The Biden administration appears to be preparing for a recession—or rather, for news of one. Rather than tackling the underlying economic problems, the White House is playing word games.
Economists have long defined a recession as “a period in which real GDP declines for at least two consecutive quarters,” to quote the popular economics textbook by Nobel laureates
This definition isn’t perfect, but it describes almost every downturn since World War II.
With expectations of low or even negative growth for the first two quarters of 2022, President Biden’s Council of Economic Advisers has been trying to blunt the news by disavowing this textbook definition. It is “neither the official definition nor the way economists evaluate the state of the business cycle,” reads a post on the White House website. Treasury Secretary
endorsed the claim on NBC over the weekend.
In place of the standard economic definition of a recession, administration officials point to the business-cycle dating committee of the National Bureau of Economic Research as the “official recession scorekeeper.” It’s a highly convenient move for them. While the nonpartisan NBER employs a robust set of indicators to pinpoint recessions, it does so retrospectively. The great recession of 2007-09, for example, had already been under way for a year before the NBER released its determination. Sometimes recessions end by the time NBER classifies them, and this built-in delay limits the utility of NBER scorekeeping for real-time policy decisions.
The White House’s attempt to wordsmith its way around a recession shows the dangers of politicizing economic terms. Mr. Biden’s economic advisers are trying to buy time by exploiting NBER’s otherwise defensible methodology. They hope doing so will insulate the administration from the electoral backlash in the event of a downturn.
There is no federal statute that appoints the NBER as the official arbiter of recessions. Quite the contrary, the federal government has historically followed the conventional textbook definition. The Gramm-Rudman-Hollings Act of 1985, which attempted to rein in the deficit by triggering mandatory sequestrations in federal agencies, introduced a recessionary escape clause for tough economic times. If the Congressional Budget Office projected a recession, Congress could fast-track a vote to suspend the sequestrations. The law defined a recession as a period when “real economic growth is projected or estimated to be less than zero with respect to each of any two consecutive quarters.” The CBO could also trigger a suspension for “low growth” if the change in GDP dropped below 1% for two quarters.
Although the Gramm-Rudman-Hollings Act succumbed long ago to the profligate pressures of deficit spending, its “two consecutive quarters” standard may be the closest thing to an official definition of recession. Derivative language still appears in the federal statute books, and it has long been used as a basis for other counter-recessionary measures governing federal employment. Canada and the U.K. also employ the two-quarter definition to designate the onset of a technical recession, further attesting to its legitimacy.
Mr. Biden’s economic advisers are certainly free to make the case for a revised determination. The NBER takes a more holistic approach, in part because some recessionary events are shorter than two quarters or manifest in nonconsecutive quarters. But this rationale works against the White House’s current argument, which seeks to delay acknowledging a recession even if a two-quarter decline is observed this year. The NBER committee has previously acknowledged recessions that fell short of a strict and sustained two-quarter contraction. This last happened during the 2000 dot-com bust, which played out in nonconsecutive quarterly drops.
While recognizing its limitations, the traditional definition of a recession provides a functional rule of thumb to interpret events as they unfold. The NBER determination is a rigorous and reputable historical indicator for dating the beginning and end of business-cycle troughs, but it isn’t suitable for real-time policy determinations.
The president’s economic team should think twice before discounting the risk of a recession. After all, they stumbled into the current inflationary crisis after a year of trying to manipulate the language: Inflation was “transitory” and therefore of little concern until it eventually topped an annualized 9%. Let’s not stumble into a recession because the White House has political priorities that conflict with economic reality.
Mr. Magness is director of research and education at the American Institute for Economic Research.
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Appeared in the July 28, 2022, print edition.