Thursday, April 7, 2011

What’s a Recession?

I’ve heard many folks label our current financial mess as the Great Recession, a reference to the Great Depression of the 1930s.  But what exactly is a recession?  Most economists define a recession as two straight quarters of negative GDP.  GDP, or gross domestic product, is the final market value of all goods and services produced in the country in a given year.  So, negative GDP would indicate a contraction in the economy.  But is this definition the most meaningful representation of the events unfolding? 

This blog has talked about the problems with GDP and its inability to capture correctly the internal workings of our economy.  One concern is government or G in the equation GDP ~ C + I + G + Nx.  Our economy can be spiraling downwards but as long as G is large enough, GDP might actually increase.  In the second quarter of 2009, GDP fell 0.7%, while G increased 6.1%.  Had G been even larger, GDP might have sprung positive.  Suppose G increased enough to raise overall GDP positive.  Would this mean our economy was expanding again?  I doubt it.

So, what other indicators might we use to determine a recession?  What about unemployment?  Certainly, this matters most to America’s human resource – people.  The unemployed would probably argue that negative GDP is simply a symptom of unemployment and not necessarily an accurate measure of economic health.

Perhaps tax receipts are a better indicator of the health of an economy.  Falling tax receipts indicate that unemployment is on the rise and the economy is experiencing some contraction.  Rising tax receipts, ceteris paribus, is normally a good economic indicator.   

I’m sure there are many smart people out there who have ideas on how to better measure the health of an economy, one that isn’t subject to heavy influence by the big G.  I’d like to hear some.


  1. I say we need to abandon all simplistic aggregates. They are too useful to those who would argue that the economy can be "fine tuned" through various policy levers.

  2. Well, do we even need to attach official labels to things like recession? What purpose does it serve, except to embolden government? Perhaps this is what you are saying.

  3. Yes, labeling economic trends is the first step on a slippery slope.