The United States has officially experienced two consecutive quarters of contracting GDP, which fits the commonly accepted definition of a recession. But not in the United States, where that decision rests with eight economists on a small independent body called the Business Cycle Dating Committee.
In most other countries, Mass would be read and the start of the recession recorded. But not in the United States. GDP in the world’s largest economy fell 0.9% year-on-year in the second quarter, the Commerce Department said on Thursday (July 28). This is the second consecutive quarter of negative growth in the United States.
In France, for example, this would be sufficient to estimate that a recessionary phase has begun. INSEE defines such an economic downturn as “a decline in gross domestic product (GDP) for at least two consecutive quarters”. Ditto for the OECD.
The eight American arbiters of the recession
In fact, Japan is the only other democratic country besides the United States that doesn’t follow this quasi-automatic rule for dating the onset of a recession. It is the “Japanese government that decides, taking into account factors other than GDP, such as employment or consumption,” Harvard economist Jeffrey Frankel said in a presentation, pointing out the American exception in defining business cycles.
At least in the Asian archipelago, it is a democratically elected body that is well identified by the population that decides. Not so in the United States, where the arbiters of the recession are eight economists united in an independent group called the Business Cycle Dating Committee.
For them, a recession is “defined by a significant drop in economic activity that spreads to all levels of the economy and lasts for several months.” GDP is just one of the factors taken into account by these economists, as well as the unemployment rate, the level of wages or even investment.
The pressure on these chief judges of America’s economic well-being or malaise is intense right now (they’re also the ones who are officially signaling the end of a recession). In fact, the recession in Washington has become a very politically sensitive issue.
A body that takes its time
Especially since Republicans and conservative political commentators are clamoring for recession from all sorts of media outlets so they can blame US President Joe Biden for the country’s misfortune. And between the poor GDP figures, rising prices and the declining real estate market, they have arguments to make.
But Joe Biden can say in good faith that the United States is not in a recession until the Business Cycle Dating Committee declares it. While awaiting the official verdict, the government is also taking advantage of this blurring to ensure all is not so bad. The unemployment rate remains at historically low levels and “it makes no sense to say there’s going to be a recession under these conditions, especially if wages are also rising,” said Jerome Powell, the Federal Reserve’s governor.
The Business Cycle Dating Committee is therefore increasingly being called upon to settle this debate. But we must be patient because this group “takes an average of 12 months to decide if a recession has happened and when,” writes Jeffrey Frankel, who has served on the committee for more than 20 years.
So these economists had on the 1ah December 2008 to explain that a recession had started in late 2007. By now, Lehman Brothers had gone out of business, and the financial crisis was wreaking havoc around the world.
This committee is therefore in no hurry, which “can be a problem when we know that politicians sometimes need quick estimates to make decisions,” public radio NPR notes in a program dedicated to these “recession arbiters “ is dedicated.
The friendship between a socialist economist and an ultra-liberal
Their slowness can be explained historically. The American exception stems from the aftermath of World War I and the unlikely friendship between Nachum Stone, a socialist economist, and Malcolm Rorty, a great defender of liberalism who worked for American telecom giant AT&T, says Forbes magazine. These two could not agree on anything that touched on economics except on one point: the United States needed to arm itself with an organization capable of ascertaining some indisputable facts to serve as a basis for economic debate.
Thus, in 1920, the National Bureau of Economic Research (NBER) was born, an independent institute designed to bring together the brightest minds from across the business community to come to a consensus on pressing issues such as growth rates, employment measurements, or even recessions.
Almost 60 years later, in 1978, this organization founded the Business Cycle Dating Committee, whose very academic task was to date with certainty the various business cycles in the United States.
Hence their slowness. “There are often GDP revisions, for example,” James Poterba, an economics professor at MIT (Massachusetts Institute of Technology), chairman of NBER and a member of the Business Cycle Dating Committee, told NPR. For example, the UK declared a recession in late 2011 before revising GDP growth upwards in 2013, noting that there had ultimately been no recession.
Lack of transparency and diversity
“Overall, I think our US approach to fixing the start of a recession is working quite well compared to the purely mechanical approach [de ne retenir que l’indicateur de deux trimestres successifs de repli du PIB]’ says James Poterba.
But the criticisms of this committee relate less to the method than to the way it works or its composition. First of all, this organization is not an example of transparency, regrets CNN. There is no meeting schedule, no minutes of meetings, and generally members refuse to say where they meet and what they talk about. “It’s a bit like the ‘fight club’ of business,” concludes NPR.
These eight members are also all from the top-ranked universities in the United States (Harvard, Princeton, or Stanford), are white, and are in their sixties. Also, there are only two women and one of them is another member’s wife. “That is [intellectuellement] a bit incestuous as a medium,” Richard Wolff, an economist who studied at Harvard, Stanford and Yale, admits to CNN.
A lack of social or racial mixing that is not without consequences for the work of this committee. At their last meeting in July 2021, these economists had declared that the last recession – linked to the Covid-19 pandemic – ended in April 2020 before the health crisis.
But that wasn’t the case for everyone: the poorest Americans and minorities were still a long way from regaining their lost purchasing power. “More diversity in the composition of this committee would bring different perspectives and nuances to understanding the health of our economy,” Valerie Wilson, an economist at the Economic Policy Institute, told CNN.