- 25 Jan 08, 11:20 AM
Is there such a thing as a "cathartic recession"? A recession that purges the demons of excess from the economy and punishes the badly-behaved for their sins?
I'm not sure there is. But I unwittingly found myself in an argument with the former US Treasury Secretary Larry Summers on the subject.
I asked him whether central banks should be modest about how much they can hope to achieve and whether they might sometimes have to accept that economies slowdown.
My question was motivated by a sense that there's a limit to the imbalances an economy can accumulate to keep itself running at a good speed. (You can hear the interview on Saturday's Today programme).
Maybe I shouldn't have raised the topic.
He certainly put me in my place, arguing that the very question betrayed an adherence to one of most cruel, fatalistic and mistaken beliefs of the economics profession. It was the view held in 1929 he said.
He's once of the brightest economists around, Larry Summers and one of the most articulate. (His forthright views have got into trouble on more than one occasion). And his views need to be taken seriously.
As it happens, I don't actually believe in cathartic recessions, but his vociferous denunciation of them invites us to think carefully about exactly what it is we should believe of the economy at the end of a bubble. We might be right to tolerate a slowdown as part of a process of sensible rebalancing while also having to avoid a deep recession that wastes the potential of the population and needlessly makes people poorer than they should be.
My view is that the correction of imbalances probably involves some slowdown and we should live with that. Larry Summers' view (I think) is that we should not talk that way, because it will soon lead us into tolerating or creating the needless cathartic recession.
After he had finished with me, Professor Summers said he had been inspired by my questions (the sheer stupidity of them) to give a talk on this very subject.
It's good to know that my interview was so inspirational.
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