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.
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 , ). 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 . 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 , a war of choice (at least $10 billion per month in direct fiscal costs) , and implementing Medicare Part D (CBO letter [pdf], ). Let’s hope the Chinese, and the sovereign wealth funds of the Persian Gulf countries , are going to be willing to re-capitalize the banking system.
[Late update: March 17, 10:30am Pacific]
Figure 1: Log industrial production (blue) and manufacturing production (red), seasonally adjusted. Source: Federal Reserve via FRED II, accessed March 17, 2008.
President’s Working Group on Financial Markets,
Business Cycle Dating Committee.