SYNOPSIS: The economy doesn't seem to be getting better, but it hasn't gotten worse. Things are getting worse more slowly let's celebrate! That seemed to be the mood in the markets yesterday, after the National Association of Production Managers released its monthly survey for April. Any score less than 50 indicates that the managers surveyed see deteriorating conditions, and the index for April was only 43.2. But the index was up slightly from March — as I said, things are getting worse more slowly — and as the day went by investors seem to have concluded that this was good news.

In fact, the N.A.P.M. index was only one of a number of straws in the wind that suggest that the economic situation might not be as bad as some — myself included — have feared. For all we know the good news is just a statistical blip, and we are still on track for a deep economic plunge. But we can now contemplate, at least for the sake of argument, the possibility that the United States will dodge the bullet — that we will survive the bursting of the great technology bubble without going through an all-out recession. If so, we will have learned an important economic lesson.

Put it this way: Many economic commentators seem to subscribe to a sort of crime-and-punishment theory of recessions. They believe that after the economy goes through a period of speculative excess, it must then pay for that excess with a slump.

But must irrational exuberance be followed by recession? The alternative to crime-and-punishment is let-bygones-be-bygones. Of course capital is wasted in a speculative boom, and much of that capital must be written off. Moreover, the sectors of the economy in which the speculative excess was greatest may not see much new investment for a while; it might be years before the demand for servers or business software resumes rapid growth.

But why should this stop the economy in its tracks? There are always good investments to be made, if the price is right. Millions of Americans have decided that low interest rates offer a good opportunity to refinance their homes or buy new ones, even as the headlines warn of a slumping economy; and there are plenty of profitable opportunities in those old- economy sectors that got a bit neglected during the technology bubble.

I've always favored the let-bygones-be-bygones view over the crime-and-punishment view. That is, I've always believed that a speculative bubble need not lead to a recession, as long as interest rates are cut quickly enough to stimulate alternative investments. But I had to face the fact that speculative bubbles usually are followed by recessions. My excuse has been that this was because the policy makers moved too slowly — that central banks were typically too slow to cut interest rates in the face of a burst bubble, giving the downturn time to build up a lot of momentum. That was why I, like many others, was frustrated at the smallish cut at the last Federal Open Market Committee meeting: I was pretty sure that Alan Greenspan had the tools to prevent a disastrous recession, but worried that he might be getting behind the curve.

However, let's give credit where credit is due: Mr. Greenspan has cut rates since then. And while some of us may have been urging him to move even faster, the Fed's four interest-rate cuts since the slowdown became apparent represent an unusually aggressive response by historical standards. It's still not clear that Mr. Greenspan has caught up with the curve — let's have at least one more rate cut, please — but the interest-rate cuts do, cross your fingers, seem to be having an effect.

If we succeed in avoiding recession, this will mark a big win for let- bygones-be-bygones, and a big loss for crime-and-punishment. And that will be very good news not just for this business cycle, but for business cycles to come.

For the big lesson of the late 1990's was that speculative bubbles spring eternal. The signs of irrational exuberance, not to mention sheer silliness, were there for all to see; yet the bubble expanded — and then burst — all the same. Surely there will be other bubbles, and other burstings, in the decades ahead. The best we can hope for is that when the bubbles burst the consequences can be limited. And the faint signs of good news in the U.S. economy are reason to hope that they can.

Originally published in The New York Times, 5.2.01