The Ghost in the Recovery Machine

NEW HAVEN – The International Monetary Fund’s October World Economic Outlook proclaimed that, “Strong public policies have fostered a rebound of industrial production, world trade, and retail sales.” The IMF, along with many national leaders, seem ready to give full credit to these policies for engineering what might be the end of the global economic recession.

National leaders and international organizations do deserve substantial credit for what has been done to bring about signs of recovery since the spring. The international coordination of world economic policies, as formalized in the recent G-20 statement, is unprecedented in history.

But one also suspects that world leaders have been too quick to claim so much credit for their policies. After all, recessions generally tend to come to an end on their own, even before there were government stabilization policies. For example, in the United States, the recessions of 1857-8, 1860-61, 1865-7, 1882-85, 1887-88, 1890-91, 1893-94, 1895-97, 1899-1900, 1902-04, 1907-8, and 1910-12 all ended without help from the Federal Reserve, which opened its doors only in 1914.

Economic theorists long ago developed models that describe how recessions end on their own. In his 1959 book The Business Cycle , in a chapter entitled “The Lower Turning Point,” Cambridge University economist R. C. O. Matthews summarized a host of factors that business-cycle theorists of his day argued tend to bring on recovery automatically.