P(Recession)=1? Or, Why a Binary Concept of Recession is Ridiculous

Beloved readers, apologies for the delay in posting and the brevity of this post. Like every other academic every December, I underestimated the amount of work I need to do in the next 11 days or so and thus have been rushing off between lectures, class and the coffee shoppe where my nose has been buried in old timey Foucault. But the recent story on the US Recession is just too good to pass up. So here’s the brief version:
On December 1st, the National Bureau of Economic Research’s Business Cycle Dating Committee announced that the economy had peaked in December of 2007, and thus that economy had been in a recession for almost a full year*. But what does it mean to be in a recession? A tidbit from a news story:

According to official government data, the US economy contracted at a 0.2 percent pace in the fourth quarter of 2007 but grew 0.8 percent in the first quarter and 2.8 percent in the second quarter of 2008. It then contracted 0.5 percent in the third quarter, based on a provisional estimate.

But the gross domestic product (GDP) data may have been skewed by tax rebates that stimulated consumer spending, according to analysts.

The NBER said “we do not identify economic activity solely with real GDP, but use a range of indicators” in determining the onset of recession. It said over the past year there have been unusually wide discrepancies between income and output.

Key things to note here, from my perspective: The story claims that “official government data” show the U.S. economy contracting. That data, mentioned in the next line as the GDP, is linked 1 to 1 with the economy. That linkage is the outcome of a process that, I argue, began in 1934 with the first official national income statistics in the U.S. (if not earlier) and was resisted at every step of the way by at least one of the architects of the statistics (Simon Kuznets). The Business Cycle Dating Committee (which Kuznets’ mentor Wesley Mitchell created, along with NBER, and on which I believe Kuznets sat) still knows that the GDP is not supposed to be, and has never been intended as, a measure of “the economy” and thus they feel comfortable relying on a combination of indicators and expert judgment. Mechanical objectivity vs. expert judgment much? (Porter 1995)

But that’s not where I want to go with this post (although it is one place I might want to go with my dissertation research). In this post I want to argue that a binary idea of recession and expansion is fundamentally absurd. For example, we can all remember the “jobless recovery” of the early 2000s. What the heck is a jobless recovery? Recovery for whom? Etc. Economists, however, have gone entirely the other route with the binary economy, moving from a strict dualism to a probabilistic framework. That is, they have started calculating the probability we are in a recession. Here’s a graph, based on data found here (and ignore the black dot, it’s an artifact of the silly way I extracted this image):
usrecessionprobsdec06todec08

One interesting thing here is that the recession probability index is only around 17% in December 2007. So, according to one group of economists, we likely were not in a recession then. But what does that mean?

Here’s the wrong question: Were we ‘actually’ in a recession starting at the end of 2007? This question is silly. Officially**, we were (although not at the time. But now, officially, we were. We have always been at war with Eurasia.). On the ground, the situation has always been more complicated. Naming and dating recessions and expansions is a shorthand, convenient for some purposes, disastrous for others, and always political (in the sense of being connected to relationships of power and knowledge, although also in the more commonly-used sense).

Were I to have more time to spend on this, I’d probably make some argument about the business cycle committee performing (cf. Callon 1998) the recession, then some bad joke about how if we could just get rid of the committee we could get rid of recessions forever! Instead I will, Borges-style, merely reference those unwritten comments and end this post. Back to Foucault!

* For a more technical description, check out this post at Economist’s View.
** Well, semi-officially. NBER is technically not governmental, but for whatever reason their business cycle dating committee is seen as the official recession-naming body.

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4 Comments

  1. I’ve always been troubled by that GDP definition of “the economy” — the production of stuff that we sell for money. I’d prefer to think of an economy as the matching of the productive capacity with the needs of the society. Unfortunately, this idea probably doesn’t square with free-market principles. Even so, I wonder if there are measures along these lines.

    • Oddly, Simon Kuznets, the first person to produce an official set of national income statistics for the United States, had exactly those concerns as well (except that he wasn’t as worried as much about the economy per se, a concept that was just being developed, but rather about the potential for national income to be misused as a measure of national welfare). Later, RFK would have similar concerns. Ever since national income has been systematically estimated it has been used as a proxy for national welfare, and every so often (including at its birth) people have challenged that use. I highly recommend the first 9 pages of Kuznets’ 1934 report to the Senate, “National Income, 1929-1932”, Senate Document 124, 73rd Congress (That’s from memory, so it’s likely a bit off, and lord why do I know that from memory?!). Hopefully, this will be the subject of some papers I’m working on and possibly my dissertation, so… look for more in this space over the coming months and years 🙂

  2. Edward J. Dodson

     /  December 5, 2008

    In addition to the problems described above with “binary” analysis is the serious theoretical shortcoming of neoclassical treatment of nature as a form of capital good, with the same response to the price mechanism. Economic theory must confront the fact that as prices rise for nature the owners of nature have every incentive to withhold supply in expectation of even greater gains. Our land markets, fueled by the ready availability of credit, skyrocketed to the point where many businesses could no longer maintain profit margins and many consumers found housing expenses absorbing half or more of their gross monthly incomes. Under these stresses, an economic collapse was assured.

    Absent a near-100% annual tax on potential locational rental values, the dysfunctional nature of land markets results in a leftward leaning supply curve, and the capitaliztion of imputed rent into higher and higher land prices.

    Too many economists seem blind to the way markets actually operate in the real world.

    Mr. Livingston also makes an astute observation regarding the continued use of GDP figures as an indication of our economic health. Redefining Progress uses a far more objective measurement — the Genuine Progress Indicator — which shows that our economic well-being peaked in the 1970s and has been on the decline ever since. GDP reflects every dollar spent by government, which accounts for the annual increase in GDP and our worsening economic wellbeing.

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