The usual suspects

Two main culprits are often cited as causes for economic downturns. First are external developments, such as the oil shocks in the 1970s or the first Gulf War in the early 1990s. The second is the Federal Reserve. Both seem exaggerated. Certainly, external variables can tip the economy over, but only, it seems, if it is already vulnerable.

Look at the oil shock of recent years. Pundits have claimed virtually every $10 increase over $40/barrel was economically intolerable. The U.S. economy expanded at a 0.6-percent pace in Q4 2007. That puts growth in the second- half 2007 near 2.75 percent — one most industrialized countries would envy. In 2001, the U.S. was emerging from the business downturn just as many had expected the exogenous shock of 9/11 to drive it into a recession.

The Federal Reserve is often accused, especially in some political quarters, of triggering economic downturns by setting monetary policy too tight for too long (i.e., hiking interest rates or keeping them high). When he was much younger and under the influence of Ayn Rand (http://www.aynrand.org), former Federal Reserve Chairman Alan Greenspan seemed sympathetic to such a view.

But the historical record suggests otherwise. The business cycle existed long before the Federal Reserve was created (1913). It seems illogical to blame recessions on the very institution created to mitigate them. As observed above, recessions have become rarer over the past 25 years.

The causes of business cycles are the subject of much debate. One camp argues the seeds of an economic downturn are planted during the expansionary phase. Another camp says the end of the business cycle is caused by factors outside the business cycle. Much ink has been spilled in defense and criticism of each camp. Suffice to say, it looks as if business cycles are like people in that they can die of old age as well as by murder.