Samuelson's Economic Insight

Are we in a recession? Are we truly experiencing two consecutive quarters of decline in real GDP?

Is fiscal action by the Federal government useful or even necessary?

What may have caused the softening growth that many now swear is a recession?

The more I reflect on what I learned about economics in college and graduate school, and since, the more I come back to one simple insight.

Paul Samuelson's 'accelerator-multiplier' theory.

Stunningly simple, it seems to square, for me, at least, with human behavior. As many great economic insights do. Such as fellow Nobel Laureate Milton Friedman's concept of income as a steady, long-term expected value.

Samuelson noted that when growth slows from a higher rate, to a lower one, the mere slackening of growth is transmitted back through what we now would call the supply chain, as a series of demand reductions.

Instead of 10% more materials each year to make my products, this year, I need only 5% more.

My supplier will see a decrease in expected sales. Growth will be half of what it was, and, thus, sales fall below expectations.

While real output is still higher, the gradual cutback in production from expectations results in a contraction, as workers work to produce less. The cycle continues, and the multiplier effect, which, in forward gear, causes economic expansion, is responsible for its contraction when run in reverse.

Seen in this light, recessions which are attributable to simple changes in economic outlook can't really be affected very effectively by one-time fiscal monetary transfers.

Plus, as noted by Alan Reynolds in his recent Wall Street Journal editorial, writing checks to one group of US citizens by the Federal Government simply means borrowing from someone else, in some way, and paying interest in the bargain. But nothing is really created. Either other spending is curtailed, or debt is assumed, crowding out someone else's potential spending, and making the stimulus really a function of differential marginal propensities to consume, to be technical.

Samuelson's genius seems to lie in his identification of a fundamental tendency of humans to view the lack of attainment of growth objectives to feel like a cutback in business. If this is what is happening, even as a result of the wealth effect of the many tens of billions of dollars of recent equity losses in US markets, it remains a phenomenon which is unlikely to be fully and successfully addressed by one-off fiscal spending by the Federal Treasury.

If any fiscal actions were to have longer-term consequences, they would seem to be the act of making soon-to-expire tax rate cuts permanent. And perhaps going further and lowering rates, permanently, once more.

Anything less would seem unlikely to provide a sufficient, long term change in demand to alleviate any potential recession. Instead, simple spending programs like that now contemplated by Congress might just feed inflation and aggravate the dollar's price.