The Biden administration appears to be bracing for a recession — or rather, news of one. Instead of addressing the underlying economic problems, the White House is playing puns.
Economists have long defined a recession as “a period in which real GDP declines for at least two consecutive quarters,” to quote the popular economics textbook by Nobel Prize winners Paul Samuelson and William Nordhaus. That definition isn’t perfect, but it describes almost every downturn since World War II.
Facing expectations of low or even negative growth for the first two quarters of 2022, President Biden’s Council of Economic Advisors has attempted to deaden the news by dismissing that textbook definition. It is “not the official definition, nor is it the way economists assess the state of the business cycle,” according to a post on the White House website. Treasury Secretary Janet Yellen confirmed the allegation to NBC over the weekend.
Instead of the usual economic definition of a recession, administration officials refer to the National Bureau of Economic Research’s Business Cycle Dating Committee as the “official recession counter.” It’s a very convenient move for them. While the bipartisan NBER uses a robust set of indicators to pinpoint recessions, it does so with hindsight. The great recession of 2007-09, for example, was already a year underway before the NBER released its finding. Sometimes recessions end when NBER classifies them, and this built-in delay limits the usefulness of the NBER rating for real-time policy decisions.
The White House’s attempt to avoid a recession with words shows the dangers of politicizing economic terms. Mr. Biden’s economic advisers are trying to buy time by exploiting NBER’s otherwise defensible method. They hope this will shield the government from electoral reactions in the event of a downturn.
There is no federal law making the NBER the official arbitrator of recessions. On the contrary, the federal government has historically followed the conventional textbook definition. The Gramm-Rudman-Hollings Act of 1985, which attempted to curb the deficit by triggering mandatory sequestrations in federal agencies, introduced a recession escape clause for tough economic times. If the Congressional Budget Office forecasts a recession, Congress could speed up a vote to suspend the confiscations. The law defines a recession as a period during which “real economic growth is projected or estimated to be less than zero for each of two consecutive quarters.” The CBO could also trigger a “low growth” stay if GDP change falls below 1% for two quarters.
Though the Gramm-Rudman-Hollings Act long ago succumbed to the profligate pressures of deficit spending, its standard of “two consecutive quarters” comes closest to an official definition of a recession. The derived language still appears in federal codes and has long been used as the basis for other anti-recession measures that regulate federal employment. Canada and the UK also use the two-quarter definition to denote the start of a technical recession, further confirming its legitimacy.
Mr. Biden’s economic advisers are certainly free to advocate for a revised provision. The NBER takes a more holistic approach, in part because some recessionary events are shorter than two quarters or manifest in non-consecutive quarters. But this justification works versus The current White House argument aimed at delaying recognition of a recession, even if this year sees a two-quarter contraction. The NBER committee has previously acknowledged recessions short of a severe and sustained two-quarter contraction. This last happened during the dot-com bust of 2000, which played out in non-consecutive quarterly dips.
The traditional definition of a recession, while acknowledging its limitations, offers a functional rule of thumb for interpreting events as they unfold. The NBER determination is a rigorous and reliable historical indicator for dating the beginning and end of economic downturns, but it does not lend itself to real-time political determination.
The President’s economic team should think twice before considering the risk of a recession. Finally, they stumbled into the current inflation crisis after a year of trying to manipulate the language: inflation was “temporary” and therefore of little importance, until it eventually topped 9% on an annualized basis. Let’s not stumble into a recession because the White House has political priorities that are at odds with economic reality.
Mr. Magness is Director of Research and Education at the American Institute for Economic Research.
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Published in the print edition on July 28, 2022.
https://www.wsj.com/articles/redefining-the-r-word-recession-biden-economy-advisers-gdp-nber-semantics-poltics-gramm-rudman-hollings-11658951723 A Recession by Any Other Name