“Harvard’s Feldstein Says U.S. Economy in Recession”

That’s the title of an article in today’s Bloomberg. I think it highlights an interesting counterpoint between the statements coming out from the Administration, on one hand, and from academic and financial sector economists, on the other. From Bloomberg:

By Matthew Leising and Steve Matthews

March 14 (Bloomberg) — Harvard University economist Martin Feldstein, a member of the group that dates business cycles in the U.S., said the nation has entered a recession that could be the worst since World War II.

“I believe the U.S. economy is now in recession,” Feldstein, president of the National Bureau of Economic Research, told the Futures Industry Association conference in Boca Raton, Florida. “Could this become the worst recession we have seen in the post-war period? I think the answer is yes. I would emphasize the word `could.’ ”

Feldstein’s remarks represent the first time that a member of the NBER’s business-cycle dating committee has publicly described the current downturn as a recession. The economy may not respond quickly to Federal Reserve interest-rate cuts, and a package of tax rebates and investment incentives will offer only a temporary boost, he said.

Investors today raised their bets that the Fed will slash interest rates by a full percentage point next week after the central bank and JPMorgan Chase & Co. agreed to provide emergency funding to Bear Stearns Cos., the fifth-largest U.S. securities firm.

Bush administration officials including Treasury Secretary Henry Paulson have avoided saying the economy is in a recession.

“We have slowed down very significantly,” Paulson said in a National Public Radio interview yesterday. “I’m not getting into” whether it is a recession.

“Monetary policy is not likely to have the favorable traction in this slowdown that it has had in the past, in part because of what is happening in housing and in credit markets,” Feldstein said.

A fiscal-stimulus package will help growth in the second half of the year, though that is “not very likely to do more than cause a pause” in the downturn, he said.

Revised Data

Committee members say any formal determination of a recession may still be months away, in part because economic data is frequently revised.

Feldstein said that while some data may be updated, it is “very likely” that reports will confirm a recession this year.

“Given the retrospective nature of our process, no determination of a peak in activity is likely in the next few months,” Robert Hall, a Stanford University economist who leads the NBER’s business-cycle dating committee, said March 7.

“There is a good chance that when all the data are in they will show that we entered a recession in the first months of 2008,” Harvard University economics professor Jeffrey Frankel, another member of the committee, said in an interview on March 12.

Now consider the speech President Bush delivered today at the Economic Club of New York.

First of all, in a free market, there’s going to be good times and bad times. That’s how markets work. There will be ups and downs. And after 52 consecutive months of job growth, which is a record, our economy obviously is going through a tough time. It’s going through a tough time in the housing market, and it’s going through a tough time in the financial markets.

And I want to spend a little time talking about that, but I want to remind you, this is not the first time since I’ve been the President that we have faced economic challenges. We inherited a recession. And then there was the attacks of September the 11th, 2001, which many of you saw firsthand, and you know full well how that affected our economy. And then we had corporate scandals. And I made the difficult decisions to confront the terrorists and extremists in two major fronts, Afghanistan and Iraq. And then we had devastating natural disasters. And the interesting thing, every time, this economy has bounced back better and stronger than before.

So I’m coming to you as an optimistic fellow. I’ve seen what happens when America deals with difficulty. I believe that we’re a resilient economy, and I believe that the ingenuity and resolve of the American people is what helps us deal with these issues. And it’s going to happen again.

Our job in Washington is to foster enterprise and ingenuity, so we can ensure our economy is flexible enough to adjust to adversity, and strong enough to attract capital. And the challenge is not to do anything foolish in the meantime. In the long run, I’m confident that our economy will continue to grow, because the foundation is solid.

Unemployment is low at 4.8 percent. Wages have risen, productivity has been strong. Exports are at an all-time high, and the federal deficit as a percentage of our total economy is well below the historic average. But as Glenn mentioned, these are tough times. Growth fell to 0.6 percent in the fourth quarter of last year. It’s clearly slow. The economy shed more than 80,000 jobs in two months. Prices are up at the gas pump and in the supermarket. Housing values are down. Hardworking Americans are concerned — they’re concerned about their families, and they’re concerned about making their bills.

Fortunately, we recognized the slowdown early and took action. And it was decisive action, in the form of policies that will spur growth. We worked with the Congress. I know that may sound incongruous to you, but I do congratulate the Speaker and Leader Reid, as well as Boehner and Mitch McConnell and Secretary Paulson, for anticipating a problem and passing a robust package quickly.

This package is temporary, and it has two key elements. First, the growth package provides incentives for businesses to make investments in new equipment this year. As more businesses take advantage, investment will pick up, and then job creation will follow. The purpose was to stimulate investment. And the signal is clear — once I signed the bill, the signal to folks in businesses large and small know that there’s some certainty in the tax code for the remainder of this year.

I have two observations: First, I’m not sure the President read the Policy Statement of The President’s Working Group on Financial Markets. From the speech:

…yesterday Hank Paulson announced new recommendations to strengthen oversight of the mortgage industry, and improve the way the credit ratings are determined for securities, and ensure proper risk management at financial institutions. In other words, we’ve got an active plan to help us get through this rough period. We’re always open for new ideas, but there are certain principles that we won’t violate. And one of the principles is overreacting by federal law and federal regulation that will have long-term negative effects on our economy.

From the Policy Statement of The President’s Working Group on Financial Markets (Section III. Policy Issues and Recommendations, page 11):

2. Federal and state regulators should strengthen and make consistent government oversight of
all entities that originate and fund mortgages and otherwise interface with customers in the
mortgage origination process. All states should work towards adopting the principles set forth in
the guidance developed by the federal regulators for nontraditional and subprime mortgage
lending and ensure that effective enforcement mechanisms are in place to deal with
noncompliance with such standards. One key step that already has been taken is that the
Conference of State Bank Supervisors (CSBS) issued principles-based underwriting guidance on
subprime mortgages in July 2007 that was nearly identical to guidance issued earlier by federal
supervisory agencies. In addition, a group of supervisors has launched a pilot program to review
the underwriting standards and senior management oversight of risk management strategies for
ensuring compliance with consumer protection laws and regulations at selected nondepository
lenders with significant subprime mortgage operations.3 The results of these reviews should be
analyzed in order to determine whether to continue the project and, if so, how to focus future

Presumably, there’d be no need to strengthen oversight if oversight had been sufficient in the run-up to the bust. Here, I’d like to repeat, free markets are not necessarily competitive markets. And the President apparently still has little understanding of how his Administration’s policies have led to where we are. That includes a deregulatory zeal that set the stage for at least the housing market portion of the financial meltdown (see [0], [1]). Of course, not all of the housing boom was due to the failure of prudential regulation on the part of the Federal government; but if the Administration was happy to take credit for the frenzied buildup, it should be willing to take its share of the blame (deserved in my mind) for the downturn.

Second, I’m not sure he has a clear idea of the head-winds the economy is facing [2]. Even taking into account the fact that the President has to put a positive gloss on the current economic situation in order to maintain confidence, to say that “there will be ups and downs” strikes me as a little blithe.

Fortunately, we can use fiscal policy to get us out of this downturn, should it turn out to be more severe than the previous two recessions, as hinted in the latest WSJ poll of (primarily nonacademic) economists (ok, it’s only 47% who say that, but remember most of the surveyed economists didn’t predict a recession until this survey…). Oops, I forgot we used up our fiscal ammunition in two tax cuts [3], a war of choice (at least $10 billion per month in direct fiscal costs) [4], and implementing Medicare Part D (CBO letter [pdf], [5]). Let’s hope the Chinese, and the sovereign wealth funds of the Persian Gulf countries [6], are going to be willing to re-capitalize the banking system.

[Late update: March 17, 10:30am Pacific]

Industrial and manufacturing production numbers released today strengthen the case for a slowdown, to say the least (Bloomberg article.


Figure 1: Log industrial production (blue) and manufacturing production (red), seasonally adjusted. Source: Federal Reserve via FRED II, accessed March 17, 2008.

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15 thoughts on ““Harvard’s Feldstein Says U.S. Economy in Recession”

  1. esb

    I will never forget, even should I live to be 100, that day in 2004 when the Bush was asked by a reporter a question regarding the specifics of his economic plans for a second term, and the man uttered the most profound of all profundities …
    he said,
    “I think people oughtta own things.”
    I knew then that what I had suspected since 20March2003 would come to pass, that we were most certainly going to be F’ed.
    And just lookie where we are now.
    I think people oughtta own things.

  2. Charles

    There’s an even greater risk than simply being unable to use fiscal stimulus, Menzie. There’s a clear and growing danger that certain government functions will break down.
    There is intense pressure across the agencies to cut costs. Shorting veterans on medical benefits is just one obvious example. But the pressures are rising exponentially. The consequence will be unplanned and catastrophic failure, across all areas of government, from mail that isn’t delivered to defective weapons that are.
    This is the kind of thing that economic modeling tends to miss. It causes real and lasting damage to an economy, as healthy and unhealthy enterprises alike are wrecked. I think that this mild recession will be followed by a much more damaging one, much as the mild Carter recession was followed by a much more damaging one a couple of years later– and for almost the same reasons. Stagnating growth, rising inflation, high oil prices, a demoralized military, international backlash against Brand America. Referring back to an unpopular topic in a former thread, the question of what the inflation rate and the unemployment rate are if measured by the same methods used in 1979-80 is a particularly germane one, because alterations in measurement methods can blind us to parallels that do exist.
    History is never twice the same, but it rhymes, as the saying goes.

  3. jg

    Yeah, you’re right, Doc, that the proposed tax increases coming out of the Democrat-controlled Congress are going to solve everything.
    Gimme a break.
    The system is terrible — and was so long before Bush — and will break: falling receipts (YOY) in Jan. and Feb. will continue and accelerate. Monday’s data on net foreign purchases of U.S. Treasury securities should be interesting, as demand for our t-paper is clearly falling: last week, an auction for 10 year notes registered the lowest demand in four or five years.
    We have tough, ugly years ahead of us, with what will be a crippled Federal government and a wrecked banking system.
    Let’s hope that we can keep the Republic.

  4. Kevin A

    I wonder if the Chinese will be in much of a position to help us re-capitalize. If policy-makers in China are serious about containing inflation, then they will be forced to ease money supply growth and let the yuan appreciate at a greater rate. Add to that a bursting stock bubble and generally slowing global conditions, and maybe we’ll be talking about a Chinese recession in 09.

  5. algernon

    Kevin A has it right. That is the other shoe to drop. Consistent with this, long-term interest rates are poised for a extended secular rise, caused by inflation, the end of foreign central bank purchase of our debt, & unkeepable promises on the part of the US gov’t.
    Our future is more complicated & troubling than mere Bush profligacy & will not be ameliorated by anything Obama does beyond getting out of Iraq.

  6. CathyG

    Let’s just recount for a moment what’s gone missing during Dubya’s benighted reign:
    4 airplanes
    2 towers
    2000 American citizens
    4000 American soldiers
    2 million Iraqis
    Bin Laden
    Al Zawahiri
    An historic Southern city
    A third of the value of a dollar
    An 85 year old investment brokerage
    Integrity, competence and personal accountability among our public servants
    The homes of half a million American families
    And, oh yeah, the economy of the richest nation in history.
    Anything I missed?

  7. E. Poole

    KevinA: Ideally, buying up overseas companies should help keep Chinese growth on track.

    I hope the Chinese revalue the yuan at a much higher rate. Such a move might help the Chinese economy avoid a post-party recession as you suggest.

    CathyG: Common sense in the areas of energy and agricultural policy also went missing during Bush II’s regime. Undented US hegemony is no more. It’s gone. Any global credibility with respect to nuclear weapons proliferation evaporated. I’m sure there is more.

  8. GWG

    I would like to respectfully ask that we stick to economic matters and avoid turning this into a Bush-bashing blog. This is really getting to be a bit annoying for those of us who are not into far left politics.

  9. Menzie Chinn

    GWG: Since the President and his advisers are directing economic policy, including decisions regarding fiscal policy and management of the unfolding financial crisis, critiques of current economic policy (including expenditures on defense spending) seem appropriate to me. You might interpret that as Bush bashing; but I respectfully submit that reasonable people could find fault with at least some of the policies currently in place.

  10. GWG

    No, not at all. I have no problem with critiques, and I too have many disagreements with the administration. I simply think that comments such as those from CathyG above serve no useful purpose other than to inflame passions.
    You make my point with comments such as “contempt for the follies”…

  11. know-nothing-teen

    to cathy g. i gotta say you are a little judgmental…i’ve always learned that the economy takes anywhere from 2 to 10 years to catch up w/ itself…not that i have any proof of that, but it kind of makes sense. If you buy anything with a credit card you don’t have to pay for it for a certain amount of time, right? So you don’t pay for it then, you pay later. “buy now, pay later” that’s the whole theme of this country. That’s off the subject tho. So, you get your credit card bill and you owe the company over ten grand for your new car. What do you do? try to get a raise at your job? get another job? nope. you get a LOAN. yup. and then you have to pay interest on the loan. and then your car cost you 1.5 times as much as it supposedly was because interest rates are so high.
    Sorry, i might sound like i’m some stupid teenager who hasn’t experienced life, but hey…at least i’m not going to contribute to this recession (apology to whoever doesn’t admit we’re in one) by buying something i don’t have money for.
    I’m done now…i think. I just have to say not everything is Bush’s fault. I’m not saying he did nothing, but give the guy a break…he is running an entire country.
    sorry about the lenght ;)

  12. Ken

    We are certainly in a recession although some economists dispute it because unemployment rate is low by historical standards. I disagree and think unemployment rates do not truly tell the whole story. Note that people give up looking for jobs if it becomes too difficult to find decent, well paying jobs, no matter what the government says about unemployment rates. Reality today is that people are unhappy with their employment prospects, so either they have taken up low paying jobs to get by, or have stopped looking for work and hence the unemployment rate stays low despite problems in the labor market. So unemployment rate is not a good indicator of recession.
    A better barometer to judge whether we are in a recession really depends on peoples job prospects or job security. Scorelogix (www.scorelogix.com) Job Security Score (see job security entry in Wikipedia http://en.wikipedia.org/wiki/Job_security) computes job security based on economic conditions, including unemployment data, which perhaps is a better indicator of whether we are in a recession or not. Scorelogix Job Security Index is a good measure to gauge job security for the country and it has been at near 2001-2002 levels, so either we are in a recession or near recession.

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