James Hounsell’s ’11 provocative Wespeak entitled “’Recession’ distortion” (September 23, 2008, Volume CXLIV, Number 7) raises a number of interesting issues, but he is inadvertently perpetuating a common myth regarding the definition of a recession in the United States.
The formal definition of a recession is a prolonged and significant decline in economic activity as indicated by a wide range of measures including employment, production, sales, income, and GDP. The “Dating Committee” of the National Bureau of Economic Research (NBER) is the final authority that designates recessions. My colleague Victor Zarnowitz, a senior economist at The Conference Board (a non-profit global business organization that is supported by business executives) whose research discovered the business cycle that underlies the NBER’s analysis, sits on this committee. Their analysis, however, is anything but straightforward; the Nobel Prize-winning economist Paul Samuelson noted that “economists have predicted nine of the last five recessions correctly.”
The myth that recession is defined as two quarters of negative GDP growth started in 1974; a good summary of how the myth was started, and why it matters that we correct it, can be found in Lakshman Achuthan and Anirvan Banerji’s article, “The Risk of Redefining Recession,” published in money.cnn.com.
A more enjoyable (because it can’t be factually resolved) debate could be had over the political aspects of Mr. Hounsell’s comments regarding recession — namely, that the Democrats have every incentive to exaggerate the problems in the U.S. economy. That certainly seems to be a reasonable conclusion — in the same way that John McCain’s observation that “the fundamentals of the economy are strong” the day before the largest financial restructuring in the history of the country could probably be called a tad optimistic (or at best really, really bad luck).
But on a more serious note, Wesleyan students should understand that there is indeed a fundamental problem in the U.S. financial sector that has not been caused by the recent campaigns of either candidate for president. The mechanisms for measuring and managing risk turned out to be woefully inadequate, and just about everyone involved turned a blind eye to the problem, which has had an unprecedented effect on the availability of credit to businesses in every industry. It’s hard to deny that the Bush administration’s laissez faire approach to regulation didn’t exacerbate the problem; but it’s also hard to argue that his predecessor had nothing to do with it either. And let’s not forget homeowners who purchased houses on borrowed money they knew they could not afford. There is a lot of blame to go around.
What are the lessons that Wesleyan students should take from this? The most important, I think, is never to suspend the good judgment you are being taught in Middletown. The late Herb Stein was famous for saying, “if something cannot continue forever, it will eventually stop.” I personally ignored this advice during the internet bubble of 2000 and took a company bankrupt as a result. I recovered, and so will the U.S. economy (there are indeed areas of basic strength that will fuel our future growth), but it was a painful process then, and it will be a painful process now, notwithstanding one’s political preferences.
Leave a Reply