MUCH AS it pains me to say, it appears that there is a recession in the works. This bothers me - and it should concern my fellow fourth-years as well - for two reasons. First, I am about to enter the work force. And second, recessions are not fun. Most of us have never experienced a "real" recession. That minor slowdown in the early 1990s paled in comparison to its predecessors from the early 1980s and before. We were in grade school at the time, and our country's economic health was not at the forefront of our attention.
We've already begun to hear a host of solutions to the potential crisis. On one side, we hear the call for severe tax cuts. On the other, we hear the demand for the federal government to increase spending on some social programs like Medicare, Social Security and education.
At its core, this is a battle over how to use the record budget surpluses of recent years. Should we give it back to the people who paid it, or should we spend it on certain programs that theoretically benefit these same people? We have a tendency to seek catchall solutions to economic problems. By doing so, we are kidding ourselves. We should scrutinize anyone who claims to have a perfect solution to any economic ills. On their own, the tax cuts President George W. Bush has proposed will not save the economy from recession, and could in fact provoke a worse one.
Sure, we could all use a tax cut. Those of us who are soon to start full-time work wouldn't object to the idea of getting more of the money we have earned. But as history has shown, it's not simple. Whenever the government grants such a sweeping tax cut as Bush has proposed, inflation can rear its ugly head.
It's easy to understand. You and I have more money in our pockets. We have two options. We can leave it in the bank, or invest it in some other way. Or we can take the second, infinitely more popular option - we can spend it. There is nothing more American than mass consumption, and if we have more money, you can rest assured that we will buy more stuff. But if the economy has more money chasing after the same number of goods, then you get inflation.
Our modern-day Wizard of Oz, Alan Greenspan, hates inflation like the plague. And whenever he thinks he sees the slightest inkling of possible inflation, he has to stamp it out, no matter what it costs the economy. The law requires him to do so, but Greenspan would probably do it anyway. And to the extent that Bush's tax cut intends to boost economic growth, our Federal Reserve chairman might have to bring the recovery to a halt before it had a chance to get going.
Recessions, in general, do not just happen. In modern economic history, every recession we have endured was the result of some internal or external shock to or flaw within the system. In the early 1970s and again in 1979, petroleum price spikes brought us into recession while introducing us to the newest economic terror - "stagflation." In the early 1990s, we faced another smaller recession due to the ballooning budget deficit that was literally choking off the economy's potential for growth.
But the wonderful thing about the American economy is that its "natural" state is one of growth. That is, absent some fundamental flaw in our economic and financial system, and absent some external price shock, we generally chug along just fine. In most other countries, this condition does not apply.
Rather than search for quick, sound-byte-ready solutions, President Bush and his economic team should seek out what, if any, flaws exist in the American economy. A tax cut alone will not fix the problem, should a recession appear on the horizon later in the year. It is like giving Tylenol to a cancer patient. It might make him feel better momentarily, but in no way will it cure the disease. For now, Bush would be better off to implement a more modest tax cut, and devote a larger portion of the surplus to paying down the debt. By lowering interest rates, debt reduction would have a potentially larger impact across the board than any tax cut.
For now, let's all hope that there's no disease that Bush and company have to cure. But if a recession hits sometime this year, we should be careful not to fall for any quick-fix solutions that might ultimately bring more harm than good to our economy. The path former President Clinton and Alan Greenspan carved out over the past few years is a sensible one, and clearly met with a lot of success. Should our current president stray too far from it this time, he runs the risk of inheriting the same economic troubles that were the political undoing of his father. And that is as stern a warning as any economist's ever could be.
(Timothy Duboff's column appears Thursdays in The Cavalier Daily. He can be reached at tduboff @hotmail.com.)
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