By Donella Meadows
–September 11, 1986–
A recent headline reads, “Recession May be Looming on the Economic Horizon.”
But a market analyst says, “Job growth is the economy’s bottom line, and it is signaling an expanding economy.”
Page 20 of a recent Business Week tells us, “The early data during the third quarter do not support a major fizzling out of the economy into or near a recession.”
Page 21 of that same issue says, “The industrial sector is virtually in a recession. Output in the nation’s factories, mines, and utilities slipped 0.1% in July, following declines of 0.3% in June and 0.5% in May.”
The experts argue about recessions, deny them, and are surprised by them, though recessions have occurred every 4-7 years since economic record-keeping began.
A recession is the down side of the business cycle. On the up side factories run near full capacity, unemployment falls, inventories are low because customers are buying, the economy grows. During recessions everything goes the other way around. Usually 3-5% of the workforce is laid off. About 15% of manufacturing capacity is idled, until the next recovery.
The most recent business-cycle peaks have occurred in 1969, 1973, 1979, and 1985, with troughs in 1971, 1976, and 1982. The cycle is not nearly as regular as clockwork, but it is real, persistent, and roughly predictable. The most recent upswing has lasted 44 months. An average upswing lasts 33 months. A recession is overdue.
But we deny the down part of the business cycle, dreaming of a never-never land of Eternal Up.
That’s about as foolish as trying to deny winter. If we spent all fall arguing about the meaning of daily temperature swings, welcoming each spell of Indian summer as a sign that the Feds finally had winter under control, telling each other spring is just around the corner, we’d never put the storm windows up or the snow tires on. We’d set ourselves up for an unnecessarily uncomfortable winter.
In just that way borrowers have been borrowing and lenders lending under the assumption of uninterrupted economic growth, as if no one had never heard of recessions.
Financial managers now say that the level of debt in the economy is not sustainable if growth falters. Economic slowdown will cause massive default. There will be far more business and bank failures — already at a postwar high — than there would have been if the possibility of recession had been admitted by governments, businesses and banks.
Similarly, federal budgets depend on calculations of the coming year’s tax receipts. The budget cannot be balanced if those calculations assume more economic growth than actually takes place.
This year’s budget was geared to a fairy-tale forecast of 4% economic growth, a rate that can only be expected in the strongest part of the business cycle upturn. This year it was pure wishful thinking. It allowed politicians to put off nasty thoughts like raising taxes or cutting military expenditures. By ignoring the probability of recession, the government will probably produce a bigger deficit this year than ever before, Gramm-Rudman or no Gramm-Rudman.
There are many ways to prepare for a long, cold recession, if we have the courage to foresee it. Government could strengthen support programs for the poor and unemployed. Companies could put on hiring freezes now, rather than face layoffs later. Everyone could refrain from policies that depend for success upon uninterrupted 4% growth.
We could also bring more sense to politics by decoupling the business cycle from the election cycle. When an election happens to come during an upturn, we gratefully return the current President or his party to power. During downturns we usually throw rascals out. We think Presidents cause recessions, which they do not, not any more than Presidents cause winter.
Business cycles are a logical consequence of business decisions made under a free-market system. They are necessary corrections for over- and under-accumulations of inventory. They persist through Republicans and Democrats, New Deals and Reaganomics. Business cycles probably create Presidents, rather than the other way around.
Therefore, much as some of us would love to pin the present downturn on Ronald Reagan — as he pinned the previous one on Jimmy Carter — in honesty we shouldn’t do it. The Republicans may have prolonged this last upturn with deficit spending and handouts to the arms industry. The coming recession may be especially brutal because of the debt they accumulated and because of their dismantling of supports for the poor. But a recession would have come along about now anyway, no matter who was in power.
No one can predict exactly when this recession will become so obvious that everyone will admit it, any more than one can predict exactly when the first snow will fall this winter. We don’t know how long the recession will last, any more than we know the day next spring when the crocuses will open. But it’s probably wise at this point in the cycle to get in the firewood and to cut the financial risks. Spring will come, but winter is almost certain to come first.
Copyright Donella Meadows Institute