Recession, Depression, or Neither?
There’s no doubt that the U.S. economy is in a downturn. The cost of petroleum has skyrocketed, creating all manner of ripple effects throughout the economy. The “housing bubble” has burst in several cities and the sub-prime mortgage industry has gone bust, leaving many people upside down in their houses or facing — or experiencing — foreclosure. Bear-Stearns sold for pennies on the dollar. And the government is scrambling to at least give the appearance of doing something about all this.
Despite all this, there’s serious debate as to what to call all this. The media and political class seems to agree that we’re in a recession and some pundits say that we’re actually past recession and into a full-blown depression. Others reject these labels.
David Usborne says that we’re in a depression and that food stamps are the proverbial canary in the coal mine.
Michigan has been in its own mini-recession for years as its collapsing industrial base, particularly in the car industry, has cast more and more out of work. Now, one in eight residents of the state is on food stamps, double the level in 2000. “We have seen a dramatic increase in recent years, but we have also seen it climbing more in recent months,” Maureen Sorbet, a spokeswoman for Michigan’s programme, said. “It’s been increasing steadily. Without the programme, some families and kids would be going without.”
But the trend is not restricted to the rust-belt regions. Forty states are reporting increases in applications for the stamps, actually electronic cards that are filled automatically once a month by the government and are swiped by shoppers at the till, in the 12 months from December 2006. At least six states, including Florida, Arizona and Maryland, have had a 10 per cent increase in the past year.
Steve Fraser was using the “D” word back in December.
It is not only a matter of mass foreclosures. It is not merely a question of collapsing home prices. It is not simply the shutting down of large portions of the construction industry (which is inspiring some of the doom-and-gloom prognostications). It is not just the born-again skittishness of financial institutions that have, all of a sudden, gotten religion, rediscovered the word “prudence” and won’t lend to anybody. It is all of this, taken together, that points ominously to a general collapse of the credit structure that has shored up consumer capitalism for decades.
The equity built up during the long housing boom has been the main fallback position for ordinary people financing their big-ticket-item expenses, from college educations to consumer durables, from trading up in the housing market to vacationing abroad. Much of that equity has suddenly vanished, and more of it soon will. Also drying up fast are the lifelines of credit that allow all sorts of small and medium-size businesses to function and hire people. Whole communities, industries and regional economies are in jeopardy.
All of that might be considered enough, but there’s more. Oil, of course. Here the connection to Iraq is clear; but, arguably, the wild escalation of petroleum prices might have happened anyway. Certainly the energy price explosion exacerbates the general economic crisis, in part by raising the costs of production all across the economy and so abetting the forces of economic contraction. In the same way, each increase in the price of oil further contributes to what most now agree is a nearly insupportable level in the U.S. balance-of-payments deficit. That, in turn, is contributing to the steady withering away of the value of the dollar.
Finally, it is vital to recall that this tsunami of bad business is about to wash over an already very sick economy. While the old regime, the Reagan-Bush counterrevolution, has lived off the heady vapors of the FIRE sector, it has left in its wake a deindustrialized nation, full of super-exploited immigrants and millions of families whose earnings have suffered steady erosion. Two wage-earners, working longer hours, are now needed to (barely) sustain a standard of living once earned by one. And that doesn’t count the melting away of health insurance, pensions and other forms of protection against the vicissitudes of the free market or natural calamities.
Robert Reich, Bill Clinton’s first Labor Secretary, has been throwing the word around, too, including in an appearance on NPR this past weekend.
American consumers are coming to the end of their ropes and don’t have the buying power they need to absorb the goods and services the U.S. economy is capable of producing. This is likely to mean fewer jobs, which will force Americans to pull in their belts even tighter, leading to still fewer jobs — the classic recipe for recession. That recession may turn into a full-fledged Depression if fiscal and monetary policies can’t make up for consumers’ lack of buying power. And there’s reason to worry they cannot because consumers are in a permanent bind. They’re deep in debt, their homes are losing value, and their paychecks are shrinking.
At the other extreme, the likes of John Lott are arguing that even talk of “recession” is a product of liberal media bias.
During the 2000 election, with Bill Clinton as president, the economy was viewed through rose-colored glasses. According to polls, voters didn’t realize that the country was in a recession. Although the economy started shrinking in July 2000, most Americans through the entire year thought that the economy was fine. But over the last half-year, the media and politicians have said we were in a recession even while the economy was still growing.
A little perspective on the economy would be helpful. The average unemployment rate during President Clinton was 5.2 percent. The average under President George W. Bush is just slightly below 5.2. The current unemployment rate is4.8 percent, almost half a percentage point lower than these averages.
The average inflation rate under Clinton was 2.6 percent, under Bush it is 2.7 percent. Indeed, one has to go back to the Kennedy administration to find a lower average rate. True the inflation rate over the last year has gone up to 4 percent, but that is still lower than the average inflation rate under all the presidents from Nixon through Bush’s father.
Gas prices are indeed up 33 percent over the last year, but to get an average of 4 percent means that lots of other prices must have stayed the same or gone down. On other fronts, seasonally adjusted civilian employment is 650,000 people greater than it was a year ago. Personal income grew at a strong half of one percent in just February.
As improbable as it may seem, all these things are true. We’ve simultaneously got a booming economy — in the sense that almost everyone who wants a job has a job and that most of us are living in material luxury that our parents, let alone our grandparents, could never have dreamed of at our age — and yet serious signs of an economic crisis. At both the government and family level, we’re generally living beyond our means, sustaining ourselves on easy credit and the unrealistic expectation that the good times will never end. With minor blips, we’ve had a booming stock market, made tons of money off our houses, and had historically low inflation for a quarter century.
Lott’s right that, to a large extent, perception is reality in economic matters. During most recessions, the effects are felt by a small percentage of the population as certain sectors shrink and a few simply go away forever. Yet the perception of a recession becomes something of a self-fulfilling prophecy, as people fear making large purchases, fear risking starting a new business or expanding their existing one, and otherwise hunker down.
He’s also right that, by traditional measures, we’re not in a recession. Historically, we’ve defined the term as “a decline in a country’s gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year.” We haven’t even experienced one down quarter by that standard. More recently, though, the National Bureau of Economic Research has used a looser, more qualitative definition:
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. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion.
By that standard, the current economy probably qualifies as being in recession — but we won’t “know” until NBER tells us months from now.
Reich and Fraser are right, too, that we’re afraid of the “D” word and have been loathe to apply it in recent decades. Depressions were relatively common in American economic history but the “Great Depression” of the late 1920s and 1930s forever changed our perception of that concept. Indeed, we invented the term “recession” afterwards to differentiate smaller downturns from major calamities.
Which brings us back to our question:
So how can we tell the difference between a recession and a depression? A good rule of thumb for determining the difference between a recession and a depression is to look at the changes in GNP. A depression is any economic downturn where real GDP declines by more than 10 percent. A recession is an economic downturn that is less severe.
By this yardstick, the last depression in the United States was from May 1937 to June 1938, where real GDP declined by 18.2 percent.
If we use this method then the Great Depression of the 1930s can be seen as two separate events: an incredibly severe depression lasting from August 1929 to March 1933 where real GDP declined by almost 33 percent, a period of recovery, then another less severe depression of 1937-38. The United States hasn’t had anything even close to a depression in the post-war period. The worst recession in the last 60 years was from November 1973 to March 1975, where real GDP fell by 4.9 percent. Countries such as Finland and Indonesia have suffered depressions in recent memory using this definition.
We’re certainly not in a depression. And any of us old enough to remember the 1970s know that this doesn’t feel at all like a major recession. Even with the skyrocketing prices at the gas pumps, inflation is unfathomably low even by Carter era standards. The “misery index” is amazingly healthy. Nobody’s sporting “Whip Inflation Now” buttons, instituting wage and price controls, or even sitting around in a cardigan talking about our national malaise.
But the boom times of the last quarter century have recalibrated our expectations. The milk and honey are now fully contained within the river beds rather than flooding the streets. So, naturally, people expect the government to stop pretending that it doesn’t have a magic wand to wave and get on with making it all better.