Yes, Virginia, this is a Recovery

- by New Deal democrat

I have been meaning to write a piece like this for awhile, but I couldn't - and still can't - decidehow much should be soothing reason and how much should be intellectual outrage. So this will be some of both. Your mileage may vary.

On the one hand, I fully appreciate those who say, essentially, "we're not in a recovery because things are still awful," but on the other hand want to take no prisoners of those who disrespect that the term has an academic meaning that is well known and that requires respect.

Well, the Doomorons are at it again, this time citing as authority a piece written at New Deal 2.0 by a "Junior Fellow" at the Franklin and Eleanor Roosevelt Institute, who claims that it is "idiocy" to say that we are in a recovery because, allegedly, the middle class is doing worse than it was in 2009. He provides no evidence, and in fact, almost all the evidence is that the middle class is still doing poorly, but better than it was doing in 2009. Real income is still bad, but up. Foreclosures are bad, but down. Household net wealth isn't good, but has gone up. Hourly earnings are still bad, but up. Jobs are bad, but up. Unemployment is bad, but down.

The author of this little polemic turns out to be a guy who just got his Ph.D. in finance a year ago from the august halls of Florida Atlantic University, a small regional school that seems to specialize in online or video courses. If his screed is correct, then perhaps its most noxious implication is that, by its own standard, FDR's original New Deal also fails to qualify as a Recovery.

Shame on New Deal 2.0. I will accept the contrary decision of the NBER's dating committee, which consists of the following members, instead:

Robert Hall, Stanford University (chair)
Martin Feldstein, Harvard University
Jeffrey Frankel, Harvard University
Robert Gordon, Northwestern University
James Poterba, MIT and NBER President
James Stock, Harvard University
Mark Watson, Princeton University.

Not Florida Atlantic University I realize, and not newly minted last year, but still not too shabby a group.

And then, last night, I get an email from a young friend who regards me as something of an Economic Deity, saying in part " I don't think were out of the recession like everyone else says." I know what he means and I'm not upset with him at all.

The problem is that we need to be able to measure how the economy is doing by two different standards. (1) Is it good or bad? and (2) is it improving or worsening? It can be good an improving, or good but worsening. It can be bad and worsening, or bad but improving.

In a recent opinion piece, Catherine Rampell of The New York Times nailed the problem, pointing out that:

Economists and laypeople mean different things when they use the word “recession”: To most people, it refers to the level of economic activity. To economists, it refers to the change in economic activity.

That is, most people associate a poor economy — that is, low levels of spending, high levels of unemployment — with the word “recession.” They use the word to refer to times when the country just feels lousy.

But economists use the term “recession” to talk about the economy’s direction. Regardless of whether the level of economic activity is good or poor, is the economy shrinking, or is it growing?

Thus, as she points out, the NBER was careful to note that:

“In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month.”

We are in a state right now where things are still bad, but they are improving. That's a "recovery." Yet if you ask the typical person on the street, they'll say that we are still in a recession and not in a recovery because things are bad.

Prof. Mark Thoma was similarly spot on when he likened the condition to being in a recovery unit in a hospital:

When we say the recession is over, what we mean is that the fever finally broke — the patient was getting sicker and sicker, but now it finally looks like recovery has started. The patient still can’t get out of bed, and is still quite sick, and it may take a long, long time before there is a full recovery, but at least things are no longer getting worse. People use the term “recession” to mean still sick and in bed, even if the recovery has started, while economist use it to mark the point at which the fever breaks and the recovery begins.

The term "recovery" is, as Thoma explains, a very good analogy. The problem in my opinion is rather with that the economic term for a condition that is contracting, regardless of whether most people would consider the economy doing well, is still called a "recession," which has no obvious general-usage-in-english analogy. Thus, for most people, a "recession" means the economy is bad. So when you say the recession is over and we are in a recovery, people think you are saying the economy is "good", which you're not.

In fact, there are general terms for all of the categories above, but like the word "recession" they have no rigorous analogy. Some people call an economy that is improving, but just barely, a "growth recession." An economy which has made up all of its losses in GDP terms from the last recession, and is improving, is typically styled an "expansion."

Worse, the usual definition of a "recovery" does not include what is happening with jobs. Many people take exception to the term "jobless recovery" and they have a point. Can you truly say that the economy is "improving" if it is still shedding jobs - by most peoples' measures, the most important factor of all?

In my blog posts, I try to use terms in their more precise academic or business meaning. Hence, we are in a Recovery. And I believe that is the proper term. Leaving aside the census, the economy has added jobs every single month this year, and real personal income, as well as median inflation-adjusted wages are up. Not by much, but up. Thoma's analogy of the hospital recovery unit makes perfect sense to me.

Even if we were to accept the polemicists' argument and change the name of a time when the economy is bad, but improving, to something else - call it an 'Upmove' - sooner or later the public would criticize that term as well: "We can't be in an Upmove, everything still stinks!"

So, despite my intellectual disdain for those who are dismissive of the academic sense of the word "recovery," it makes sense to me that the terms "recession" and "expansion" ought to be reconsidered. An expansion ought to mean all times when the economy is growing, whether good or bad. A recession ought to mean all times when the economy is bad. Further, we should adopt the monetarist definition of "contraction" to include all contractions in the economy, whether the economy is doing well or badly. Finally, we should stick with the term "growth recession" to indicate those times when the economy is doing well but declining, i.e., not well enough to add new jobs and the unemployment rate may be slowly rising (as is typically the case when YoY GDP falls under about 2%).

Thus, most people, correctly in my opinion, consider the entire period from 1929 to 1941 as the "Great Depression," although it featured what the monetarists call "The Great Contraction" of 1929-32 followed by the New Deal, which was the strongest and most impressive Recovery of the entire 20th Century, from 1933 through 1937. Similarly, by this standard, we are currently in the Recovery phase of a Recession. Which ought to be clear enough.

So, I will continue to call this a Recovery, because that is what it is.