Gerard Jackson
BrookesNews.Com
Monday 19 January 2004

"New presidents almost always want to take over in recession and leave in a boom, so they almost always bad-mouth the economy when they come in. Maybe Bush has gone a little bit farther in wishing for a [US] recession than others have." So said Barry P. Bosworth, a senior fellow at the Brookings Institution, a Keynesian think tank.

There is probably some truth in what Bosworth said but to suggest that Bush's public utterances on the economy contributed to the US recession is just a Democratic libel. The US recession was clearly underway before the election and that means it started under the Clinton Administration.

That President Bush should have endeavoured to remind the public of that fact was not only to be expected it also made good political and economic sense. If the Democrats had successfully pinned the US recession on him they would have paralyse his economic policies. But I suspect that that wouldn't have caused Mr Bosworth too much concern. Democrats can be amazingly blasé about the US economy when it serves their electoral interests.

As I have pointed out a number of times, the true nature of recessions always confounds the prevailing economic orthodoxy. Highly paid economists sit in their Wall Street offices trying to figure out what's up. It's almost an Alice-in-Wonderland situation where nothing is what it seems. In January 2001 Steve Slifer, chief economist at Lehman Brothers, called the slide in US economic activity "an odd-looking slowdown".

Of course the US recession was odd if your thinking had been muddied by Keynesianism. In its 2001 January outlook for regional manufacturing, the Philadelphia Fed posted the second severest month-to-month fall since the survey began in 1968. What made this odd to the likes of Slifer is that employment was still at 4 per cent while the service sectors and housing were still holding up even though car manufacturing was obviously in trouble.

It was this situation that caused them to claim that overall economy is not in recession but manufacturing is. If a ship was slowly taking on water no one would claim it was basically OK because only the engine room and the bulkheads had been flooded so far. There is a lesson here from the Great Depression, if only some of these analysts had been prepared to look, learn and think.

It was certainly observed at the time that the retail trade, the final stage of the production structure, was the least affected by the depression where as the manufacturing stages suffered greatly, with the financial pain tending to rise as the distance from the point of consumption increased.

The process, to a much lesser degree, fortunately, is what occurred at the beginning of this recession. That's why the 4 per cent US unemployment figure was deceptive. It was assumed that because demand in those areas closest to consumption was holding up that the US unemployment rate would not rise. A closer look at the figures, however, showed that unemployment in manufacturing had been go up. How else could it have been when manufacturing output had been falling?

Returning to events that took place just before the Great Depression we find that December 1928 is a key month. It was then that the Fed slammed on the monetary breaks and froze the money supply. Six months later manufacturing output began to slide, which is what one would expect, and then the US economy went into freefall.

The stock market felt the blow first some three months later America was in depression. The sequence of events is clear and beyond dispute. But only the Austrians have accounted for them — and certainly not the Keynesians.

What was accelerating under the Bush administration was well established under Clinton, and there was nothing new, odd or inexplicable about it. It's a great pity that the Republicans are unable to grasp this fact and articulate it.

Gerard Jackson is Brookes' economics editor