Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared in Project Syndicate on June 14th, and in The Guardian.
This month marks the 10th birthday of the US economic recovery. June 2009 saw the “trough,” the end of the Great Recession of 2007-09. (As always, a declaration that the recession was over could as easily have been phrased less cheerfully as a declaration that the economy had hit “rock bottom.”)
Who or what deserves credit for the length of the expansion? There is plenty of credit to be parsed out to explain the end of the free-fall that the economy was experiencing in January 2009 (a free-fall that was reflected in job loss, output loss, and financial market decline) and the beginning of the recovery in June 2009. There is also plenty of blame that can be allocated to explain the slow pace of the ten-year recovery that followed (at half the growth rate of the 1991-2001 expansion).
But the best answer to the question of the length of the 2009-19 expansion is disappointingly simple. The 2007-09 recession was the worst since the 1930s. The deeper the hole, the longer it takes to climb your way out.
Some would say that Carmen Reinhart and Ken Rogoff accurately predicted that the recovery from a recession that arises in a severe financial crisis would take longer than a recovery from other recessions. But I would say that their impressive prediction was the depth of the recession itself; the long recovery time in turn follows mostly from the depth of the hole.
The ten-year mark is especially noteworthy because – assuming the US is not unknowingly already in a new recession – the current expansion ties the record for the longest previously recorded US expansion. That previous record was set by the 10-year expansion of March 1991 to March 2001. (Technically, records of US troughs and peaks only go back to 1854.)
The 10-year US expansion, however, is far from the record-length expansion among countries internationally. That honor goes to Australia’s economic expansion, which began in mid-1991 and still continues to this day, at the age of 27 years, soon to attain 28.
The basis for dating the expansion in Australia and in almost all other countries is the rule that defines a recession as two or more consecutive quarters of negative GDP growth. The United States is almost alone in officially setting the dates of the beginnings and ends of recessions, not by the two-quarter rule, but by a less mechanical process that factors in employment and a variety of other economic indicators in addition to the core criterion of GDP. (Japan‘s government also uses a less mechanical procedure.)
Troughs and peaks in the US economy are declared by the Business Cycle Dating Committee of the National Bureau of Economic Research. The NBER is a private nonprofit research organization. (I am a member of this committee, but do not speak for it and rather am writing this column purely in my personal capacity.) The NBER dates are official in that the Commerce Department and other US government agencies rely on them, for example, in their published charts.
There do exist, for some other countries, institutions that also depart from the automatic two-quarter rule and provide dates for business cycle turning points based on a variety of criteria. But their chronologies are not recognized by the corresponding national authorities and tend to receive far less attention in the media. Such bodies include the OECD, the CEPR’s Business Cycle Dating Committee for the Euro Area, and other institutions.
The method for dating business cycles is a consequential choice. For example, the Italian economy has experienced several separate recessions since 2008 if one uses the standard two-quarter rule, but one long recession if one applies a more common-sense approach.
There are clearly both pros and cons to the rule of two negative quarters, versus the less mechanical approach of the NBER committee. One advantage to the automatic rule is that it generally appears more objective.
Another advantage is that the public is told of a cyclical turning point with a lag of only a few months, that is, as quickly as the GDP statistics are compiled. The NBER, by contrast, typically waits a year or longer after the fact, until all the data are in, before announcing a turning point. Its announcements are then duly ridiculed for the long lag.
One major disadvantage of the two-quarter rule is that GDP statistics are usually revised subsequently, which can require revising the cyclical turning points retroactively. For example, a 2011-12 recession that had been announced in the United Kingdom was subsequently erased from the record when the GDP numbers were revised in June 2013. As a result, claims that in 2012 had appeared in the speeches of British politicians and in the writings of researchers, made in good faith at the time, were subsequently rendered false. The reason that the NBER waits so long before announcing a trough or peak is so that it can be reasonably sure that it won’t have to revise the call in the future. Similarly, the Japanese government waits for a year or so.
A relatively minor reason for considering alternatives to a procedure based on GDP alone is that it does not allow the designation of precise months, since most countries compile GDP statistics only on a quarterly basis.
Some technical complications require interpretation even regarding which measure of gross domestic output to use. The NBER committee puts real Gross Domestic Income “on an equal footing” with the more widely known expenditure-based measure of real Gross Domestic Product. The consequences of different statistical methodologies for measuring GDP can be huge in some countries, for example, India in recent years.
Another reason for abandoning the rule of two negative quarters is more fundamental. Some countries experience sharp slow-downs or periods of “diminished economic activity,” like the rest of us, and yet have long-term trend growth rates that are either so high or so low that the negative-growth rule does not capture what is wanted.
Consider, first, a case where the rule would yield excessively frequent “recessions.” In Japan, population growth is negative and productivity growth is far below what it used to be, so that its output trend has averaged only 1 per cent in recent decades. The result is that even small fluctuations can turn GDP growth negative. The two-quarter rule would suggest that Japan has a new recession more often than once every 4 years (7 downturns in the 26 years since 1993).
Now consider the opposite problem, how the two-quarter rule can yield infrequent recessions. To be sure, much of Australia’s success can be attributed to the adoption of structural reforms since the 1980s, such as openness to trade and a switch to a floating exchange rate. One of the reasons why Australia’s GDP shows no downturns in the last 28 years, however, is that its rates of growth of population and labor force are substantially higher than in the US and other OECD countries, especially Europe and advanced countries in East Asia.
China is another example. It has not had a recession in 26 years (since 1993). Of course the performance of its economy has been outstanding. Like most countries, it suffered in the Great Recession of 2008-09. But even a growth loss of 8 percentage points — from 14% in 2007 to 6 % briefly in 2009 — was not enough to turn China’s GDP growth negative. The reason, of course, is that its trend growth rate has been very high (due to productivity growth).
Assuming the US expansion continues in July, it will break the US record length of ten years (120 months) set in 1991-2001. But it is sobering to consider that if the dates of American business cycles were determined by the rule applied by most other countries, the recession of March-November 2001 would apparently be erased. It did not include two consecutive negative GDP growth quarters, but rather two negative quarters separated by a positive one. (This is a case where other indicators like employment help to make the call.) Under that interpretation, the apparent US record would have been set by the 17-year interval from 1991 (Q1) to 2007 (Q4) and the current expansion would not be close to breaking it.
This post written by Jeffrey Frankel.
“The 10-year US expansion, however, is far from the record-length expansion among countries internationally. That honor goes to Australia’s economic expansion, which began in mid-1991 and still continues to this day, at the age of 27 years, soon to attain 28.”
Why not China? Do they even date business cycles and if so – when was their last recession?
Oh wait – Jeff notes this linking to Noah Smith:
Last recession in 1993. Since then the US has had one minor recession and the Great Recession.
How has Australia avoided recessions for 27 years?
“Its success was built on the structural reforms of the 1980s and ’90s, when trade barriers crumbled and foreign-exchange controls were removed. A floating dollar cushioned the economy against external aches; inflation stabilised around a target band of 2-3%; and government finances greatly improved. By the time the global financial crisis hit, Australia had enjoyed over a decade of budget surpluses and net debt had been eliminated. It helped that China’s demand for commodities was fuelling a mining boom that created jobs and pushed up wages. Australia’s terms of trade soared as it churned out coal and iron ore to feed its neighbour’s factories. By 2013 household incomes were about 13% higher than they would have been without the bonanza.”
OK – the commodity boom helped but that ended a few years ago. Let’s see – floating exchange rates, free trade, fiscal surpluses. Huh – Australia’s success is based on doing just the opposite of what Team Trump wants to do!
yeah all that but in essence the main reason is inflation has always been under control ( and thus so has wages) and the RBA has never had to raise rates very much
This was a really good, informative post.
So the end of a recession doesn’t require two positive quarters. Seems an asymmetric rule.
Not a fan of Reinhart and Rogoff. When data is intentionally manipulated to support a false argument— everything you have said both before the intentional manipulation of data and after becomes suspect. They can so “oh that was just a spreadsheet mistake”. Yeah, and every time the hospital F**ks people over by over-billing them and not itemizing things “it’s a spreadsheet error”. And every time Wells Fargo F**ks people over by creating fictionally created account and then charging fees for non-provided. And every time your bank over charges you “it’s a spread sheet error”. I like Professor Frankel, I think he’s a good professor and has great insight on many topics. My only peeve with Professor Frankel would be to “grow up” a little in the “naivety dept” when quoting people who are more interested in a narrative to sell books than objective facts
Why did Reinhart and Rogoff’s “mistake” happen to “coincidentally” support what is largely a bogus argument?? I leave it to otherwise highly intelligent and [albeit] well-meaning economists in their late 60s stage of life (initials “J.F.”) who apparently still get a real charge out of watching Tinker Bell and think elephants with large ears can fly.
We shall never know for sure, and it is true that R&R ran big time with the result that fit into their general views, with this unfortunately supporting policy changes pursued by many that damaged the recovery from the Great Recession. But I think it is widely accepted that R&R did not deliberately distort the data in their infamously incorrect data. This looks to have probably been a genuine mistake, with a research assistant or student messing up while entering the data. R&R certainly can be taken to task for failing to verify that the data was correct, and they have been widely ridiculed for this failure. But, again, most seem to accept that it was an error on their part rather than a deliberate distortion.
As it is, their book that JF cited does not contain that paper and is excellent. They did an excellent job of making it clear that downturns associated with major financial crashes tend to be deeper and last longer than those happening for other reasons. Given that they argued this makes it all the more embarrassing for them that they messed up on that paper as they themselves had already argued that iit was going to be a long and hard slog to recover from the Great Recession. Rogoff i particular has a long record of being a highly original and even brilliant economist, but even such people can make mistakes, especially when they get careless and sloppy.
So, I see no reason for JF to change his analysis of all this on account of this.
Also, the de Long link does not seem particularly relevant to this matter.
I have stated before on this blog that my account on Twitter was suspended. I could get the account back by volunteering my phone number. I refuse to give Twitter my personal info, because of a BOGUS claim of violation of twitter policy. Why was I “suspended” (in reality banned if I must give personal info to get my account back)?? I do not know, but am 99.99999999% certain it was because I was criticizing a female sports “journalist” based in central Texas. She had tweets where she was complaining about opposing fans to Baylor’s basketball team making r*pe chants aimed at the Baylor university. This same sports journalist covers Baylor, and had ZERO criticisms of the Baylor board of regents or Ken Starr (the university president) who fostered and really near encouraged the atmosphere which gave rise to gangr***s on the Waco campus. When I asked this sports “journalist” why the r*pe chants were “upsetting” to her and she thought they were “rude” when she had NOTHING to say about Baylor university leaders who had fostered and nearly sponsored that activity by star Baylor football players and purposely tried to hide the sex felony crimes—I was suspended from Twitter about 10 seconds after. I have been asked to show those tweets by many people doubting my story—they cannot be accessed when your account is suspended. I can show you one thing though, which might be educational for some of you who think you MUST be “evil incarnate” to be suspended or banned from Twitter :
In case you missed the top-most portion of that link:
I wonder what the effect of fracking has been? Menzie, your co-host on this blog has opined on the effect of oil prices on the economy, but I don’t recall him looking at the effect of fracking, which seems to me a game changer. Maybe we would have gone into recession before now without that change.
Is the lower prices on oil a supply issue or more a demand issue?? I would lean towards demand if forced to answer the question, but certainly Professor Hamilton could answer way more intelligently and with much more depth than I can/could. If someone can show me where Iran being out of the supply loop has affected prices I’d love to see it, because I sure as hell don’t see it at the pump. I have great respect for Professor Hamilton but I doubt he can show me a graph where Iran’s increased supply has drastically lowered prices anytime in say—the last 5 years. I’m mainly talking end-point consumer prices here, not traders. This is why Iran uses the Straight of Hormuz threat—because mostly all you hear is snoring noises when Iran isn’t selling oil.
No federal prisoner has been treated this delicately since Michael Milken was sent off to the local country club. Manafort is a dandy boy though, isn’t he??
Such a dandy boy.
Does anyone know how donald trump’s personal defense attorney William Barr is going to avoid getting hepatitis A if he spends all day rimming donald trump?? I see serious liver damage in William Barr’s future.
So after two plus years of journalists choking their chicken, we FINALLY find out what happens when donald trump gets a follow-up question and Maggie Haberman isn’t playing “Nod My Head And Smile To Make Orange Nutso Happy” journalist cosplay game??
Gee, this is no fun. Can Maggie Haberman at least get a participation ribbon before we move on to the reality stage portion of the game??
Jon Stewart, discussing the near useless Republican Mitch McConnell, who apparently has zero respect for policeman, fireman, and ambulance workers who save people’s lives during crises and terrorist attacks. They can all just literally drop dead while Mitch McConnell slow walks laws and collects on his federal government health care and his federal government pension.
*policemen and firemen, sorry, I think I’ve been reading too many donald trump tweets and apparently plural words are now a challenge for me. In defense of myself, I’d like to say I still know the difference between Wales and “Whales”, but if this stretches out to 2024 I can’t guarantee how much longer I can sustain that.
I still strongly recommend reading the Mueller Report with your own eyes, but if you can’t or it’s just going to be some time before you can, then this is probably the best you’re going to do with a half hour lunch break and a laptop.
The NYT story itself is comforting to any literate American of any intelligence. donald trump’s reaction to the NYT story, is frightening, and yet completely unsurprising. donald trump is a walking and breathing threat to America’s national security, and world security. He is now probably a bigger threat to this nation than the Chinese government. FULL STOP
In other news, donald trump is now attempting to appoint a woman who can’t even bother to show up to her job—as in ATTEND the work office of her job, to represent America with the U.N.
Just try to imagine, any country appointing a U.N. representative who thinks it’s to much to ask to tie her shoes in the morning and drive to work??
Since the Great Recession began in Dec. 2007, the federal debt has increased by $13 trillion, more than doubling in size, and the debt-to-GDP ratio, which was 61% in 2007, has been over 100% for the past 6 years running.
Yet we have the longest economic expansion in our history with the creation of 23 million jobs since the jobs recession hit bottom in Feb. 2010.
Clearly, the R&R “spreadsheet” error was far more than a simple mistake. The federal budget deficit has fueled the economic recovery for a decade, just as Keynes said it would. Does anyone doubt that balancing the budget now would throw the economy into another recession?
PAUL MATHIS I don’t think anyone is arguing that we should balance the budget right now. So that’s a strawman. Instead, we should be steadily reducing the deficit as a percent of GDP over some time horizon as long as the economy is out of recession. Growing the deficit as a percent of GDP makes no sense when the economy is at full employment.
The spreadsheet error was the least of the problems with the R&R paper. They confused cause and effect. And their bifurcation into developed and developing country categories would have been defensible if they limited their analysis to something like the post-WWII era, but going back a couple of centuries was just idiotic. And why would anyone take seriously a categorical average based on one observation? But R&R’s biggest sin was in allowing themselves to be seduced and awestruck by powerful congress critters who used and abused R&R’s analysis. When Rogoff was talking with other academic economists he would agree that concerns about deficits in the context of the depths of the Great Recession were misplaced. He agreed that deficits made sense in that context. But when R&R were in front of Congress they were passive and allowed Tea Party idiot politicians to put words in their mouths. They didn’t push back or attempt to correct the record. They were spineless.
I don’t think we should let the American Economic Review (AER) off the hook either. The infamous R&R paper was never peer reviewed. It was basically just an extended working paper note that captured some findings that R&R thought were curious. If anyone from East Flunkee State College had written that paper it never would have seen the light of day, but because of R&R’s reputation they were able to submit their working paper to the AER, no questions asked.
“I don’t think anyone is arguing that we should balance the budget right now.”
Well maybe Art Laffer was. After all – wasn’t that the point of the latest tax cut for rich people? How is this working out for his little cocktail napkin?
“Growing the deficit as a percent of GDP makes no sense when the economy is at full employment.”
The last time the unemployment rate at 3.6% was nearly this low in April, 2000, at 3.8%, the prime age labor force participation rate was 84.4%. Yet last month it was 82.1% and has been declining all year. https://fred.stlouisfed.org/series/LNS11300060
Not only are we not at full employment, but the latest Fed projections show GDP growth declining while the unemployment rate rises. Wage increases are nearly stagnant and aggregate demand is weak.
The federal budget deficit is the only component of GDP over which the government has direct control. The time has come for massive federal infrastructure spending financed with debt, just as state governments have done for decades. If done with little waste, the projects will simply amount to trading one asset — money — for another — roads, bridges, schools, parks, etc. Future generations will benefit as well as the current population. With inflation low, there is no reason not to spend the money and 30 year Treasury bonds can easily be sold.
PAUL MATHIS I don’t think anyone understands “full employment” to mean 100 percent employment. The usual understanding is that U3 unemployment is composed of frictional and structural unemployment but no cyclical unemployment.
I agree that there are important infrastructure projects as well as many “green” projects that the government should undertake. But just because the government should be spending more money on those kinds of projects does not mean the government should engage in deficit spending to fund those projects. There is this thing called a balanced budget multiplier. If you want to improve infrastructure, then raise taxes to improve infrastructure. Deficits are really countercyclical tools. A kneejerk reaction to use deficits to fund structural projects is Dick Cheney-nomics.
Cheney said deficits don’t matter. Obviously they do matter because they are fiscal stimulus for the economy. The constraint is inflation which has been below the Fed target rate for many years. We could easily build up this country for the future instead of letting it fall to ruin.
Your proposal to raise taxes is simply a proposal to do nothing which has been clear since Pres. Obama’s infrastructure proposals made in his speech 5 years ago. Our economy is not “overheating” by any stretch and infrastructure spending would supplant the need for tariffs as a domestic demand generator.
We always have plenty of money to spend on foreign wars and no problem financing those with deficits, but spending on domestic needs must be financed with cash up front in the form of taxes or “pay-fors” as Pelosi calls them. The orthodoxy that “deficits are really countercyclical tools” has no support in anything Keynes ever said.
” I don’t think anyone is arguing that we should balance the budget right now. So that’s a strawman.”
“Deficits are really countercyclical tools.”
Interesting that you contradict yourself claiming that nobody is arguing right now to balance the budget, but then saying that deficits are not appropriate now.
So which is it? Should we balance the budget because deficits are only for countercyclical situations, or should deficits continue?
Obviously deficits should continue but political correctness and fear mongering by “deficit hawks” prevent any rational discussion. PCE Core inflation has not been above 3% in over 25 years during which time the debt has quintupled from $4 trillion. If inflation is indeed the constraint on deficit financing, what exactly is the problem in using it now?
PAUL MATHIS I see the confusion. Let me reword things. I don’t think anyone is saying that we should immediately go to a balanced budget; however, that does not mean we shouldn’t be shrinking the deficits as a percent of GDP. The FY2019 deficit is projected to be ~4.2% of GDP, which is up from the FY2018 deficit. The CBO projects that it will go to 4.7% of GDP by FY2022…and that assumes there is no recession. I am not advocating that we immediately go from 4.2% down to 0%; i.e., to a balanced budget. No one is arguing that. But we should be bringing that 4.2% number down to (say) 3.9%, then (say) 3.5%, etc. until we encounter another recession. The worst thing is to continue to grow the deficit as a percent of GDP when the economy is operating close to potential GDP, as is generally agreed:
The most recent releases of Gross Domestic Product (GDP) imply that the current level of U.S. output is almost equal to the Congressional Budget Office’s (CBO’s) estimate of the “potential level of GDP,” a measure of how much the U.S. economy could produce if its resources were fully and efficiently utilized. The World Bank further estimates that this closing of the output gap has occurred not just in the U.S. but across most advanced economies (World Bank 2018). Ten years after the onset of the Great Recession, according to this view, the economy has finally returned to its potential level and economic policy instruments should be gradually returned to normal levels, a process the Federal Reserve is now implementing.
So if the deficit-to-GDP ratio were reduced from 4.2% to 3.9%, what benefit would that be to the economy? Would interest rates fall? Would investment increase? Can you explain anything beneficial at all apart from “normalization” of fiscal policy?
With inflation lower than 53 years ago, reducing it further seems meaningless and in fact would be contrary to Fed policy. Furthermore, your quote from the CBO is outdated since the Fed is now reversing course and moving to reduce rates to accommodate faster growth.
Why can’t we do massive infrastructure building now when interest rates are low? Why wait until a recession when there is a rush to do “shovel ready” jobs? All the debt/deficit phobia seems like just a pretext to do nothing by politicians who have no vision of the future. In fact, they cannot even see the past decade clearly.
PAUL MATHIS One benefit would be that all of that reduction would be in the form of a reduction in the primary deficit, which would lower future interest payments. As it is, even with today’s relatively low interest rates the interest costs for CBO’s baseline case become a serious issue ten years from now. Currently interest costs are equal to 29% of the discretionary spending. By FY2029 interest costs will represent 61% of discretionary spending. You asked if lowering the deficit would lower interest rates. In the near term probably not, but it wouldn’t increase them. OTOH, increasing the deficit as a percent of GDP will almost certainly put upward pressure on interest rates. I don’t think there’s any reason to believe that interest rates behave symmetrically with respect to Treasury auctions when those rates are already very low. But interest rates could increase if deficits as a percent of GDP rise.
Inflation is very low and right now interest costs are not a big problem. But it’s foolish to think that what’s true today will be true in the future. Eventually those bonds will have to be rolled over and by then we may not be in a low interest rate, low inflation world.
Why can’t we do massive infrastructure building now when interest rates are low?
As I mentioned earlier, our first choice should be to fund infrastructure spending with taxes. Nowhere is it written that you can only fund infrastructure spending with deficits. If interest rates are low, then this implies that private capital can’t find enough worthwhile projects. Running deficits would soak up that excess saving and the infrastructure spending would consume the same amount of real physical resources as funding through taxes. The difference is that with deficit financing we leave future generations with the welfare losses that come with interest payments. And redirecting future shares of GDP to rentiers and bondholders doesn’t strike me as a good way to deal with inequality.
I take your point that politicians are too cowardly to use the “t” word and voters are too myopic to tax themselves. And if the risks of global warming reach the point when democracy fails and the globe is threatened because American voters aren’t adult enough to accept their responsibilities, then running massive deficits might be justified in extremis. To put it bluntly, deficits are a politicians way of deceiving an inattentive and myopic citizenry. I’ve always suspected that something like this is behind the Green New Deal’s fascination with MMT.
Interest on the federal debt is 1.6% of national income (GDP). We can easily afford it and always have even when it was twice as high back in 1991.
Fear mongering about future interest rates has been the mantra of do-nothing fiscal conservatives for the past decade. They are happy to see our nation fall to ruin and are simply too cheap to fix our infrastructure which now needs $2 trillion of repairs. No politician is going to raise taxes $2 trillion to fund infrastructure; that should be obvious. So nothing will be done and the economy will slow down. Likely there will be a recession and then there will be a rush to spend more on infrastructure with deficit financing.
Once again, the stupid people prevail because the smart people are afraid to act.
The anti-deficit spending advocates are ominously similar to the anti-vaxxers — the same mindless stupidity and refusal to look at the evidence. Fear mongering of gullible people by those who should know better which causes unnecessary suffering for many others. Rampant lies based on nothing but speculation and discredited “experts” who still spread nonsense. We are at the mercy of fools.