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October 26, 2001

Economic Pothole Dead Ahead

It’s hard to comprehend today, but it was only a few centuries ago that the everyday activities of human beings on this planet were dominated by the position of the sun in the sky. The technology of artificial light has largely eliminated the need for daylight to move about and conduct commerce, but dozens of other cycles, both natural and man-made, have not been so easily tamed. In fact, some of the new forces creating ups and downs in the economy stem from the new technologies themselves.

The granddaddy of all of these is the business cycle. The inability of businesses and consumers to go lightly on the throttle during good times, and equally lightly on the brakes when things are worse, has been a staple of market economies for as long as anyone can remember. The resulting episodes of overspending, recession and recovery have outlived many generations of would-be savants who proclaimed their demise. Some of these cycles have been so severe as to alter the course of history.

As the national economy slips into what hopefully will prove to be a brief recession, it’s clear we’re still not up to the challenge of avoiding economic downturns altogether. But in the modern era, we have at least learned a few policy rules to help limit their damage. Providing the economy with liquidity, protecting the integrity of financial institutions, and facilitating the movements of capital out of failing industries and into healthy ones are only a few of the many lessons painfully taught to us in the past.

But the business cycle is itself the summation of countless smaller cycles spread across the spectrum of the economy, many of which we know much less about. Some of these cycles are driven by technology, or by other factors that are relatively independent from the overall business cycle. One might put the runup in Y2K-related spending by technology-dependent businesses in this category.

Cycles in other industries, like bad debt collection or bankruptcy auctions, run exactly counter to the ups and downs of the economy. Whether by happy coincidence, or, in the case of a government program like unemployment insurance, by explicit design, such patterns of spending are desirable, since they make the overall business cycles less severe. In recent decades, periods of higher unemployment have proved to be good for college and university enrollments, particularly post-graduate programs, with consequent dividends for the future.

Of particular policy concern are those industries whose cycles run in concert with the overall economy, and thus threaten to amplify the severity of its ups and downs. High on this list are the lending patterns of the banking and thrift industries.

Every economic downturn produces a sharp upswing in bad loans, and a subsequent tightening in the availability of new credit. That’s been true since the days when the great banking houses of Astor and Rothchild ruled the world’s capital markets, and it’s equally true today. Belt tightening by banks, if carried out too far, can starve healthy firms of needed capital and turn a mild downturn into something much more severe.

The new twist on this old story is the yet-untested promise of cutting edge information technology to more accurately assess loan risk. With data files and silicon chips on their managers’ desktops, banks have pushed further into the so-called "subpar" lending market than older rules of lending would allow. If those past decisions prove unwise today, we may all be worse off for it.

Recessions are painful experiences for businesses and workers, and humbling events for economists and policymakers as well. The challenge of simply limiting their damage will keep us occupied for the foreseeable future.

Link to this commentary: https://commentaries.cberdata.org/451/economic-pothole-dead-ahead

Tags: recession


About the Author

Pat Barkey none@example.com

Patrick Barkey is director of the University of Montana Bureau of Business and Economic Research. He served previously as Director of the Bureau of Business Research (now the Center for Business and Economic Research) at Ball State University, overseeing and participating in a wide variety of projects in labor market research and state and regional economic policy issues. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

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