Just for the record, I don’t exempt myself from this tendency. We all like to pretend we know more than we do. But events can change in a blink. Witness America’s unexpected killing last week of Iranian Maj. Gen. Qasem Soleimani and how it immediately rattled global markets.
As we enter 2020, the sharply escalating tension between the United States and Iran poses another threat to the economic expansion. It started in mid-2009, is now in its 11th year (127 months) and is the longest stretch of uninterrupted economic growth in U.S. history. The previous record holders were the 1960s expansion from February 1961 to December 1969 (106 months) and the expansion of the 1990s (120 months) from March 1991 to March 2001.
Until it became apparent in 2018 and 2019 that the old record might be broken, the subject was not widely discussed by economists, investors and other economically minded people.
In part, the inattention reflected the prevailing view that the economy was still recovering from the Great Recession of 2007-2009. This was routinely and correctly identified as the worst business slump since the Great Depression of the 1930s. It’s a jarring contrast: The present expansion is setting a longevity record, while also being the product of a calamity.
Have we finally mastered the business cycle? On and off since the 1960s, some economists have nourished that notion. Economics is portrayed as a “science” whose tools are sufficiently advanced to eliminate recessions or keep them short and mild. In the 1960s, this faith was labeled the “new economics”; in the late 1990s, it was called the “Great Moderation.”
I feel comfortable making this brash forecast: There will be another recession, possibly a harsh one. Just when it might occur, how destructive it might be and how long it might last are anyone’s guesses. But we don’t know enough about modern economies for government — through shifts in interest rates by the Federal Reserve or changes in taxes and spending of the $4.4 trillion federal budget — to create constant growth at “full employment.”
Indeed, we’re not even sure what constitutes “full employment.” Is it an unemployment rate of 3.5 percent (the present level), something lower or something closer to 4 to 6 percent — a more traditional level? The answer depends on how wages, employment and inflation interact with each other. It’s complicated.
What we also know is that past efforts to achieve continuous economic growth have ultimately backfired. The boom of the 1960s led to double-digit inflation, which in turn resulted in four recessions between 1969 and 1982. (One reason: The Fed sought to suppress inflation with higher interest rates.) Similarly, the 1990s’ long expansion and the collapse of the housing boom inspired so much pessimism that the recovery took most of a decade.
Is it possible that the Great Recession (peak monthly unemployment rate: 10 percent) so terrified both business managers and workers that they spontaneously kept wage and price increases in check, prolonging the economy’s continuous growth? This is conceivable, though not yet proved.
History tells us, in short, that there will be setbacks. We have a paradoxical economy that seems robust and fragile at the same time. Though economic growth continues, it is also slow — making it vulnerable to trade wars, real wars and other negative surprises that depress spending by consumers and companies. Before we imagine a world without business cycles, we ought to remind ourselves that we’ve been here before with disappointing results. The business cycle ain’t dead yet.