February 22, 2016
Robert Samuelson used his column today to back up Fed Chair Janet Yellen’s claim that expansions do not die of old age. In a column titled “Janet Yellen is wrong. Expansions do die of old age,” Samuelson briefly recounted the history of recoveries and recessions over the last half century.
According to Samuelson’s account, they differed a great deal in length, with the economy experiencing four recessions over the twelve years from 1970 to 1982, as the Fed struggled to slow inflation by raising interest rates and pushing up the unemployment rate. The recessions in 2001 and 2007–2009 came about as a result of collapsed asset bubbles. The former came after an almost decade long expansion.
The obvious take-away from the evidence presented by Samuelson is that expansions don’t just die, they have to be killed. The most common way they get killed is by the Fed’s efforts to curb inflation with higher interest rates. The other leading cause of death is a collapsing asset bubble.
So the question is, does anyone think current rates of inflation warrant sharp interest rate hikes from the Fed? If not, then we need to find an asset bubble whose collapse will sink the economy. If neither of these stories seems plausible, we have good reason to expect this recovery to go on for some time longer, even if the speed may be considerably slower than many of us would like.
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