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As President of the National Bureau of Economic Research and a member on the Business Cycle Dating Committee, James Poterba helps determine when a recession officially begins and ends. Why is this important? What do these dates tell us?
When the NBER was founded in 1920, its economists primarily studied worker income, firms and capital, said Poterba, who is also a professor of economics at the Massachusetts Institute of Technology. However, noticing that things didn’t stay good or bad for too long – they were constantly changing – the office quickly turned its attention to the cycles of the economy as well.
Although less than a century ago there was less economic data available, “Anyone observing economics understood that there were times when economic activity happened faster and slower, and where she was more or less happening,” Poterba said.
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The NBER economists wanted to know if these fluctuations were inevitable. And so they sought to understand why they were happening.
To determine the factors that precipitated a downturn, they would need to find an accurate way to pinpoint exactly when the economy began to contract. Today, the Business Cycle Dating Committee of NBER, a private organization of academics based in Cambridge, Massachusetts, is considered an authority on the chronology of recessions.
With Federal Reserve economists predicting the economy will enter a slump later this year, I spoke with Poterba about his research on recessions. Although the NBER does not make any forecasts, it still had a lot of interesting things to say about our concerns about the downturn. (Our interview has been edited and condensed for clarity.)
Annie Nova: Why is the main purpose to date the beginning and the end of a recession?
James Poterba: So that when we look back as students of economic fluctuations, we can try to understand what caused particular increases and decreases in the level of economic activity.
AN: How does this information help us as a society?
JP: This ultimately helps in designing policy for the future. It allows us to look back and say, for example, what are the consequences of interest rate hikes? What is the probability that a rise in interest rates will be associated, some time later, with a period of decline in economic activity? Or, if you see a sharp rise in oil prices, does that usually lead to a recession?
AN: Some economists speak of recessions as being inevitable in our current financial system. Why is that?
JP: This is a very complicated question. If you go back to the history of the United States during the days of the agrarian economy, I still think that’s an easy way to understand some of that, though. If you had a very harsh winter, or if you had a drought, those are times when the economy would be in decline. And so today, when you have a shock like an increase in commodity prices or a transportation disruption that impedes the ability to trade, those are all variables that can affect what happens in the economy.
AN: Do you have any idea of the language used to describe the downturns before the term “recession” took off?
JP: If you go back to the early work of the NBER, and now I’m talking literally 100 years ago, they used language like “business panics” or “crashes”.
AN: What factors does the committee use to determine that the United States is in a recession?
JP: A recession is a period of widely dispersed decline in economic activity that lasts for an extended period and is of substantial depth. So it’s depth, spread and duration — the three D’s.
AN: Your committee’s recession calendars don’t tell the whole story of a downturn, do they? Some people continue to face financial consequences long after the economic recovery begins.
JP: One of the places where there has been a demonstration of the long-term impacts of recessions is with college graduates. Earning an undergraduate degree in the midst of a recession is worse from an income standpoint than earning a degree in a tight job market. Even if you look a decade later, their earnings are still a bit lower. Also, when workers are out of the labor market, when they are not able to find a job, it can lead to some reduction in their skills. And it also has longer-term effects.
AN: Maybe because there’s so much data available today, or maybe it’s the nature of the news cycle, but it feels like we’re still talking about a recession. NOW. Even when we’re not in one, we can’t stop talking about the next one. Do you feel that?
JP: You are right to say that the media is very interested in the question of whether the economy is likely to enter a recession? Or, when the economy is bad, is it likely to recover? Frankly, I think that’s kind of a shortcut for the conversation about, are things going to get better or worse? The words “recession” or “recovery” have become shorthand in these conversations.