This is not about predicting when the next recession will happen, but rather about its character. The when game is impossible. As Nobel Prize-winning economist Paul Samuelson once quipped, “Economists have correctly predicted nine of the last five recessions.” However, it is possible to anticipate future difficulties and proscribe possible remedies.In this article, Palley quite correctly points out that the Federal government is pretty low on bullets to fight any economic downturn. The typical tools used to fight recessions are lowered interest rates, more government spending, and tax decreases.
First, the Federal Reserve should be very careful about over-shooting with its rate hikes, and at this time it should take an inflation chill pill. Second, the current recovery has been extraordinarily weak, which should finally discredit the notion that tax cuts for the rich drive growth and job creation. Third, the speculative financial market paradigm—which has ruled the policy roost for twenty-five years—is out of gas. It is time for a new paradigm that links growth to rising wages, rather than to asset price boom-bust cycles.These are all very good suggestions, particularly the need for the Fed to tread carefully in the next 12 months. A heavy foot on the brakes is likely to send the U.S. economic vehicle into a skid off the side of the road. And with the expense of a foreign war, over-extended borrowing, and a shifting of the international center of economic power to China/India, the road is indeed quite slick and icy.
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