What NBER Does: The ‘R-Word’
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
The November election is just around the corner, and one of the great unknowns of this election cycle involves the health of the economy. Will the National Bureau for Economic Research, a research association of academic economists, pronounce that America is officially in a recession before Election Day?
If and when that day comes, most Americans will assume two propositions: 1. calling a recession is a scientific matter devoid of politics; and 2. independent government officials make the call. Neither is correct.
Recession is a loaded word for both economists and politicians. Euphemistically referred to as the “R-word,” its mere utterance is considered a death sentence for a presidential administration even though recessions are caused by many factors, few controllable by an administration.
Politicians of both parties relish throwing the word around both for broader political purposes and for personal exposure to journalists. Bad news sells, and recession is the hallmark of bad news.
But what exactly is a recession? The popular definition is two consecutive quarters of economic contraction. But NBER provides a little more room for judgment with its definition of “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product, real income, employment, industrial production, and wholesale-retail sales.” Justice Potter Stewart might have had more succinct wording than NBER: “I know it when I see it.”
Why not let the federal government be the arbiter of when we are in a recession? After all, the federal government collects and disseminates economic data, and by all accounts quite credibly.
But the government cannot proclaim recessions for two reasons. First, the party out of power would assume politics would govern the announcements. Second, years would pass before the federal government would be in a position to announce a recession.
For example, the federal government’s Bureau of Economic Analysis recently released revised estimates of GDP from the first quarter of 2005 through the first quarter of 2008. GDP is the standard measure of economic activity in the economy, and the revised government data showed higher growth than previously reported in some quarters and slower growth in others.
Here we are in 2008 revising our views of economic growth in 2005. And once every five years, the federal government has a benchmark survey which may yet again change our measures of economic growth.
Thus NBER is left to decide if and when we are in a recession as part of its broader research on business cycles. NBER is led by widely respected economists without a unifying political slant. NBER exists mainly to advance economic research, not to referee disputes about whether the American economy is in a recession.
Part of NBER’s research agenda, however, is examining business cycles: measuring when the economy is expanding and when the economy is contracting. When NBER believes that it has sufficient information to conclude that the economy has shifted directions from expansion to contraction — or vice versa — it issues a press statement. Usually those press statements are at least six months, and sometimes as long as 21 months, after the shift in the economy.
The timing of at least one of NBER’s determinations begs questions. A few weeks after the 1992 election, NBER announced that the recession had ended — 21 months earlier in April 1991. The 1992 election was framed by candidates Bill Clinton and Ross Perot as an economy still in a recession, a characterization that helped Mr. Clinton win and that subsequently proved false.
The most recent reckoning from NBER is that the economy has been expanding since November 2001. Data from the federal government’s Bureau of Economic Analysis also indicates that the economy continues to grow.
Perhaps NBER will find that the economy continues to grow for years to come. But for any number of reasons, NBER may be of a view that the economy is contracting. An announcement in the weeks before or after November 4 will raise questions of political bias in the timing.
Despite pronouncements of politicians and journalists, in the absence of a major downturn the American public might wonder whether there is any importance in a concept so obscure it can only be determined months later by a small group of economists.
Mr. Furchtgott-Roth, a former FCC commissioner, is president of Furchtgott-Roth Economic Enterprises.