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The Eco­nom­ist

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has an inter­est­ing art­icle moot­ing the pros and cons of a delib­er­ately engin­eered reces­sion in the United States. From a purely tech­nical point of view, there is no reason why this is incon­sist­ent with the Fed­eral Reserve’s man­date. Cent­ral banks these days work on the prin­ciple of infla­tion tar­get­ing to ensure price sta­bil­ity and a smoother eco­nomic cycle. If mon­et­ary policy effects a mild reces­sion today to pre­vent a much harsher one in the future then that is the appro­pri­ate policy (or so the the­ory goes). Fur­ther, eco­nomic down­turns “weed out” inef­fi­cien­cies in the eco­nomy and force the recap­it­al­isa­tion of more effi­cient industries.

All of this is per­fectly logical to an economist.

But most people are not eco­nom­ists, and it’s dif­fi­cult to ima­gine why they’d wear the human cost of a reces­sion. Yet in the best example of this in Aus­tralia, the reces­sion of 1991 – 92, people did wear it, and went on to re-elect the man who engin­eered it.

But does Aus­tralian his­tory present any guid­ance for the cur­rent U.S. situ­ation? There are import­ant dif­fer­ences. America’s for­eign debt is far higher than was the case in Aus­tralia and it is com­ing out of a credit-fuelled binge. Rais­ing interest rates would mean tak­ing the cane to those with mort­gages, and an admis­sion that the Fed­eral Reserve was too lax with mon­et­ary policy in 2001-02.

The Eco­nom­ist

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notes that:

… even if a reces­sion were in America’s long-term eco­nomic interest, it would be polit­ical sui­cide. A cent­ral banker who men­tioned the idea might soon be out of a job. But that should not stop undip­lo­matic eco­nom­ists ask­ing whether a reces­sion once in a while might actu­ally be a good thing.

Whatever out­comes are pur­sued, it is reas­sur­ing that such decisions are made by inde­pend­ent cent­ral bankers and not self-interested politicians.