IN 1871 America added about 6,000 miles of track to its railways, an endeavor that occupie
d a tenth of its industrial labour force. But by 1875 track-building had fallen by more than two-thirds, and employed less than 3 % of America's workers.
According to Brad DeLong, an economic historian at the University of California, Berkeley, the violent ups and downs of the railway industry help to explain the popularity, before the Great Depression and John Maynard Keynes, of a fatalistic view of the business cycle. Recessions, however unpleasant, were cathartic, and therefore necessary. They released capital and labour from profitless activities (such as laying the year's 6,000th mile of track) as an essential prelude to redeploying them elsewhere. "Depressions are not simply evils, which we might attempt to suppress," wrote Joseph Schumpeter. They represent "something which has to be done".
In Schumpeter's day, this fatalism was shared by many at America's Federal Reserve. But today's Fed acts quickly to suppress recessions, which it recognises are mostly due to a lack of demand, not an excess of track. For the Fed, recessions are good for one thing, and one thing only: curbing inflation.
Unfortunately, this task is now an urgent one. According to figures released this week, core consumer prices rose by 2.7% in the year to July—too fast for comfort. In theory, curbing this inflation could be painless. If the Fed's commitment to price stability is credible, and if people look forward, not backward, when settling their wages and setting their prices, they will respond to the Fed's promises. Unfortunately, in practice, inflation suffers from strong inertia. Hence cutting it typically requires a slowing of the economy as well as a lowering of inflationary expectations.
Like pagans sharpening their knives, economists debate the size of this "sacrifice ratio": the number of people who must lose their jobs to appease the gods of price stability. Some models, including one of many that guide the Fed's deliberations, put this ratio as high as 4.25, which means that unemployment must rise by one percentage point (or 1.5m people) for 4.25 years to reduce inflation by one percentage point. But other, less bloodthirsty economists suggest the ratio is more like 2 or 2.5.
Ratios like these mean that for the first time in years America's domestic economists, who track their country's inflation and unemployment, are as worded about the future as its international economists, who fixate on the country's external imbalances. The internationalists have long feared that a recession might lie ahead should foreigners abruptly abandon the dollar. The prospect of a more conventional downturn—engineered not by foreign central banks, but by America's own—suggests the cart and horse belong in a different order. A recession might bring about a reversal of the current-account deficit, rather than the other way around. Recessions were, after all, part and parcel of Portugal's current-account reversal, which began in 1982, Britain's from 1989 and Spain's from 1991.
In reality, however, America's deficit is unlikely to close without its industrial structure changing substantially. Only about a quarter of what it now produces can be sold across borders. Andrew Tilton of Goldman Sachs has calculated that to boost exports and narrow its deficit to 2.5% of GDP by 2010, America would need to increase its manufacturing capacity by about 17%. But until this year, it was housing, a non-traded good par excellence, which has attracted extra labour and capital. In 2005 the share of construction workers in payroll employment was the highest in 50 years, and residential investment accounted for the biggest chunk of GDP since 1951. Schumpeter, no doubt, would call this "maladjustment".
Might a recession do for housing what it did for late-19th-century railways？ The last downturn was accompanied by substan
A．to serve as a background of the passage.
B．to illustrate the wild ups and downs of the railway industry
C．to introduce the fatalistic view that recession, however unpleasant, is necessary.
D．to display the relationship between industrial development and employment rate.
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