Respected Board Should Declare Recession Over to Restore Confidence

Release of the first quarter’s gross domestic product showing that the economy posted its fourth straight quarterly increase prompts me to ask the question, where’s the umpire?

As many know, the official arbiter of the business cycle is an organization called the National Bureau of Economic Research. Like an umpire in a baseball game, the NBER stands between two sides--in this case, between economists in the private sector and those in Washington.

Also like an umpire, its decisions are respected by both sides and are final. However, unlike what happens in a baseball game, the NBER doesn’t render its decision immediately; it usually waits until enough data is in, and this can take months.

Case in point: The NBER waited until April, 1991, before deciding that America’s ninth postwar recession got underway in August, 1990. Interestingly, April, 1991, may well have been the month when that recession ended. For you see, the gross domestic product, or GDP--the all-encompassing measure of economic activity within the United States--stopped declining at that time and has been rising ever since.

The GDP, adjusted for inflation, grew at an annual rate of 1.4% in 1991’s second quarter, 1.8% in the third, 0.4% in the fourth and 2% in 1992’s first quarter.

Now the NBER will be the first to tell you that dating a business cycle’s beginning and end involves more than looking at the gross domestic product, and I agree. However, unless the umpire has changed his definition of what constitutes a recession, then the time has come for the NBER to declare that the recession that began in summer 1990 ended sometime in early 1991. For never in the past has a recession included two consecutive rising quarters of GDP, much less the four already recorded.

Such a declaration would be of no small significance. One of the biggest hurdles confronting the nascent recovery is lack of confidence on the part of business and consumers. This is keeping both from spending more, which, of course, is what’s needed if the recovery is to develop momentum and spread throughout the economy.

It is not enough for the President, or any other politician with a vested interest in boosting confidence, to say that the recession has ended. People simply won’t believe them anymore than they believed Herbert Hoover when he said “prosperity is right around the corner.” However, such a declaration from the nonpartisan NBER might be enough to boost morale--and outlays.

Readers no doubt know that this recession has had numerous predecessors. The NBER counts eight since the end of World War II and a total of 30 in the United States since 1854. Undoubtedly, there have been others, if the experience of England is any guide.

Because data here goes back further--even before the United Kingdom became an industrialized country--it is possible to surmise that business cycles are a longstanding feature of almost any society.

The next question is why do the cycles occur? It appears as though they can basically be traced to human nature.

In pre-industrial days, when agriculture was the main industry, the occasional bouts of poor growing weather would affect crop production, causing scarcities. In turn, farmers would find that supplies fell short of demand.

Someone got the notion that if he could sell all his crops and then some at the prevailing price, why not ask for more, as long as demand exceeded supplies? From this was born inflation, which would proceed until enough people were priced out of the market to necessitate a lowering of prices. Naturally, this involved pain.

As countries became industrialized, and people went to work for others, this attitude went with them. When demand for workers exceeded supply, labor would tend to ask for more. This pinched business earnings unless matched by a hike in selling prices.

Once again, inflation proceeded until buyers were priced out of the market. Business sales would fall, workers would lose their jobs and prices would decline until market equilibrium was restored.

In modern times, as governments grew and central banks were formed, policy errors tended to add to the ups and downs of business. Responding to pressures from their constituents, elected officials would increase government spending and/or lower taxes.

The central bank (in our case, the Federal Reserve) would respond to the resulting increase in economic activity and the demand for funds by creating additional supplies of money and credit. This eventually led to inflation, since demand once more exceeded supplies.

In response, fiscal policy would tighten as Washington either raised taxes and/or slashed spending. For its part, the Fed would tighten monetary policy by slowing the growth of the money supply, thus pushing up interest rates. The result, of course, was enough of a softening of business activity to dampen price pressures--in other words, a recession.

When the pain of recession became intolerable, policy-makers would reverse course--usually overdoing it in the process--resulting in an end of the recession but the beginnings of the next round of inflation.