Hoisted from Comments: Robert Waldmann on "When Did the Recession of 2001 Begin? Do We Care?"

He writes:

Brad DeLong's Semi-Daily Journal: When Did the Recession of 2001 Begin? Do We Care?: Reminds me of the best abstract in the history of economics:

Paper Title: "Unit Roots in GNP: Do we Know and Should we Care?"

Abstract: No and probably not.

Authors (sue me for forgetting your names) [Larry Christiano and Marty Eichenbaum].

I think we can agree that an economic downturn was inevitable by Jan 20 2001 and indeed by November 2 2000 so it was not George Bush's fault. We can also agree that the concept of "the date a recession began" is a bit metaphysical and debate is silly.

Most importantly, I think that we can all agree that the CEA has no business talking about business cycle timing. The issue is politically important and can't be made mechanical so it is essential that political appointees not be allowed to participate in the debate. This is not because the question is really important and has nothing to do with the integrity of this or that political appointee.

There are many equally useful ways of timing business cycles. There is one way which is much worse than all the others which is to allow politicians to decide dates so as to blame other politicians. Even if Mankiw had good reason to think that the recession began in 2000, out of respect for the valuable principle of non-partisan business cycle timing, he should have kept his mouth shut so long as he was CEA chairman.

I am more enthusiastic about dating business cycles than Robert is. At a very impressionable age--I was nineteen at the time--Marty Feldstein taught me Edmond Malinvaud's (1989) Theory of Unemployment Reconsidered (New York: John Wiley & Sons: 0470268832). Ever since then I have firmly believed that modeling the macroeconomy through a set of linear equations has to be the wrong road: that the economy is a qualitatively different animal when employment is shrinking than when employment is growing and there are still unemployed workers eager to work at prevailing wages, and yet a different animal again when the economy is growing and there is "full employment." I think recession begin and end dates are important things to understand when they are used as markers for the phase transitions the macroeconomy undergoes. (Of course, the NBER's Business Cycle Dating Committee doesn't think about recessions and expansions in these terms--hence someday I want to take over the NBER BCDC and restore it to rationality.)

But Robert is right: recession begin and end dates are stupid things to think about when they are used to assign blame to politicians. Blame Hoover for his inadequate response to the Great Depression. (Blame Roosevelt too, but his response was much less inadequate.) Blame George W. Bush not for the state of the macroeconomy during his tenure, but for his inept policies--and for his attempts to convince the press that everything is fine.

Comments

[Menzie Chinn]

Of course, the consensus answer to the second question Eichenbaum and Evans gave is almost surely wrong. But I agree -- it was a great abstract.

[Menzie Chinn]

Oops, I mean Christiano and Eichenbaum.

[Bill Conerly]

I've been going through the finest level of detail available in the GDP accounts (where there are 250 categories of consumer spending), looking at peaks and troughs of the recessions beginning with 1960. I've been amazed at the variety of experience. Yes, there really is a business cycle out there. But some sectors are very early, others are very late, others so dominated by trends, either upward or downward, that no cycle is discernable in the data.

Conclusion: keep "business cycle" as a loose concept, and think of the dates of peaks and troughs as suggestive rather than definitive.

[Robert Waldmann]

TypePad ate my comment.

It makes the comment above on how I brought up the pathetically petty preposterous pluton proposition up look silly (as if it didn't already). I will try to reproduce my comment from memory (and I will save it to my clipboard this time).

I agree that the concept of a recession is very useful in understanding the economy. I was actually trying not to inform non-economists that many academic economists are interested in models of the business cycle where the concept is not needed.

I also think that the timing of turning points is metaphysical. Pluto got in the picture, because, while I feel that the concept "planet" is useful, I don't think the debate about whether Pluto is a planet is interesting. Actually the first example that came to my mind is the concept of "the Earth". Now that's a useful concept, but I am not fascinated by the debate about exactly where the Earth begins and ends. I think the standard definition is at the point where the average molecule or ion is as likely to be solar wind as upper upper upper atmosphere, but I really don't care.

Red and orange are useful concepts, but I don't know of anyone who has debated the exact freequency where orange becomes red (I am sure that people have debated this and ferociously but I am glad to have missed it).

I think that, in retrospect, there is typically a period during which a recession is inevitable but hasn't started yet. Certainly the period that began when Greenspan went pedal to the metal in 2000 and ended when the recession started is one such period. I don't see any point in arguing about the exact point when the inevitable future recession became a current recession, although I think it very important that political appointees not be allowed to meddle with the metaphysics.