Economics Stripped: Has the Fat Lady Sung?



Jenn Carey

After a November 3 statement, the Federal Reserve has embarked on a second round of “quantitative easing” with the hopes of stimulating the economy. Transla­tion: The Fed is printing 600 billion dollars that the government doesn’t have, using it to buy Treasury bonds and, thus, infuse money into the economy. With the national deficit growing at a rate that rivals that of Al Gore’s waistline, it is hard to imagine why the Federal Reserve would want to buy up government Treasury bonds. Yet the answer seems simple – the Fed is trying to mitigate the effects of the latest recession. The word “recession” has become so commonplace that even Teresa Guidice of The Real Housewives of New Jersey attempted to integrate the term as a scapegoat for her bankruptcy. This begs the question – just what is a recession? How does it differ from a “depression?” Most importantly, when does a recession officially “end?”

Unfortunately, economists have a difficult time agreeing on one overarching definition of recession. Recessions are often minimally identified as back-to-back quarters demon­strating negative Gross Domestic Product (GDP) growth rates. However, daring to be dif­ferent, the National Bureau of Economic Research (NBER) proposes its own definition of an economic recession that proves far more liberal than the two-quarter rule.

The NBER “does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activ­ity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales.” The reason for this distinction becomes apparent when examining the GDP growth rates (for the economically less-literate: the percentage change in GDP be­tween economic quarters) over the last few years. Although the recession arguably began in 2007, the Bureau of Economic Analysis (BEA) reports growth rates from the fourth quarter of 2007 that were not followed by two consecutive periods of negative growth, with the second quarter of 2008 actually demonstrating a positive GDP growth rate. However, beginning with the third quarter of 2008, the BEA re­ports four consecutive quarters of negative growth, with the economy hitting a low of -6.8% in the fourth quarter of 2008.

While American citizens may be in a state of depression over the current reces­sion, there is a significant difference between distress brought on by recession and an economic depression. Taking a Prozac will not improve an economic depression – although it might make it more bearable. Recessions and depressions are inextricably linked – but pinpointing when a recession becomes a depression is about as hazy and difficult as determining just which shot pushed someone into a state of drunkenness. One basic distinction between the two is the duration – defines a depression as “a severe and prolonged recession characterized by inefficient economic productivity, high unemployment and falling price levels.” In contrast, dates a recession as “a significant decline in activity across the economy, last­ing longer than a few months.” Regardless of whether the economy is in a state of recession or depression, however, how are Americans to know when these economic downturns have come to an official “end?”

In terms of growth rates, the U.S. economy began experiencing positive changes to GDP beginning in the third quarter of 2009 (which coincides with the release of Justin Bieber’s debut single for purchase – coincidence?). Looking to the NBER to declare when a recession has ended is often like waiting for the fat lady to sing. Although the economy began experiencing positive growth over a year prior, the NBER belatedly sang out in September of this year, claiming that as of June 2009, the economy was not experiencing a recession. However, all this talk of changes to GDP, unemployment and the two-quarter rule may be a lot to remember for the eco­nomically less-inclined. Fear not – Ronald Reagan offered an alternative definition to sum up these distinctions: “recession is when your neighbor loses his job. Depression is when you lose yours. And recovery is when Jimmy Carter loses his.” So, when in doubt, substitute a scapegoat of choice for “Jimmy Carter” and go with the Gipper.