A 'Mild' Recession?!? Sez Who?
Every time I see the word ‘mild’ next to the word ‘recession,’ I cringe, and you should too.
Economists endlessly describe the 2001 recession as mild, meaning that the economy didn’t contract much at all in terms of real gross domestic product, or GDP. Same with the previous downturn in the early 1990s. Today, there’s a lot of debate as to the how deep the current downturn (if that’s where we are) will be, and there’s no shortage of mild assessments.
Remember, this is all purely in terms of GDP. These judgments largely ignore the part of the economy that matters most to most people: the job market.
Following the allegedly mild 2001 recession, the economy experienced the longest period on record where GDP rose while we kept losing jobs, 1.1 million jobs, to be precise. The unemployment rate rose for another 19 months and for just under two years for African-Americans. Does that sound ‘mild’ to you?
The pattern was similar, though not quite as deep, after the early 1990s recession.
What’s really going on here is an artifact of the way recessions are dated. The committee that calls such matters has chosen to give less weight to the job market and greater weight to output growth. Since employment growth tends to lag that of output, there’s a rationale for this weighting scheme, but a) they’ve overdone it, and b) it has real policy implications.
You see this policy point quite clearly in the current debate. It’s repeatedly noted that if policy makers fail to act quickly, it will be too late. Conservative Bruce Bartlett has a short piece in today’s NYT purporting to make this case.
But his argument is based wholly on official, GDP-oriented recession dating, with no reference to the job market. He critically points out, for example, that Congress passed an economic package in June of 2001. But employment kept falling until August of 2003. The June 2001 package may have been ineffective (take note, current stimulus crafters), but it wasn’t late.
Obviously, real GDP growth is a critically important benchmark, but let’s get this straight: it is a necessary, not a sufficient condition for a robust economic recovery. A ‘mild’ recession characterized by deep, lasting job losses is anything but.
I'm always startled to hear we came up out of the recession after 2001. From my view the economy never got going again.
I exclude the oil and finance sectors from actual economy. Neither generates a product. The first only ships one it finds somewhere, and the second only generates imaginary wealth.
I am also mystified at discussions that assume generic consumption is an economy. Let's imagine two families in a village. One digs a well, and nobody has to walk as far for water. Worth paying for this product since it makes other activity possible. The other family makes ropes and buckets. Worth paying for to get the best out of the well. That's an economy.
But if family #1 tries to sell blue-tinted roof thatch, and family #2 tries to sell orange-tinted roof thatch, that's not an economy, even if both families buy up the entire inventory. They still have to walk a mile for water, and since they spent their time dyeing thatch, they are now thirsty and lack water for cooking.
Some products seem to make everything run better, for example computers, while others are basically just tinsel, like large-screen TVs. Some services add value, like Jiffy Lube, which simultaneously increases cars' lifetimes while making extra bucks recycling the captured oil. Then there is cable TV and lawn services.
I do not call Wall Street profits a healthy economy. It's only bead trading. But if they tank, they can intertfere with well-digging and rope-making.
January 23, 2008 6:59 AM | Reply | Permalink
I hear you, Tom. I was on a radio show yesterday talking about this stuff, and before I came on, much of the conversation was "what steps can we take to turn around the stock market?" as if that should be our primary target.
January 23, 2008 8:20 AM | Reply | Permalink
before I came on, much of the conversation was "what steps can we take to turn around the stock market?" as if that should be our primary target.
for many, it is a "primary target" since, short term, that's what matters. The "ivy league" universities, for example, are "lying through their marketing teeth" that they're making "ivy league educations affordable to the middle class" because those universities are simply siphoning off "middle class wealth" via university endowments.
so the big lie is: "taxes are going down" since university endowments, for example, have allowed universities, etc..., to directly tax Americans through "profit taxes" and something I think of as a "nationwide sales tax."
so, if the obvious taxes are raised-- federal, state, sales and property taxes, we're paying more than ever and the middle class will suffer even more than ever.
even the hospitals to the south of me (read the mayo clinic) are building up endowments and I doubt they'll let the middle class have health care because they helped build up their endowments...
thus, at some point, the politicians will stop funding hospitals (ration care) and let those endowments benefit primarily the rich and leave the middle class philanthropists out on the street.
To boldly go...
January 23, 2008 12:37 PM | Reply | Permalink
I heard that segment. I agree with Stephanie that you explain well.
In general, I worry about the "boost spending" concept absent any target. How does it achieve more than delaying a solution?
How about "boost paying down debt"? I've been reducing my debt overhead lately, so I can better handle the monstrous college-loan payments I make on behalf of my kids. I bought another car, but it was used. Didn't spend much on Christmas. Guess I'm part of the problem.
But if that's the problem, we have real problems.
January 24, 2008 11:02 AM | Reply | Permalink
Yes, it's a problem because saving or paying down debt doesn't boost consumer demand, and shart-term stimulus depends on increasing consumption. The US economy is 70% consumption...in Europe, consumption is around 55%, a huge difference.
And yes, I agree that the idea that paying down debt or saving is actually not helpful to the economy seems very perverse. Keynes called it the 'paradox of thrift' (I think it was Keynes). There's a good argument that we save too little...about less than zero...and consume too much...about 6% more than we produce. But again, the issues are distributional...many families are unable to afford the stuff they need (Eliz Warren writes informatively about this).
January 24, 2008 2:38 PM | Reply | Permalink
But Keynes said that in respect to an economy which was grossly underconsuming -- hardly a disease our current economy suffers from.
January 24, 2008 4:42 PM | Reply | Permalink
they are now thirsty and lack water for cooking.
They can, however, smoke the thatch so they won't feel as bad about being out of work.
January 24, 2008 10:56 AM | Reply | Permalink
One thing that may make the current downturn more painful for the working classes is that they have no reserves to draw on to tide them over.
When people suffer economic reverses they first tap into savings, then try to borrow informally (friends and family) and formally (credit cards), and only after this is exhausted do they seriously begin to cut back on spending. (For the wonky see J. S. Duesenberry's classic work.)
But people at the bottom have had a negative savings rate for awhile so step one is not an option. Many are maxed out on their credit cards as well, and there is a good chance that their sources of informal borrowing are in the same boat they are. This might mean that the fall in spending will be sharper than anticipated, but it also may mean that we will see people actually being thrown out on the street. Something which was a common sight in the 1930's.
It's funny but those who always talk about the need for "painful" adjustments are those ensconced in secure jobs at think tanks and in academia. Who is going to learn a "lesson" from the current downturn? The CEO who just got fired and walked away with millions in a severance package, or one of his employees at the bottom of the heap who got fired as the company sought to cut expenses? Which one caused the problem? Which one suffers?
--- Policies not Politics
Daily Landscape
January 23, 2008 7:08 AM | Reply | Permalink
Always hurts to sell the vacation house for less than the purchase price.
January 23, 2008 7:01 AM | Reply | Permalink
Duncan C. Kinder
http://www.billingsgatereport.net
The issue in determining whether a recession may or may not be mild is not whether it contracts in terms of GDP.
Rather, it is whether it contracts in term of GOP.
January 23, 2008 8:12 AM | Reply | Permalink
I'm teaming up with a friend to save our economy. I will sweep his floor for a million dollars and he will sweep mine for a million. Two million added to GDP right there. Come on folks, you can pitch in too.
January 23, 2008 8:29 AM | Reply | Permalink
If you and your friend report the income -- and it won't get into GDP unless you do -- each of you will owe the IRS about $325,000. I don't think many of us are ready to "pitch in" at that cost.
January 23, 2008 9:25 AM | Reply | Permalink
Thanks for the tip. I just finished sweeping my ex-friends floor and he paid me but now that I’m well-off I think I’ll retire and work for politicians who will give tax cuts.
January 23, 2008 9:40 AM | Reply | Permalink
But the income is offset by the expense of paying the friend the same amount. So no harm no foul and the economy is saved, yahaaayyyy!
January 23, 2008 9:56 AM | Reply | Permalink
Yeah, well we'll all enjoy the 'recession' together as we fire up our coal pellet-powered Stanley Steamers(2008 signature edition, if you count 'x' as a signature), and motor on down to McHabib's for authentic chinese-style double catburgers and soju...and we'll be using the euroasia Newdollar cards, and stand together and proudly sing the Global Unity Anthem, as the B-11 hyperstealth planes rocket across the afternoon sky...coal by the ton is on sale this week, U-load prices at Wal-mart are lower than ever!
LOL
January 23, 2008 5:41 PM | Reply | Permalink
I don't have enough of a grasp on the nuts and bolts of recession to add anything useful here. I just wanted to say that I really appreciate your informative posts, Jared.
January 24, 2008 2:19 PM | Reply | Permalink
My pleasure!
January 25, 2008 7:09 AM | Reply | Permalink