Does America Really Need a Recession?

A horrific downturn would punish Wall Street, equalize incomes—and elect Democrats.


Given the credit crunch, mortgage meltdown, and higher oil prices, it's certainly understandable why people would be wondering if the economy might be headed for a recession. But some folks have gone further. Some almost seem to want a recession. Newsweek columnist Robert Samuelson recently wrote of the "often-overlooked benefits" of economic downturns. They dampen inflation and punish financial speculation, for instance. What's more, Samuelson argues, a recession would trigger "a faster—and healthier—drop in home prices. ... By making homes more affordable, a quick and sharp price drop might revive housing more rapidly."

Another apparent recessionista, to borrow lingo from my pal Larry Kudlow, is economist John Makin of the American Enterprise Institute. "A recession," Makin wrote recently, "is the most desirable outcome" to the deflating housing bubble. Avoiding a downturn, he says, through more Fed rate cuts "would involve so much government intervention and so much reinflation by the Fed that risk-taking would be encouraged even further, resulting in an even larger bubble and a larger subsequent recession."

Heck, Democrats might want to get on this gloomy train before it leaves the station. Consider this: Two of America's big economic problems, according to the party's various presidential candidates, are rising income inequality and our big trade deficit. Guess what, a recession— even a depression—might be a great cure for both of them. According to income inequality data collected by academics Thomas Piketty and Emmanuel Saez, the top one tenth of 1 percent of Americans received 3.73 percent of income, including capital gains, in 1928. By the 1939, that number had dropped to 1.77 percent.

Another great decade for income equality was the 1970s. The top 10 percent took in 34 percent of income vs. 48 percent in 2005, the most recent year Piketty and Saez have run numbers for. Of course, the '70s was a decade where stocks went nowhere, inflation raged out of control, and the economy shrank in 1 out of every 3 months. But hey, we were all in that sinking boat together. Certainly a recession today might help make incomes more equal by dragging down the stock market and hurting upper-income people with big portfolios.

Terrible economic times are also great for turning trade deficits into trade surpluses. As George Mason University economist Don Boudreaux has noted in his Café Hayek blog:

Only 18 of the 120 months of that dreary decade [the 1930s] did the United States run a trade deficit. ... For each of the remaining 102 months of the decade of the 1930s, the U.S. ran a trade surplus. On an annual basis, the only year of the decade of the 1930s that the U.S. ran a trade deficit was 1936; in each of the other nine years the U.S. ran a trade surplus. And for the Depression decade taken as a whole, the U.S. ran a substantial trade surplus. Exports over those economically challenging ten years totaled $26.05 billion while imports totaled only $21.13 billion. In other words, the U.S. trade surplus during the entirety of the 1930s was nearly 19 percent the size of the total value of U.S. exports during that decade.

And what of today? Another dose of tough fiscal medicine might work its terrible magic again, argues economist Michael Darda of MKM Partners:

If the U.S. moves toward anti-growth policies after the 2008 elections, the current account deficit likely would fall faster. ... Tax hikes, trade protectionism, and re-regulation would sap American growth relative to the growth in the rest of the world. This would lower U.S. demand for foreign products and thus reduce the current account deficit. In other words, the standard of living would fall (or rise more slowly) and so would the trade deficit (this occurred during the Great Depression).

My take: Of course, we could go a different route and focus on continuing to grow the economy and boosting all incomes that way, just as we did in the late 1990s and here again the past three years. Furthermore, we could relax the Dobbsian antitrade rhetoric and view the trade deficit as a cyclical phenomenon that already seems to be reversing itself to some extent, based on the latest trade data. And longer term, continued global growth will enrich consumers in developing nations like India and China so they can buy more of our goods. I think I'll take a pass on a recession and vote for more economic growth instead.