So, Just When Is a Recession?

Chairman Alan Greenspan told Congress Wednesday that the Federal Reserve Board will cut interest rates at the first hint of a recession. The Fed, he said, is even prepared to drive interest rates down to overcome any drag on the economy from a combination of spending cuts and higher taxes required to make a major dent in the federal deficit. His testimony about lower interest was carefully couched, not in terms of recession but in terms of ways to deal with a reluctance of some banks to make loans, thus creating credit crunches.

It is, of course, obligatory for Fed chairmen to deny they are talking about big changes in policy or that there is any sign of genuine trouble in the economy. Nothing anyone else in Washington can say or do makes Wall Street shiver like the flimsiest hint of pessimism from the Fed (especially true when the economy is hurting.) But the scene did raise a question that once seemed settled, even if arbitrarily: When is a recession?

The unhesitating answer used to be that the country is in recession when its gross national product dips in two consecutive quarters.

But back in the 1980s, workers driven from the so-called Rust Belt of the Midwest by massive layoffs in the automobile industry had a hard time believing that they were not in a recession because the rest of the country was doing fine. The same is true these days of workers watching hard times slip south from New England into New York and New Jersey.

The question is of more than academic interest in California, where defense cutbacks and construction layoffs in the housing industry prompted UCLA economists to recently warn that the state is being pushed to the brink of a recession. But no other forecasters take such a grim view of the economic future--and California employment continues to rise and unemployment to fall, despite recent layoffs at major employers like McDonnell Douglas.

It’s possible the old definition of pool-hall economists was right all along. When your neighbor’s out of work, the economy is pausing to gather strength. A recession is when you’re out of work.