The US economy is nothing to worry about
Could the economic news be a little overly good? And if a number of economic concerns appear to be diminishing, is this cause for fear? After periods of success, are economies destined to pay the price later, perhaps even for reasons stemming from their past achievements? What raises these questions is the current US economy. The good news is clear: growth of 2.4 percent in the fourth quarter beat expectations, inflation eased into the 3 percent range, wage gains finally outpace price hikes, stock prices rebounded, volatility gauges fell, and consumer sentiment improved. Things are certainly not perfect. The number of job vacancies has decreased, banks still suffer from problems of non-performing commercial loans, and inflation remains too high, among other problems. Yet, given particularly what might happen after a pandemic that has killed more than a million Americans, the US economy seems unrealistic, in the good sense of the term.
But the question still remains: How worried should we be? There is a common tradition that economic recovery is a harbinger of hard times. And recovery might have an expiration date, just like the milk in the fridge. And after a while, the milk simply sours, no matter what you might try to do to keep it fresh. The good news is that the old macroeconomic adage that “expansions never die of old age” is basically true. Most of the academic literature supports this conclusion. There is always the possibility that expansion could turn into stagnation, as it is today, but the mere fact of expansion should not be a cause for concern. In 2010, experts were wondering if the economic recovery might have run out of steam. Instead, the economic recovery continued until the covid pandemic hit, and just before covid, the economy accelerated. And in 2021, the Organization for Economic Co-operation and Development worried that the US recovery from the pandemic would slow. But it turns out that this concern was not right.
Again, the correct conclusion is not that recession is impossible. Indeed, the odds of a recession diminish with the onset of a recovery. It is important to resist the temptation to think of economic expansion in ethical terms. And economic expansion is not like a wild party that you enjoy and then get drunk and have the idea that you have to pay the price the next day. Most economic growth is not like an artificial stimulant. Rather, growth is a natural state of the economy, provided that the country’s basic institutions function adequately (as in the case of the United States). Growth often brings more growth. Are there exceptions to these principles? Some research suggests that rapid credit booms, especially in the mortgage markets, tend to be followed by painful downturns, and this helps explain the Great Recession of 2008-2009. But these facts do not apply to the current circumstances. If there is any comment, the concern is that with mortgage rates in the vicinity of seven percent, US housing markets could become very weak.
One lesson is that it is okay to be more confident about economic expansions. But there is a more subtle point as well. When it comes to macroeconomic policy, “get it right first time” really matters. And after a negative shock like Covid, if the economy stays more or less on track (albeit with some difficulties), the benefits from this good deed could last for years. It remains to be seen how continued economic expansions will affect economies outside the United States. The economies of the United Kingdom and the European Union have not achieved the same degree of recovery, and most have not achieved similar success in reducing inflation. Unfortunately, just as good news may lead to more good news, economic hardship tends to create more hardship. High inflation erodes real income and makes economic business arithmetic difficult, while slow growth means these economies have fewer real resources to tackle critical problems. Putting all these factors together, the economic divide between the US and many other countries in the Organization for Economic Co-operation and Development is likely to widen. It may seem trivial to say that there is nothing better than good news. But the wisdom of this statement is still not appreciated.
Published by special arrangement with The Washington Post Leasing and Syndication Service.
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