A Soft Landing


  • Searching For a Soft Landing
  • Shifting Consumer Sentiment
  • Once Again, Italy Is in a Fragile State

I liked physics… for a little while. Its principles made sense to me, and the heavy use of mathematics played to my strengths. Plus the labs were fun: we slid objects across tracks and dropped them from heights. I had been doing experiments like that at home my whole life.

I was particularly smitten by Newton’s first law of motion: “Every object persists in its state of rest or uniform motion in a straight line unless it is compelled to change that state by forces impressed on it.” The law is a powerful tool for understanding why and how things move—or don’t move. From this foundation, one can anticipate how differing forces might change the speed or direction of travel.

Economics is not a natural science, and the phenomena we study do not lend themselves to tidy equations. But Newton’s first law may explain why the year ahead of us might be difficult to manage. Forces acting on the speed and direction of the business cycle are building, and unpredictable responses from economic actors will make it difficult for policy makers to secure a soft landing.

In the physics lab, it is not difficult to manage the speed of an object in motion. The exact amount of force needed to achieve a desired direction and velocity can be derived from simple calculations. By contrast, modulating the pace of economic growth is far less precise and more perilous, because the objects in motion are people, firms and markets.

We’ve only had one clear example of an economic soft landing where the force of policy slowed an expansion without stopping it. In the mid-1990s, U.S. inflation began to rise after several very strong quarters. Through a sharp increase in interest rates, the Federal Reserve was able to reduce growth and inflation to more manageable levels without creating additional unemployment.

At the time, the achievement of a soft landing didn’t seem remarkable. Alan Greenspan was chairing the Fed, and markets had immense respect for him. A biography, written prior to the financial crisis, referred to him as “The Maestro.”

In retrospect, getting the economy to settle down gently was an extraordinary feat. Actions from policy makers and responses from those affected by them are separated by long and unpredictable lags, which is like steering a car and not seeing a change of course for several miles. (At which point you might have run off the road.) The reactions are not always predictable; people are not miniature cars on a track, and a multitude of forces act on them simultaneously.