason why even famous bear Nouriel Roubini says its more likely America avoids recession than falls back in.
He is right that the risk is uncomfortably high, however. For while the conditions are in place for recovery, America has less margin for error than one would prefer. One can add to this, too, the threat that the risk of financial market panic isn't linear; it could be quite low with growth at 1% and considerably higher with growth flat.
So what one would prefer to see is some effort by policymakers to increase the margin for error, even if they're unwilling or believe they're unable to move the economy back to full employment. That's one reason so much pressure is being applied to the Federal Reserve. And that's one reason why the battle over the extension of the Bush tax cuts is important. However one feels about the cuts themselves, the default path for fiscal policy is a fiscal contraction of 2.5% heading into 2011, and that would represent a serious headwind for the economy. And it's not clear if Congress is functional enough at this point to move anything other than an extension of those cuts through.
Another way of putting this is that the risk of a double dip is entirely political in nature. Is Congress too sclerotic to prevent a significant tightening while the economy remains vulnerable? And is the Federal Reserve too conservative to act to offset the contractionary forces in the economy, of which fiscal tightening is perhaps the biggest? If you're trying to figure out whether a new downturn is a real risk, those are the questions to focus on.
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In this blog, our correspondents consider the fluctuations in the world economy and the policies intended to produce more booms than busts.
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