A while ago I argued in this blog that the US might benefit from a recession, because it was highly unlikely that the fundamental adjustment required in the US economy – a substantial increase in the national saving rate – is achievable without a period of growth below potential.
No US economist working in the US whose views I have read or heard supports the idea that a recession might be what the US needs right now. I think part of the difference in perspective comes from the fact that Europeans and other non-Americans view the US as an open economy that for decades has been saving too little and has been living beyond its means by borrowing abroad.
But even if the US were a closed economy, I would still believe that the kind of sustained increase in the national saving rate - by at least six percent of GDP to give US citizens hope of a dignified retirement (rather more than the three percent of GDP increase in the national saving rate required to restore external sustainability for the US) - cannot in practice be achieved without passing through a material slowdown, and possibly a recession.
The American economy is broke. To fix it a slowdown is well-nigh inevitable and a recession is likely to be necessary.
But the ostriches in the Fed, the White House and the Capitol are unmoved by such concepts as unsustainability. The prevailing ethos is myopic at best: let’s just put out this immediate fire, because it threatens today’s comfort level.
It is hard to have a rational discussion with those who embody and express the views of a nation that is in denial. The US establishment and political class, and quite possibly much of its electorate, are indeed in denial, and not just about the need for an early traverse to a higher national saving rate.