With a little push from the Federal Reserve, interest rates inched up last week, a reminder that the U.S. economy continues to walk a tightrope with the chasms of recession on one side and inflation on the other. A fall on either side could be disastrous.
The economy has been steaming along in fine fashion, but that very success builds pressures that boost inflation. The problem is nothing like it was in the 1970s, but any serious inflation can hurt the economy and cause a subsequent recession.Higher interest rates can slow down inflation. Yet in the process, higher rates can cost jobs, make it harder to buy homes and cars, slow business investment, and lead to economic doldrums.
Any recession would cause unemployment to rise, would make it harder to compete abroad, and would knock the bottom out of efforts to reduce the federal deficit - with significant long-term consequences.
The worst possible situation, one that prevailed for a few years at the turn of the decade, would be for the economy to go into a tailspin, while interest rates stayed high despite the economic drop.
Trying to adjust interest rates and control inflation vs. recession is mainly the job of the Federal Reserve. The Reserve can flood the economy with easy credit or drain off money through high interest rates, depending on what pressures the economy needs.
But why is the economy so touchy in the first place? Why is the tightrope between inflation and recession so thin and shaky? Why is so much tinkering necessary to keep things on an even keel? The answers have to do with the federal deficit.
Because the federal government borrows so much money as part of its budget-making - $185 billion or so a year in recent years - there is that much less money for private use. If business is good, the competition for dollars inevitably drives up interest rates far beyond where they would be if federal borrowing were not part of the economic picture.
The real answer to keeping the economy on a relatively smooth track is not fine-tuning by the Federal Reserve. The real answer would be to balance the federal budget and get rid of federal borrowing. Such a situation would leave more room for economic growth without causing immediate inflationary pressure.
The deficit is not something that exists only on paper in the federal budget. It is a real problem that affects wages, prices and jobs of ordinary Americans.
Until Congress demonstrates that it has the political courage to bring the deficit under control, the economy will remain at risk from inflation or recession, or both at the same time.