THE AMERICAN ECONOMY, as the secretary of commerce hopefully put it, is somewhere between the recession and the recovery. He assumes that there will be no further and deeper slide, and that's probably right. But it is only another way of saying that the country continues in the trough of the business cycle, and it is turning into a very long trough. Students of the subject have offered a great variety of forecasts on the timing of the recovery. A better question is not when but how. What is the source of the economic strength that will eventually begin the next business expansion?
It won't be business investment. The government published yesterday the gross national product data for the summer quarter, showing only an insignificant increase in total output. But it also showed that business investment was declining faster last summer than at any time since the recession began. That's fairly normal for a severe recession -- but it's the opposite of the effect that the Reagan strategy, with its tax cuts and investment incentives, was supposed to produce.
Sometimes foreign sales can help pull an economy out of a recession. But that's not likely to happen this time. Exports fell over the summer. The recession is worldwide, and it is aggravated by the very high exchange rate of the dollar.
It looks as though the engine of recovery is once again going to have to be Old Faithful, also known as the Keynesian Special -- personal consumption, bolstered (maybe) by a pickup in housing construction. Why would personal consumption rise in a time of widespread unemploment? It is lifted by federal payments for unemployment compensation, Social Security, food stamps and all those other terrible entitlements that you've been warned about.
In an earlier period of American politics, the entitlements were called the automatic stabilizers. When payrolls go down, the entitlements automatically rise to stabilize demand. Construction of the stabilizer system got started in a serious way in the late 1940s, and, if you look at a graph of recessions over the past century, you will notice that around 1950 the swings suddenly become much less violent than previously. When you hear discussion of the need to cut entitlements, you might want to keep in mind the service that they are currently performing in keeping a bad recession from getting much worse.
President Reagan has been celebrating a modest increase in housing starts as evidence that things are getting better. In the past, this administration has argued that there are better ways to stabilize the business cycle, with greater promise for productivity over the long haul. That may well be right in theory. But in practice, this administration, like all of its predecessors for the past generation, is now looking to housing construction and personal spending to get the economy growing again.