Recession, To Be, or Not To Be

On the way into work this morning, I heard the radio news lady tease the upcoming newscast on the hour. I can't recall all the exact words, but the gist of it was that we're certainly in the midst of an economic downturn, "which the administration STILL refuses to call a recession." The tone was of course that this administration is just denying what is obvious to every right thinking Madisonian. It was said as if this is another example of Bush not being in touch with reality.

Since economics is so universally misunderstood, I feel compelled to start with a definition. A recession is defined as having had two straight quarters of negative growth in our economy. Now I know this part requires some lateral thinking, but just hang with me and I'll get you through it. If you read that definition closely, you'll notice that it is in the past tense. That is, the two quarters must have already ended. And I'm hoping you'll agree that in order to accurately record the results from a particular quarter, you must wait for that quarter to end and then collect all the necessary data. So, BY DEFINITION, WE WILL NEVER KNOW THAT WE ARE IN A RECESSION UNTIL WE ARE SIX MONTHS INTO IT.

So, you may say, "But that's just a technical point, we all can see what's going on, we can pretty much guess that a recession is under way, can't we?"

And you'd be right. But you'd still be guessing. But there is an even bigger point as to why it is not a good idea for public officials to speculate thusly. That would be the phenomenon that occurs regularly in economics, the self fullfilling prophecy. It is a fact that the "prevailing wisdom" has a real and immediate effect on the economy. If I can convince a majority of people that the cost of gasoline is going to rise $1 a gallon by next week, you can bet that the price will rise. Commodity speculators would buy up futures contracts and regular folks would simply go top off their tanks. And prices would rise as a result. If I convince them the price will drop, speculators will bet on a price decline and consumers will ride the bus and wait for the lower prices to arrive, which will drive prices down.

I don't have the ability to convince enough people. But public figures such as the President or the Chairman of the Federal Reserve certainly do, and that's why they tend to be very careful about what they say. If the President starts talking about how awful the economy is, he will absolutely make it worse. If the Fed Chairman mentions that he is now buying Euros, you can bet that the dollar will soon be in a freefall.

So just understand, that when ANY President is faced with an economy that is likely in recession, you should never expect for him to offer confirmation or a prediction.It can only make things worse.