Why Most of Us Don't Think the Recession Is Over
Catherine Rampell of Economix notes that most people don't believe the recession is over:
Most Americans Don't Think Recession Is Over, by Catherine Rampell: The National Bureau of Economic Research declared last week that the recession officially ended in June 2009. But according to a new poll from CNN/Opinion Research Corporation, Americans overwhelmingly disagree.
Nearly three-fourths of Americans -- 74 percent -- say the economy is still in a recession. That's a slight improvement from December, when 84 percent of those polled said they believed the economy was in a a recession, but it still discouraging.Why is this? I think this explanation is correct:
One possible reason for the disconnect between popular views and the official economists' view of the country's "recession" status is semantic.
Economists and laypeople mean different things when they use the word "recession": To most people, it refers to the level of economic activity. To economists, it refers to the change in economic activity.
That is, most people associate a poor economy -- that is, low levels of spending, high levels of unemployment -- with the word "recession." They use the word to refer to times when the country just feels lousy.
But economists use the term "recession" to talk about the economy's direction. Regardless of whether the level of economic activity is good or poor, is the economy shrinking, or is it growing? The National Bureau of Economic Research says that the economy stopped shrinking in June 2009. Then it started growing again, even though the pitifully slow pace of growth still meant the level of economic activity was horribly depressed. ...I've been explaining it this way. When we say the recession is over, what we mean is that the fever finally broke -- the patient was getting sicker and sicker, but now it finally looks like recovery has started. The patient still can't get out of bed, and is still quite sick, and it may take a long, long time before there is a full recovery, but at least things are no longer getting worse. People use the term "recession" to mean still sick and in bed, even if the recovery has started, while economist use it to mark the point at which the fever breaks and the recovery begins.
But maybe there's another explanation, that the public is paying attention to employment rather than output:
Addendum: There is also debate within the economics community about whether it makes sense to change the criteria for determining when the economy is shrinking, because in the last three recoveries output has reversed course much earlier than the job market has. But that is a separate issue.I think we should explore alternative measures, and some researchers are doing just that, but the NBER business cycle dating has taken on an official, almost government sanctioned status. This is reinforced by the fact that the academic community implicitly abides by these dates as they do empirical analysis, and the implicit official status of the NBER measure inhibits the ability of alternatives to gain attention.
There is good reason to maintain a consistent definition of a business cycle through time when conducting research, and it's also good for people to use a common measure of business cycles so that research is comparable. But alternatives can be constructed that are consistent over time, and they may provide a better measure of the business cycle than the current technique. For example, I have a colleague, Jeremy Piger, who estimates business cycle dates using a variety of alternative methodologies. Here is one example of what he finds:
This measure is based upon a concept known as the output gap, defined as transitory deviations from a permanent trend. But the precise methodology isn't important, what's important is that alternative measures do exist, this is just one example, and some of them may be superior to the NBER's definition.
While this alternative tracks the NBER definition most of the time (shown as the shaded regions on the graph), there are differences, namely the two most recent recessions in 90-91 and 2001 where the alternative measure tracks unemployment fairly well (even though it is an output based measure).
Using this alternative measure of business cycles could make a big difference for policy because it would condition policymakers to pay more attention to employment than they do presently. Importantly, when the recovery of employment lags behind the recovery of output, policymakers would be less likely to pull back on stimulus before employment has recovered.
But the main point is a simple one. The NBER measure is not the only means of dating of business cycles, and it may not be the best one -- its "official" status does not guarantee that it is superior to all other measures -- and we should be open to alternatives. Someone's job may depend on it.
