June 13, 1980

NEW SOLIDARITY

Page11

Political Economy: David Goldman

National Bureau of Economic Recessions

Arthur Burns, long a follower of the economy's "biorhythms."

The self-styled National Bureau of Economic Researchit is a private, not governmental, bodyannounced "officially" June 3 that the American economy had entered a recession as of last January. This evaluation was widely reported in the press. The subject of this discussion is why the National Bureau's breathtaking discovery that the country is in recession is indeed a news item, in the nature of a "man bites dog" story. Small children often get the idea that firemen start fires, because the fire engines appear whenever there is a fire. Under unusual circumstances, this mode of reasoning may produce interesting results. In the case of the

National Bureau of Economic Research, it can be stated that the purpose of the organization is not to report recessions, but to start them. Founded in 1920, the NBER has helped start every recession since, including the 1921 depression, the 1929 depression, the 1958 recession, the 1969 recession, the 1974 recession, and the 1979 crash. Economic Biorhythms Why do recessions occur? According to the National Bureau and its founder, University of Chicago economist Wesley Clair Mitchell, it is because of something called a "business cycle." This is to economics what biorhythms are to psychology. Actually, according to the theorists, there are all kinds of cycles going on at the same time, including investment cycles, trade cycles, population cycles, and so forth. Every once in a while all these cycles gang up together and the economy goes into recession. Even the more tolerant among this newspaper's readers would be aghast if the medical profession prescribed tranquilizers and pep pills to everyone on the basis of biorhythm analysis (which is what some well-connected kooks want to do). Roughly speaking, the economics profession and, more specifically, the Federal Reserve, do the same thing. There isas the LaRouche-Riemann computer model has demonstratedno reason whatsoever that the economy cannot sustain uninterrupted growth, provided that it makes the right sorts of investments in increased productivity. This is not a conclusion subject to disputation; we have demonstrated simply that the economy can keep churning surplus product into investment and keep growing indefinitely. There are no physical barriers to this. All the business cycle theorists, like Mitchell, his student Arthur Burns, and Viennese kooks von Hayek and Mises, assume fixed productive resources. The idea is that economic expansion runs up against fixed capacity, causes inflation, and leads to recessions. Mitchell and Burns suggested other variants, e.g., entrepreneurs overinvest relative to markets, causing overproduction and hence recession. None of this need necessarily happen. How the Fed Makes Decisions So, who causes recessions? The National Bureau of Economic Research causes recessions.

Not directly, of course. The National Bureau of Economic Research invented all the nonsense indicators, like Gross National Product, inventoryto-sales ratios, leading indicators, lagging indicators, and other modern substitutes for sheep entrails. On the basis of these indicators, which say nothing whatever about the state of the real economy, whether proper investments are being made to increase productivity, or whether surplus has been diverted into nonproductive activities, the Federal Reserve makes policy decisions. Whenever the economy grows too much, Wesley Mitchell wrote in the 1920, the Federal Reserve should impose a credit crunch, "taking effective action when industrial activity is approaching the elastic limit set by full use of existing plant, and when further expansion will be primarily a speculative boom . . . it is desirable to raise discount rates in periods of sustained expansion." Of course, the Federal Reserve's policy of stopping sustained expansion with credit crunches made it extremely difficult for industry to make the longterm outlays required to maintain and improve its plant and equipment. By 1965, America began to suffer from chronic underinvestment; by 1975, we were investing $10 billion a year below maintenance requirements. Our manufacturing productivity collapsed, according to the LaRouche-Riemann models indicator, by 3 percent per year starting in 1976. Inflation That led to high rates of inflation. Of course, chronically falling productivity is only one factor in inflation, but crucial in making the economy susceptible to inflation in the first place. The head of the National Bureau of Economic Research, Harvard monetarist Martin Feldstein, proposed "unemployment of men and machines" as a means of controlling inflation. Feldstein, like his protectors Milton Friedman and Arthur Burns, the NBER chairman during the 1960s, believes that having recessions is the solution to almost everything. There is a deep philosophical cast to this commitment to having recessions. Wesley Mitchell wrote 50 years ago, after sustained exposure to John Dewey's philosophy, that the world seemed so irrational to him that it could not be studied unless participants in the economy guided themselves by his indicators in the first place. Then, events would be predictable, he wrote in a 1916 essay, "The Role of Money in Economic Theory." What is important about money, Mitchell thought, is not merely that it determined economic events, as Milton Friedman says, but that the Federal Reserve could use

money to condition individuals to make economic decisions that it wanted. All this, Mitchell attributed to John Dewey's "social psychology." Since 1920, the Federal Reserve and the National Bureau of Economic Research, now located in Cambridge, Mass., have had a magical relationship; the Bureau no sooner wishes for a recession than the Fed makes it happen. As we have reported at some length, Volcker set this one off last October, with the "Saturday Night Massacre" credit controls, followed by the even more painful March 16 measures. No one can deny the National Bureau of Economic Research the privilege of making the "official" statement, as the newspapers put it, of telling us when the economy is in recession. They know better than anyone.