Posts Tagged recession
What Is A Recession?
Posted by TonyLima in Using economic data on June 20, 2012
What is a recession? This question is prompted by an exchange over on Twitter. First, the St. Louis Fed tweeted:
I replied:
Then Kathleen Hays (Twitter profile: The Hays Advantage, Host, Bloomberg Radio. Economy, finance, markets, politics. Monday-Friday 12-3pm ET – The Econoqueen lives!) asked:
Hmmm. It’s been a while since anyone asked this question, so it’s probably time to review the rules. Off the top, everyone concedes that the NBER Business Cycles Committee is the arbiter of when recessions begin and end. Their statement of September 20, 2010 said the recession ended in June, 2009.
Dissenting Opinions
I’ve written about this before, but it bears repeating: the U.S. unemployment rate has been above 8 percent since January, 2009. The labor force participation rate is around 60%, the lowest level in three decades (specifically, since May, 1973). These are not signs of a healthy economy. It’s my opinion that the recession never really ended. Other, better-known, economists agree. On September 2, 2011, Ken Rogoff said, “We have never left the recession by any reasonable measure. If you’re 10 feet below water, and you come up a foot, you’re still drowning. The question of whether we are growing at 1% or falling at 1% is not the big issue. We’re in a different animal.” And there’s this from CNN:
“John Silvia, chief economist for Wells Fargo Securities, said the economy remains at risk as long as most households are struggling with weak wages, rising prices and the loss of household wealth.
Silvia puts the chance of a new recession at 30% to 40%, up from 20% to 30% before Friday’s jobs report.
“A significant number of Americans have never seen a recovery,” Silvia said. “We’re just skating on really thin ice. We can’t take another shot.”
Technically, the recession ended in June 2009, according to the official definition from the National Bureau of Economic Research. But that group takes into account a wide range of economic indicators.
For the average household, the Great Recession never ended. In fact, eight in 10 Americans think we’re still on one, according to a newCNN/ORC poll.”
What Defines a Recession?
Once upon a time, defining a recession was easy: two consecutive calendar quarters of declining real GDP. That’s easy to understand and transparent. Economists understood the definition’s strengths (simplicity, transparency) and weaknesses (using a single variable to define a recession is not a good idea).
Enter the NBER, Here’s what they have to say about business cycles:
“The NBER’s Business Cycle Dating Committee maintains a chronology of the U.S. business cycle. The chronology comprises alternating dates of peaks and troughs in economic activity. A recession is a period between a peak and a trough, and an expansion is a period between a trough and a peak. During a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year. Similarly, during an expansion, economic activity rises substantially, spreads across the economy, and usually lasts for several years.
In both recessions and expansions, brief reversals in economic activity may occur-a recession may include a short period of expansion followed by further decline; an expansion may include a short period of contraction followed by further growth. The Committee applies its judgment based on the above definitions of recessions and expansions and has no fixed rule to determine whether a contraction is only a short interruption of an expansion, or an expansion is only a short interruption of a contraction. The most recent example of such a judgment that was less than obvious was in 1980-1982, when the Committee determined that the contraction that began in 1981 was not a continuation of the one that began in 1980, but rather a separate full recession.
The Committee does not have a fixed definition of economic activity. It examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve’s index of industrial production (IP). The Committee’s use of these indicators in conjunction with the broad measures recognizes the issue of double-counting of sectors included in both those indicators and the broad measures. Still, a well-defined peak or trough in real sales or IP might help to determine the overall peak or trough dates, particularly if the economy-wide indicators are in conflict or do not have well-defined peaks or troughs.”
The Committee’s FAQ is also instructive in explaining why they no longer only look for two quarters of declining real GDP.
Let me translate. Paraphrasing Humpty Dumpty’s conversation with Alice, ‘ ”When I use the word recession,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.“
“The question is,” said Alice, “whether you can make words mean so many different things.”
“The question is,” said Humpty Dumpty, “which is to be master— that’s all.” ‘
(from Through the Looking Glass, and What Alice Found There, Lewis Carroll, 1871, ch. 6)
The NBER Business Cycles committee includes many smart economists, most of whom I admire greatly:
“Robert Hall, Chair — Director of NBER’s Program of Research on Economic Fluctuations and Growth and Professor, Stanford University
Martin Feldstein – President Emeritus of NBER and Professor, Harvard Univerity
Jeffrey Frankel – Director of NBER’s Program on International Finance and Macroeconomics and Professor, Harvard University
Robert J. Gordon – NBER Research Associate and Professor, Northwestern University
James Poterba – President of NBER and Professor, M.I.T.
Christina Romer – Co-Director of NBER’s Program on Monetary Economics and Professor, University of California, Berkeley
David Romer – Co-Director of NBER’s Program on Monetary Economics and Professor, University of California, Berkeley
James H. Stock – Research Associate in the NBER’s Monetary Economics Program and Professor, Harvard University
Mark W. Watson – Research Associate in the NBER’s Economic Fluctuations and Growth Program and Professor, Princeton University”
But, after all, the Committee changed the definition of a recession, making it less transparent and more complicated. A cynic might note that this change creates a demand for the services of economists to serve on the Business Cycles Committee. But the change has been made. I interpret that to mean that my opinion is as good as theirs.
The recession of 2008 has never ended. Any talk of a “double-dip” is meaningless.
Welcome to the Party, Ken Rogoff
Posted by TonyLima in The state of the economy on September 3, 2011
According to CNN.com, Harvard economist Ken Rogoff made this comment: “We have never left the recession by any reasonable measure,” Rogoff said. “If you’re 10 feet below water, and you come up a foot, you’re still drowning. The question of whether we are growing at 1% or falling at 1% is not the big issue. We’re in a different animal.”
On behalf of all of us who made this comment a year or two ago, I’d like to welcome Prof. Rogoff to our group.
Nine Point Eight! Are You Convinced Yet?
Posted by TonyLima in The state of the economy on December 3, 2010
by Tony Lima
December 3, 2010
“President Obama had scheduled a speech about the economy this morning, but instead he went to Afghanistan.”[1] No wonder. If I was president I wouldn’t want to be in the country today either.
Today the November labor market report was released. The, um, highlight was the unemployment rate: 9.8%. Corporate profits are soaring and the economy is growing, albeit slowly. So where are the jobs?
Let’s review my earlier posts, specifically March 27. [2] There I analyzed the impact of the health care bill on the economy. My summary conclusion: the health care bill included tax increases of about $32 billion. Excerpts are at the end of this post. Those tax increases have pretty much kicked in. (The exception is the increased tax revenue that will supposedly be captured by requiring businesses to file 1099 forms for any firm or individual with whom it does more than $600 per year in business.) What my earlier article didn’t focus on was the uncertainty created by the health care bill and the financial reform bill.
Taken together, these two laws will require writing about 600 new rules. Many of these rules will impact the cost of employees. And businesses don’t know what the rules will be. Small businesses, in particular, are flat-out scared – nervous about future unknown liabilities for employees, worried about the expiration of the Bush tax cuts, and generally just worried about the prospects for their futures. Would you hire new employees in this environment? When, at every turn, the president or a member of his staff demonize businesses? When decisions made in Washington, D.C. have a distinct “shoot from the hip first, ask questions later” flavor?
Neither would I.
Excerpts from my March 27 post:
“So here we are 45 years later. The economy is in a deep recession. If we’ve learned one thing since John Maynard Keynes published The General Theory of Employment, Interest, and Money (1936) it’s this: don’t raise taxes during a recession.
Yet that’s exactly what the recently-passed health care bill does. To support the accounting fiction that the government budget deficit will be reduced, many of the taxes and fees begin during the next two years. The majority of benefits don’t kick in until 2014. Is this yet another instance of presidential ego trumping sound economic policy?
As of March 27, various corporations have announced they will recast their earnings to reflect the fact that healthcare prescription benefits offered under their employees’ insurance plans will no longer be tax deductible. According to the Wall Street Journal article cited in the footnote, “Mr. Zion of Credit Suisse estimated in a report this week that companies in the S&P 500 index will rack up a combined $4.5 billion charge due to the change in the value of the tax asset.” That’s the equivalent of a $4.5 billion tax increase.
Let’s consider another small part of the new taxes. Beginning in 2012 there will be additional taxes imposed on individuals with wage income over $200,000 ($250,000 for married couples filing joint returns). There are two parts to these taxes. First, an additional tax of 0.9% will be levied on wages and salaries in excess of $200,000 ($250,000). Using IRS data for 2007 together with some educated guesses, total income above $200,000 was about $1,382,126,976,000. That implies a tax increase of about $12,439,000,000.
The second tax extends Medicare taxes to cover “Modified Gross Income.” Basically, modified gross income is wages and salaries plus interest. The phrase “exempt from taxes” refers to the exemption of non-employment income from Social Security and Medicare taxes. The purpose of this clause is to extend the 3.8% Medicare tax to cover all interest earned by anyone making over $200,000 ($250,000). … For the year 2007, that total for households with income above $200,000 was $196,513,160,000. The total tax increase for that year would have been $19,906,642,864. Call it $20 billion, bringing the total tax increase to $32 billion.
My conclusion is simply this: despite the fiscal stimulus (much of which still remains unspent), the U.S. economy will continue in recession through 2013. At best we can expect sluggish growth. The tax increases in the health care bill combined with the expiration of many of the Bush tax cuts in 2011 are two factors. But there’s even more. Fiscal policy is as much about expectations as actual changes in tax rates and government spending. Right now businesses and individuals expect higher taxes to continue for the duration of the current administration. Therefore I expect the recession to continue at least until November, 2012 and possibly even longer.”
[1] Heard on NPR’s Morning Edition December 3, 2010.
[2] http://gonzoecon.com/2010/03/the-health-care-bill-disaster-for-the-economy/
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