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Thursday, March 24, 2011

Is "The Recession" over?

           Talk about mixed signals!  Unemployment is up, but we are seeing growth in GDP.  Wall Street’s back on track, but Main Street continues to stagnate.  So which is it?  Is the recession over or what?

           The muddle stems from misconceptions about the use of the word.  A “recession” is not a term for “general economic badness.”  It’s actually something quite specific.

           Economists typically define a recession as 2 consecutive financial quarters of GDP shrinkage.  Basically, when we go 6 months producing fewer dollars worth of goods and services then we did in the 6 months before.  (Keep in mind though; a recession isn’t something that appears in nature, or came divinely described on stone tablets.  We could define it as anything we wanted...)

           Here’s the rub.  The concept was solidified in the economist lexicon a long while ago, when the US was still a manufacturing and agricultural focused economy - when our most valuable output was tangible, finished goods. 

           In that time period, a shrinking GDP almost always correlated with growing unemployment.  Firms simply were not productive without retaining a lot of labor.  Physical products require physical activity to be created. 

           And seeing how we were thriving principally off of tangible goods production, a firm simply could not grow without hiring a larger workforce.  Inversely, if firms were producing less, they had to be laying people off as they contracted.  Or so the intuition went.

           High employment, on the other hand, means more of the national GDP gets distributed (though the channels we call “wages”).  And with money in the people’s pockets, more and more industries are willing (and able) to start up, creating products intended for the people’s consumption, not just industry’s or government’s.

           So at that time, GDP growth alone served as a pretty sufficient barometer of overall economic health, since it was so indicative/encompassing of other economic indicators: like employment, wealth distribution and inter-industry stimulation. 
           But now?  Modern day America is a service based economy.  We make 77% of our GDP from producing  things like educations, bank accounts, lines of credit, insurance policies, legal services, financial services, medical assessments, consulting fees, logistics, credit default swaps, collateralized debt obligations…things that a person cannot hold in their hands.  These products are very valuable, but can typically be produced with just a few (highly skilled/specialized) people. 

           What's more, we’re a much more high-tech and educated economy, one in which the average worker can produce more value in a day than his past-generations counterpart ever could.  Try to imagine doing your job, whatever it is, without a computer.  Or a high-school diploma.  Very few of us could.   

           Given the advantages the modern workforce has, it’s easy to imagine a scenario where only a small number of people are working, yet the overall national output is very high, producing the impression of a strong economy.

           Here’s where I’m going with all this: up until the last 30, 40, or 50 so years of our country’s history, a growth in GDP and a growth in unemployment was virtually impossible.  But today, you and I are living through that very phenomenon.  In the past it made a lot of sense to define a “recession” as a behavior of GDP alone.  Nowadays, I’m not so sure…     

           So is “The Recession” over?  Technically, yes.  Does that mean we can all start loosening our belts again?  Probably not.  Be wary of these proclamations of “economic turnaround.”  You should be asking yourself, “a turnaround for who?  For me, or for the nation in aggregate?  Have the effects of economic recovery reached my house yet?”

           It’s probably time that economists all revise their definition of “recession” to take into account things like unemployment and savings behavior as well. 

           Until they do, I’d like to suggest a new definition.  “If you are still feeling recessed, as far as you’re concerned, there’s a recession going on.”  Easy as that.


  1. So, should we be concerned?

    Two questions of policy: should a nation's government be concerned with a 'general lack of employment among the populace' when the nature of the economy is that the employment of most people aren't necessary?

    I don't know the answer to that question.

    But the second question: is it feasible to do anything about this situation? What's the solution? Change back to a low-tech manufactoring society? Can we (and if so, how) actually provide employment to the masses when we don't need to employ masses? It seems the only way out, without moving back, is for every person to be extremely entrepeneur-ish of themselves and apply their effort immediately to inventing their own personalized, required economic niche. And I'm not certain most people can do that.

    This has been on my mind since the market collapse in 2008. Obviously, we were spending too much, pretending we all had money we didn't, which creates jobs for others. But how can we ever give most people jobs in a scenario that isn't an delusion of how credit works.

    Thoughts, Dan?

  2. The short answer is this: People are NOT unnecessary to the economy, in this period or any other. Actually, technological advancements typically encourages MORE employment.

    Since each worker is more productive per hour when they have tech/capital to rely on, its more valuable for a firm to hire them. An employee is a more productive asset to a producer when he has tech to enhance their labor's product.

    Marx is typically blamed for starting that panic (Even in Marx's time, this idea was never fully accepted by economists, although it was super popular among politicians and philosophers. Go figure.), but the fear of machines replacing men is much older than that. Read up on the Luddites for more (the Wikipedia has a good overview).

    Maybe I'll do an in depth post on the subject further down, but for now, here's a cute little thought experiment: in Marx's world, around 1875, there were 1.34 billion people on the planet. Today there's 6.77 billion. Worldwide unemployment rate today is about 6.85%, giving us a roughly 5 billion job positions having been created since Marx's predictions, despite all the technology that has developed in that time.

    If an automated workforce was any type of real reality, an employed individual in the year 2000 would have been rarer than a tap-dancing unicorn.

  3. Regarding the new measurement idea, the problem isn't a bad definition, it's that there's too many moving parts. Would your doctor ever give you a one-size-fits-all definition for sick? A stethoscope will never find cancer, and a blood test will never find PTSD. Furthermore, thanks to tech advancement, no economy has the same industrial & demographic profile twice, so even if a housing bubble caused two recessions in the same economy, the systems they interact with wouldn't work. I think what we do now is as good as we'll get. Nobody gets an easy answer, but that's because there isn't one.

  4. Good point. The more complicated we make the definition, the more limited the usefulness of the term "recession" probably becomes.

    However, its important for people to know that when they are hearing "recession, recession, recession" on the financial news, they're only hearing about one thing: GDP. Its like the weatherman just telling me that its going to be "sunny" today. A day can be "sunny" and 30 degrees or "sunny" and 70. It can be humid or dry, it can be windy or still. If I really want an sense of whether or not its going to be a "nice day," I need to pay attention to more than one factor.