That’s the question posed yesterday by Calculated Risk. Here’s how I’d answer it.
CR begins with the above histogram, whose height shows the probability of observing a growth rate of real GDP over 4 quarters at a level indicated by the number on the horizontal axis. CR notes that for the 4 quarters ended 2007:Q1, real GDP grew only 1.5%, and for the 4 quarters ended 2007:Q2, growth was 1.9%, either of which he classifies as “sluggish growth or mild recession” for purposes of the diagram above. He then concludes
recessions do matter in that economic activity slows down, but the key point here is that there is very little difference between sluggish growth and a mild recession.
Another graph that I think is interesting to look at for purposes of this discussion is the unemployment rate. One of the very striking things about this series is its tendency to spike up during the episodes we characterize as recession. This does not appear statistically to be a smooth response to slower growth, but instead looks to me like a discrete phase into which the economy sometimes shifts.
I believe there is also a fundamental difference between the forces that are driving economic dynamics during the episodes that I would characterize as recessions and those that govern normal times. The normal situation is that the primary factor limiting how much the economy produces is our physical capabilities– how many people are willing to work, the quality of their skills and technology, and the physical capital available for them to use. All these factors tend to increase over time, accounting for the broad tendency of real GDP to grow from decade to decade.
It is hard for me to accept the claim of many modern macroeconomists that the same factors could also be driving business cycle downturns. We obviously don’t have any decrease in population during a recession, and no capital has been destroyed. I am deeply skeptical of the assumption by many academic economists that adverse “technology shocks” could account for a decrease in the level of overall economic activity. Instead, the spike up in the unemployment rate suggests to me that there is an idling of potentially productive resources that occurs during a recession, and that the dynamics that produce this tend to kick in fairly quickly once they set in. I discussed this idea further in a recent academic paper, What’s Real About the Business Cycle?
That’s why my answer to CR’s question– does a recession matter– is a definite “yes”.