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26 February 2002

A Recession? A Depression? A Panic?

by Ed Ross

The war effort is going better than the economy. Economists have finally decided that we're in a recession, although they've never agreed on how to define one. This allows enterprising economists to prove almost any hypothesis by changing the time of the recessions. We need the National Bureau of Standards to define what a recession is so that we can know when we're in one.

Until 1930, what's now a recession was called a "panic." President Hoover thought the word "panic" was too panicky, so he called the downturn a "depression." In the 1937 downturn, President Roosevelt thought "depression" was too depressing, so he called it a "recession." Since then, downturns that cause panic have been called "recessions."

What I'd like to be able to tell you now is that this panic/depression/recession will be short and mild. People like messengers who bring good news, and I like to be popular. In an attempt to salvage some good will, I'll say that I hope I'm wrong, but I don't believe it will be short. The motion control business will correspond to the economy.

Two economists I've been following are Michael Mandel, chief economist at Business Week, and Lester Thurow of MIT. Mandel wrote a book about "the coming Internet recession" before the dot-com collapse, an achievement that gives him a special place among economic forecasters, as far as I'm concerned. (There's another Michael Mandel, a Canadian lawyer, who trumpets that the U.S. is just as bad as bin Laden. They're not the same people.)

In Business Week on 29 November, Mandel wrote, "Most forecasters expect low interest rates and tax cuts to bring economic growth into positive territory by mid-2002." He added, "Any recovery will be anemic." (There have been no tax cuts at this writing.) He's somewhat optimistic for the long term. "No one can know yet what the next expansion will look like or when it will arrive. But . . . at least we can be sure that one is on the way." It's slightly encouraging that we will get, at some future time, an anemic recovery.

Thurow is known as a forecaster of the future. He's an adherent of what I call the servo-control theory of economic forecasting. Most economics forecasters use some form of this theory. The idea is that the economy of America is a vast flow of money in one direction and of goods and services in the other. Adding money can accelerate the flow; subtracting money can diminish it. Because the money recirculates, there's a "multiplier," or amplifying effect, to that change. Government action adds or subtracts money to/from the flow to increase or decrease economic activity as necessary. This is supposed to keep the economy moving at a desired rate while maintaining stability.

In The Boston Globe of 27 November 2001, Thurow identified seven possible points of change that could stimulate a recovery: consumption, business investment, residential investment, exports less imports, inventories, state and local government spending, and federal government spending. These make up our gross domestic product. The first six of these, he believes, won't help at this time. This leaves federal government spending.

He calculated that the government must pour in an additional $250 billion in 2002 (in tax cuts and/or spending) to return us to prosperity. He said he considers the $100 billion in the stimulus bill to be inadequate and would rather err on the side of doing too much than of doing too little. Because even the "inadequate" stimulus bill hasn't been passed, Thurow's views on the economy aren't sunny.

It does appear that the military segments of the motion control business will increase (aircraft and missile actuators, for example). The main flow of motion control business is tied to the whole manufacturing segment, however.

I still use the news of layoffs and hires as my leading indicator. I still see more layoffs than hires. I'm afraid things will get worse before they get better.

Some readers took the time to write to me about my December column. Most letters were favorable:

One reader raises some questions:

While not everyone felt the column was appropriate for this technical forum, I thought this to be an area that would interest engineers as well as everybody else. My particular background in science and marketing research gives me a unique perspective.

I'm sure his experience living in the Middle East gives him special understanding. On the other hand, there's some advantage in not being too close to a situation. Humans already knew the moon was round when they still thought that the world on which they lived was flat. If I were on the moon, I could immediately tell that the earth is round. On the other hand, I wouldn't know about the World Trade Center's destruction.

I'd hoped to convey that the terrorist groups exaggerate the degree of anti-American feeling in Islamic countries. That's what they want us to believe.

Since I submitted that column, the Americans have crushed the Taliban. Yet the anti-American demonstrations they called for in Pakistan were, this time, very poorly attended. If the populace really hated us deeply, attendance would have multiplied rather than declined.

Sometimes it's better to look at the situation from the moon, or to put it another way, it's better to not be where "you can't see the forest for the trees."