25 August 2008


Yet another comment that I realized, halfway through, wanted to be a blog post. This comment is from Thought-Mesh:

It's a little more complicated than that. There's no new definition, but there are alternative definitions. The "new" definition your friend mentioned is the definition used by the National Bureau of Economic Research which, it's name notwithstanding, is an entirely private, unofficial organization of economists headquartered in Cambridge, Ma. NBER is interested in dating to the month cycles of expanding and diminishing economic activity in the US economy. NBER has not said that we are in a recession; basically, they never do. They wait for revised numbers to come in and date the cycle retrospectively. Most recently, in 2003 they announced that a brief recession that began in March 2001 had ended in November 2001.

According to NBER, "A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." Since NBER does not focus solely on GDP, it is possible that it could announce a recession that did not consist of at least two consecutive quarters of GDP contraction. Although it's website is a little unclear, I don't think that it has ever done so. When it announced the beginning of the 2001 recession, reported GDP had fallen in the first three quarters of 2001. After it announced the November 2001 end of that recession, second quarter 2001 GDP was revised upwards so that now the 2001 recession consists of two nonconsecutive quarters of contraction. NBER didn't change its dates.

So, the NBER definition is not new, but neither is it "official." We're all free to choose the definition we like best. The rule-of-thumb or traditional definition (two consecutive quarters of contraction) works pretty well and is actually contemporaneously useful.

As for President Bush's economic performance, I remain skeptical that the President has much to do, one way or another, with the economic cycle. But if he does, and I can see the heuristic value of holding him responsible, then President Bush has done pretty well. Accepting that there was a 2001 recession (which only someone deep in the throws of BDS could blame on a President who took office two months earlier), then we're in the 83rd month of the Bush expansion. The post-war average is 57 months. If we don't recognize the 2001 recession, either because there weren't two consecutive quarters of falling GDP or because it wasn't a significant decline in economic activity spread throughout the economy, and as I said we're not bound by NBER's determination, then we're at 203 months of expansion, by far the longest in American history.

Which brings us to the real answer to your friend: does she really think that all recessions can be avoided, that the economy can grow continuously without respite and that the President can achieve this? As a general proposition, saying of someone that she thinks that the business cycle has been repealed is not a compliment on her keen grasp of economics. All the sins of the federal government that we get excited about -- earmarks, deficits, wasteful spending, etc. -- are pretty small compared to the size of the economy. The amount of difference a President, or the government as a whole, could realistically make doesn't amount to 2-3% of GDP. I believe in tipping points, but I don't believe that a swing that small can avoid all recessions. It's easier to believe that fixing those "problems," if done through bad tax policy, could easily have a worse effect on the economy by dissuading producers from producing.

What really seems to happen is that companies start an expansion lean and hungry. But as the expansion gets older, living is easy and money is cheap. Inventories grow, payrolls grow and perks grow. Eventually, the dead weight gets to be too much and the economy tanks as companies either go under or shed inventory, employees and benefits as fast as they can. When they're back to lean and hungry, the cycle starts over again. Computers and management education seem to have constrained companies from gaining too much fat during the good times, so we're seeing longer expansions and shallower contractions. The President doesn't have much to do with it one way or another.


Bret said...

Here's a more detailed view for those with nothing to do. (HT: Carpe Diem)

Harry Eagar said...

As you know, I spend my time disaggregating the aggregates.

It doesn't bring much comfort to, say, newspaper reporters that the economy overall is expanding 0.2% or whatever.

If you're an orthopedic surgeon, on the other hand, times have never been better.

Well, as Ronald Reagan proved to G.H.W. Bush, pump priming can only artificially boost a declining biz cycle for so long.

As Lyndon Johnson proved to Lyndon Johnson, it's better to finance your war with taxes than bonds.

Both parties get to share the blame for neglecting to put a fence around Wall St., but Bush gets to reap the benefits of the crash.

I don't blame him for $115 oil, though.

David said...

Harry: Presumably you don't think we're ever going to have our last recession. Therefore, there's always a pending recession and when it comes, as it inevitably will, there's always going to be some trigger to blame. But unless we think that it is possible to avoid recessions entirely, it doesn't pay to focus too much on the trigger because if it wasn't this trigger it would have been something else. Rather, the thing to do is to try to make the inevitable recession as short and shallow as possible, something that Americans have done pretty well. Much better, certainly, than the Japanese, who are more or less in their 20th year of stagnation while we're in our 25th year of growth.

Harry Eagar said...

Recessions will always be with us, although policy can multiply them easily enough. It's crashes that can be, maybe, avoided.

I'm pro-avoiding 'em, too.

Given the top-heavy structure of the Japanese economy, it's no surprise it has a hard time recovering from downturns. On the other hand, it was great at reaching takeoff and sustaining it.

I don't understand why people are so quick to disparage what was, until recently, the world's 2nd-largest economy and is still the 2nd-largest economy in a democracy. Sheesh.