Posted on Samedi 19 janvier 2008
5 Myths About That Depressing R-Word
By Kevin A. Hassett
Sunday, January 20, 2008; B03
When Scottish historian Thomas Carlyle branded economics the « dismal science » in 1849, he gave it a name that would stick. (Some theorize that he picked on economists since, like most Scots back then, Carlyle had never visited a dentist.) Fortunately for economists, 1849 was a pretty good year. If Carlyle had seen how economists behave during recessions, he probably would have dubbed their subject something far worse.
Economists have the same occupational hazard as baseball managers and football coaches: Every person on the street knows their job better than they do. And if you listened to the economic stimulus package talk last week from the White House and Capitol Hill, not to mention Federal Reserve Board Chairman Ben Bernanke, you could be forgiven for thinking that the recession is just around the corner. But the main result of all this chatter is that far too many myths about recessions have made their way into popular culture.
1. We’re already in a recession.
The truth is, nobody knows. The responsibility for declaring the stages of the business cycle is informally held by that most dreaded of concepts — a committee of economists. The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) uses a number of economic indicators, including personal income, unemployment, industrial production and sales and manufacturing volume, to determine the health of the economy. It’s not true that they declare a recession if economic growth is negative for two quarters in a row. If it were that simple, we wouldn’t need a committee.
If you want to know about the state of the economy in real time, you can’t rely on the NBER. If the NBER did the D.C. weather forecast, here’s how it would work. The bureau would gather precipitation data from every neighborhood, then interview residents to make sure that the data are accurate. After much deliberation, it would tell us whether it had rained last month. Same with recessions: The NBER’s pronouncements historically come long after recessions have begun, a whopping seven months on average. By the time the bureau announced the recession of 1991, it had already ended.
It’s impossible to tell whether the NBER will make a pronouncement anytime soon. Right now, we only have enough data to assess the economy accurately through last November. The best available real-time indicator of recession, a model developed by economist Marcelle Chauvet of the University of California at Riverside that has correctly called every postwar recession without ever giving a false signal, clearly indicates that the economy was not in recession in November. Things certainly have deteriorated since then, but it is an open question whether they have deteriorated enough. A recession may have started. Or it may not have. (more…)