It is not surprising that controversies surround the issue of whether an economic “recession” is over or not. This is especially true for a world-shattering episode like the Great Recession that started in late 2007 and ended in the middle of 2009. The dates I just quoted were determined by a committee of economists at the National Bureau of Economic Research. Contrary to what most textbooks say, however, such dates are subject to debate. So below I present another new gauge to indicate when economic recessions occur, on top of the one I discussed in an earlier blog post. The new one is based on the officially-measured unemployment rate (U3). But to set the stage for this, alas, I must first repeat some of what I already said in an earlier post. I promise to throw in a tiger analogy to make things more interesting.
There, I discussed a major contrast in perceptions: while the NBER, many economists, and most pundits declared the Great Recession “ended” as of July 2009, many or even most folks outside of this charmed circle say “the recession isn’t over!” Using a year-to-year fall in the inflation-corrected median household income as indicating the existence of a “recession,” it turns out that popular perception was almost completely correct. However, further examination of how the dates of recessions’ peaks and troughs are set suggests that more is going on. Even though many dislike the phrase, the idea of a "jobless recovery" actually makes some sense in terms of the normal workings of capitalism.
Definitional Differences. An important reason for the difference between the non-governmental NBER and those of us who have to live in the real-world economy is a lack of communication. First, econopundits define a “recession” as the situation where the economy is actually receding (or retreating) until it reaches the business-cycle "trough." Making things clearer, this kind of event is often called an economic downturn. Journalists often measure this as the situation when we see two or more back-to-back quarters when the inflation-corrected GDP fell. (This is also called the “real” GDP; I’m going to ignore the controversy about his practice and just go with the flow.) This is a simplistic, but easy-to-measure, version of the generally-accepted definition used by the NBER. In practice, it gives quarterly dates for peak and troughs that corresponds well to the NBER dates. Thus, I’m treating the journalistic definition as equivalent to an “NBER recession” – or a recession as defined in this “standard” way. (People should remember, however, that the NBER uses a more complex way to determine the dates of cyclical peaks and troughs. Otherwise they wouldn’t need a committee!)
In contrast, so-called “ordinary” folks, for whom the economy’s situation is up close and personal, often see a “recession” as including not only the period when the economy is falling but also the quarters or even years when it’s stagnating in the aftermath of an “official” NBER recession. We should be heartened by the fact that the economist Lawrence Ball’s Money and Banking textbook takes a similar tack: his recession adds what economists call a “recessionary gap” (i.e., real GDP hovering below its estimated potential) onto the back end of the falling real GDP conception.This fits with much of popular experience.
However, this debate is really nothing but a difference about definitions. To my mind, there’s no point in arguing about which definitions are “correct.” A fight over whether that big creature that’s about to stomp on us is a Brontosaurus or an Apatosaurus is totally sterile. And does it really matter whether we call a thumb a “finger” or not? But we should remember that this disagreement arises because people are speaking slightly different languages, based in their different life experiences and intellectual approaches.
Median Income Recessions. But there are more serious differences. As noted in the previous blog post on this subject, the economists and pundits are likely gauging a “recession” using the wrong numbers. For the vast majority of people, using inflation-corrected median household income is better than using real GDP (which is so central to the standard definition). Suppose that the Jones family represent the median household, i.e., one which is smack dab in the middle of the income distribution. If they find that their money income isn’t keeping up with inflation (so that their real income falls), that disrupts their efforts to make ends meet and may drive them to borrow to maintain their standard of living. That is, the Joneses must cut back, canceling visits to movie theaters, sit-down restaurants, and even doctor’s offices. This is exactly the kind of situation that the word “recession” evokes for most people.
In the previous blog post, I determined the dating of Household Income Recessions using yearly data, since that is what’s available. It’s possible that quarterly data would be better, but the analysis suggests that recessions are a much more serious problem than the econopundits have seen. A year-to-year recession of household incomes captures the severity that most associate with this word.
Using the median household income has the advantage of correcting the usual real GDP measures for the effects of population growth. In my post, I didn’t even mention this issue because it’s not very important in a rich country such as the United States.
A different way to deal with the population issue is to use per capita or mean income (that is, the total GDP divided by the total population). But using real median household income to gauge recessions is highly superior. Per capita incomes can soar even though the 99 percent find our lives continuing to be nasty and brutish (and short, if we can’t afford medical care). This happens if the rich are garnering income hand over fist and grabbing the lion’s share of any increase in total income. In fact, that’s exactly the situation we’ve seen in recent years: in the aftermath of the Great Recession, the rich have been getting richer while most of the rest of us have continued to suffer.
Thus, the Household Income Recession I found that corresponded to the NBER’s “Great Recession” ended in 2012 rather than in the July 2009. In fact, it may be continuing into 2013 or even later. Whether or not the Recession will continue can only be seen when the government cranks out the data (if they can find the money to do it).
Ride the Tiger! An important criticism of the use of market incomes to gauge the onset and end of a recession is that both GDP and household incomes, whether they are measured in “real” terms or not, totally ignore non-market costs and benefits. They thus mis-measure the net benefits produced by the economy. In GDP calculations, the cost of pollution – think of the megatons of oil the BP’s oil disaster dumped on the Gulf of Mexico a few years ago – is not deducted, unlike the market cost of (say) the gasoline that goes into making the GDP. In fact, the clean-up costs from a massive oil spill can add to the value of GDP since it involves hiring and paying droves of workers! Further, the benefits of non-market activities – such as parents taking care of their own children – are also forgotten in GDP calculations. Thus, some have developed alternatives, such as the Genuine Progress Indicator to get an idea of the net sustainable benefits actually created by our economy for people.
This criticism is totally on-target when we think about the quality of long-term economic growth (i.e., rises in the ability of the economy to produce). Are we building higher and higher GDP numbers by dumping costs on Nature? That may not be sustainable because they’ll come back to bite us in a few years. For example, GDP growth is promoted by dumping carbon dioxide into the atmosphere (rather than paying for it as a cost up-front). But the resulting rise in the sea level with likely create large economic costs very soon, if global warming isn't doing that already (as with all of the "weird weather" we've been having).
The problem is that this criticism isn’t relevant to the issue of business cycles (a shorter-term matter). Remember that we live in a capitalist economy. That means that the vast majority of people are dependent on getting jobs and being paid wages or salaries. This makes us dependent on the health of the capitalist market economy – by its own standards. Even rich folks are dependent on the health of capitalism since they reap dividends, interest, capital gains, and/or princely executive salaries and bonuses that the system pumps out. GDP, despite its limits, measures capitalist health. This means that it real GDP stagnates, not many jobs will be created and not much property income will be garnered. So many or most people will suffer.
Think of us as riding the back of the tiger called capitalism. Measures like GDP miss such events as when the tiger kills an antelope for no reason and lets the carcass rot. However, if we have no way to get off its back, we want the tiger to be well-nourished. After all, it might decide to eat its passengers. GDP is like a measure of the amount of food the tiger gets, as is the study of business cycles. If GDP is soaring, the passengers can enjoy the ride ... (I apologize if this analogy is unfair to tigers.)
(to be continued)
– Jim Devine
There, I discussed a major contrast in perceptions: while the NBER, many economists, and most pundits declared the Great Recession “ended” as of July 2009, many or even most folks outside of this charmed circle say “the recession isn’t over!” Using a year-to-year fall in the inflation-corrected median household income as indicating the existence of a “recession,” it turns out that popular perception was almost completely correct. However, further examination of how the dates of recessions’ peaks and troughs are set suggests that more is going on. Even though many dislike the phrase, the idea of a "jobless recovery" actually makes some sense in terms of the normal workings of capitalism.
Definitional Differences. An important reason for the difference between the non-governmental NBER and those of us who have to live in the real-world economy is a lack of communication. First, econopundits define a “recession” as the situation where the economy is actually receding (or retreating) until it reaches the business-cycle "trough." Making things clearer, this kind of event is often called an economic downturn. Journalists often measure this as the situation when we see two or more back-to-back quarters when the inflation-corrected GDP fell. (This is also called the “real” GDP; I’m going to ignore the controversy about his practice and just go with the flow.) This is a simplistic, but easy-to-measure, version of the generally-accepted definition used by the NBER. In practice, it gives quarterly dates for peak and troughs that corresponds well to the NBER dates. Thus, I’m treating the journalistic definition as equivalent to an “NBER recession” – or a recession as defined in this “standard” way. (People should remember, however, that the NBER uses a more complex way to determine the dates of cyclical peaks and troughs. Otherwise they wouldn’t need a committee!)
In contrast, so-called “ordinary” folks, for whom the economy’s situation is up close and personal, often see a “recession” as including not only the period when the economy is falling but also the quarters or even years when it’s stagnating in the aftermath of an “official” NBER recession. We should be heartened by the fact that the economist Lawrence Ball’s Money and Banking textbook takes a similar tack: his recession adds what economists call a “recessionary gap” (i.e., real GDP hovering below its estimated potential) onto the back end of the falling real GDP conception.This fits with much of popular experience.
However, this debate is really nothing but a difference about definitions. To my mind, there’s no point in arguing about which definitions are “correct.” A fight over whether that big creature that’s about to stomp on us is a Brontosaurus or an Apatosaurus is totally sterile. And does it really matter whether we call a thumb a “finger” or not? But we should remember that this disagreement arises because people are speaking slightly different languages, based in their different life experiences and intellectual approaches.
Median Income Recessions. But there are more serious differences. As noted in the previous blog post on this subject, the economists and pundits are likely gauging a “recession” using the wrong numbers. For the vast majority of people, using inflation-corrected median household income is better than using real GDP (which is so central to the standard definition). Suppose that the Jones family represent the median household, i.e., one which is smack dab in the middle of the income distribution. If they find that their money income isn’t keeping up with inflation (so that their real income falls), that disrupts their efforts to make ends meet and may drive them to borrow to maintain their standard of living. That is, the Joneses must cut back, canceling visits to movie theaters, sit-down restaurants, and even doctor’s offices. This is exactly the kind of situation that the word “recession” evokes for most people.
In the previous blog post, I determined the dating of Household Income Recessions using yearly data, since that is what’s available. It’s possible that quarterly data would be better, but the analysis suggests that recessions are a much more serious problem than the econopundits have seen. A year-to-year recession of household incomes captures the severity that most associate with this word.
Using the median household income has the advantage of correcting the usual real GDP measures for the effects of population growth. In my post, I didn’t even mention this issue because it’s not very important in a rich country such as the United States.
A different way to deal with the population issue is to use per capita or mean income (that is, the total GDP divided by the total population). But using real median household income to gauge recessions is highly superior. Per capita incomes can soar even though the 99 percent find our lives continuing to be nasty and brutish (and short, if we can’t afford medical care). This happens if the rich are garnering income hand over fist and grabbing the lion’s share of any increase in total income. In fact, that’s exactly the situation we’ve seen in recent years: in the aftermath of the Great Recession, the rich have been getting richer while most of the rest of us have continued to suffer.
Thus, the Household Income Recession I found that corresponded to the NBER’s “Great Recession” ended in 2012 rather than in the July 2009. In fact, it may be continuing into 2013 or even later. Whether or not the Recession will continue can only be seen when the government cranks out the data (if they can find the money to do it).
Ride the Tiger! An important criticism of the use of market incomes to gauge the onset and end of a recession is that both GDP and household incomes, whether they are measured in “real” terms or not, totally ignore non-market costs and benefits. They thus mis-measure the net benefits produced by the economy. In GDP calculations, the cost of pollution – think of the megatons of oil the BP’s oil disaster dumped on the Gulf of Mexico a few years ago – is not deducted, unlike the market cost of (say) the gasoline that goes into making the GDP. In fact, the clean-up costs from a massive oil spill can add to the value of GDP since it involves hiring and paying droves of workers! Further, the benefits of non-market activities – such as parents taking care of their own children – are also forgotten in GDP calculations. Thus, some have developed alternatives, such as the Genuine Progress Indicator to get an idea of the net sustainable benefits actually created by our economy for people.
This criticism is totally on-target when we think about the quality of long-term economic growth (i.e., rises in the ability of the economy to produce). Are we building higher and higher GDP numbers by dumping costs on Nature? That may not be sustainable because they’ll come back to bite us in a few years. For example, GDP growth is promoted by dumping carbon dioxide into the atmosphere (rather than paying for it as a cost up-front). But the resulting rise in the sea level with likely create large economic costs very soon, if global warming isn't doing that already (as with all of the "weird weather" we've been having).
The problem is that this criticism isn’t relevant to the issue of business cycles (a shorter-term matter). Remember that we live in a capitalist economy. That means that the vast majority of people are dependent on getting jobs and being paid wages or salaries. This makes us dependent on the health of the capitalist market economy – by its own standards. Even rich folks are dependent on the health of capitalism since they reap dividends, interest, capital gains, and/or princely executive salaries and bonuses that the system pumps out. GDP, despite its limits, measures capitalist health. This means that it real GDP stagnates, not many jobs will be created and not much property income will be garnered. So many or most people will suffer.
Think of us as riding the back of the tiger called capitalism. Measures like GDP miss such events as when the tiger kills an antelope for no reason and lets the carcass rot. However, if we have no way to get off its back, we want the tiger to be well-nourished. After all, it might decide to eat its passengers. GDP is like a measure of the amount of food the tiger gets, as is the study of business cycles. If GDP is soaring, the passengers can enjoy the ride ... (I apologize if this analogy is unfair to tigers.)
(to be continued)
– Jim Devine
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