The Slowdown Slows Down -- that's good, right?

by Fred E. Foldvary

Excuse me, but I’m going to get mathematical. A recession means that the output of an economy is declining. The rate of decline is the slope of the downward curve at some moment in time. That slope is mathematically the first derivative of the line at that time point.

The second derivative is the change in the slope. When an economy peaks out, at first the slope is flat as output changes from growing to shrinking. Then the rate of decline gets bigger as the economy falls faster. Last fall, the economy was plunging like a boulder thrown off a cliff.

But now there are signs that the rate of decline is going to get less steep. The change in the slope is now going from negative to positive. We can see the signs in the price of metals and the calming of financial markets. The economy is still falling, but a bit more slowly, and if the change in the rate stays positive, the decline will become less and less steep.

People pay attention to the peaks and bottoms of the economic cycle, but the more important turning points are the change in the rate of growth or decline. Thus when the economy is growing fastest is when it starts to grow a bit less fast and now, woe! that second derivative has gone from positive to negative. That negative second derivative, meaning a slowing rate of growth, then foreshadows the coming recession.

So the good news now is that the opposite is happening. The economy is starting to plunge less rapidly, and a continuing positive second derivative implies that the decline will flatten and the recession will be over.

The recession will most likely end in the fall of this year 2009. Of course, it will not yet be happy days, since the economy will be depressed and the recovery will be very slow. Taxes are going up, including the implicit tax of cap-and-trade pollution permits. Banks will be hit by waves of defaults by commercial real estate such as shopping centers. So the economy may be flat for a while and then slowly recover.

When the recovery kicks in, banks will be lending their huge cash hoard, and as money circulates, the past jump in monetary inflation will cause high price inflation. The inflation will bail out real estate and the stock market, but will be bad for workers and for savings if it is not inflation-protected. The stock market has already rebounded from its lows.

The smart money is already sniffing at real estate bargains. Land values are still falling, but those who know the market can get good deals. Low mortgage rates, coming price inflation, and low prices are making houses attractive again, if you have the down payment.

Government chiefs will take credit for the end of the recession. They will say the stimulus, bank rescue, and mooching worked and were needed. But some economists disagree, as they say the economy would have actually recovered sooner and faster without the government intervention.

Nobody will be pushing the true remedy, the replacement of punitive income and sales taxation with economy-stimulating land value taxes that would push people to make their land productive while pulling them up by the incentive of tax-free gains. When I say “nobody,” this means except the followers of Henry George, the economist who realized that true free trade means the abolition of all tax barriers, which implies lowering taxes to the ground, tapping the rent beneath our feet.

The economic deceleration may be thrown off course by shocks such as the swine flue that, as of this date, April 28, 2009, has just erupted. A mass epidemic could plunge the global economy into another great depression. Perhaps this reveals a wisdom in the old Kosher laws, in the Judaic and Islamic prohibition of pork. Maybe heaven did not wish for pigs to be eaten, even if pork chops taste good and cooked pigs are now safe to eat. Swine genes in biological viruses may end up being worse for humanity than the financial crash.

This article first appeared in the Progress Report, www.progress.org. Reprinted with permission.

Dr. Fred Foldvary teaches economics at Santa Clara University and is the author of several books: The Soul of Liberty, Public Goods and Private Communities, and the Dictionary of Free-Market Economics.