Recessionary jargon and epidemics
20 Jul 2021The definition of “a recession” is weird.
The NBER Business Cycle Dating Committee has spoken: the COVID recession in the US lasted 2 months. NBER defines a recession as the time from the peak of a business cycle to the trough. The trough has to be “significant” enough that it isn’t just noise, which in the past usually meant that it was at least somewhat prolonged. As the Committee notes in their announcement, the shortest recession prior to this one was 6 months long.
I know this definition, have known this for a while, but I’ve never really thought about it before. Why peak to trough? What concept are we trying to capture there? The definition is describing the duration of the decline, but why?
In my experience of general use, “recession” often means “the bad time when the economy isn’t doing well”. I don’t know many folks who use generally use it without referring to the suffering first, technical definition sometime later (if at all). When the technical definition differs from the general-use sense of the term, it’s more common that I hear “those economists are crazy” than “huh, let me recalibrate my use of this term”. Economics papers and reports use the technical definition but that’s to be expected. Maybe the two senses of the term align pretty well for most types of recessions observed before. But this wasn’t like most of the recessions observed before. (Even the Committee agrees, this time is different.)
I’m not original for saying this was the first pandemic that the global “we” have been so prepared to deal with. We went into it with lots of machines and drugs to keep people alive, we developed vaccines in record time, in some places we acted very quickly with social distancing, and so on. It’s also been the first set of epidemic-driven recessions we’ve experienced with so much preparation.
“Rational epidemic” models describe laissez-faire epidemic recessions as short, brutal things. I’m working on such a model (with an amazing group of people way smarter than me) to think about disease-economy tradeoffs under different policy approaches. When calibrated to the national US economy and contact structure using pre-pandemic data, the recession (technical meaning) hits the trough at day 55 of the epidemic. At the quarterly frequency, it’s “only” a 33% decline in consumption. But at a daily frequency, it’s a 66% decline. In our calibrated model, it takes about a year and a half for the economy to recover from the epidemic and the virus to be suppressed. The recovery is a slow, grinding thing. It doesn’t have to be; if the coordination failure driving the recession is addressed, it’s a 3% daily consumption decline at the trough, with a similar 2-month recession duration. The virus still takes about a year and a half to suppress, but the economic recovery takes only half a year. The suffering is much lower when policy addresses the coordination failure effectively even if the recession (technical sense) is just as long. (We define recovery as “output gap within 1.5% of the initial steady state”, but the result holds for any such threshold. Our definition is entirely arbitrary and “reasonable-seeming”.)
This isn’t a post about that paper, so I’ll leave it at that. This isn’t a post about rational epidemics, either. This is about the term “recession” in general, and epidemic recessions in particular.
When I first saw the NBER announcement, I thought it was some kind of joke. Were they out to lunch? The peak-to-trough decline in GDP was on the something like 38%, and you’d have to be under a literal rock to miss the ongoing suffering. The Sahm’s rule indicator doesn’t flatten out till April 2021. I had to read the announcement twice before the definition stuck. It was right at the top, so it’s a testament to the strength of my prior that the COVID recession (general sense) really sucked and continues to do so for a lot of people. Okay, given this definition, the COVID recession (technical sense) in the US was 2 months long. The grinding “expansion” that followed has been a year and change of very polarized suffering, but polarized suffering is nowhere in the definition.
I think this recession highlights the issue of concept-jargon disconnect: the technical term we use to describe a thing actually describes an effect of the thing in its general usage, rather than the thing generally discussed itself. (I’m sure this is an idea people already have a name for, but I couldn’t find it.) Describing a recession in the general-use sense is hard, and maybe the technical sense came first, I don’t know. But now the term seems pretty clearly linked in general usage to a concept that’s similar to, but can be quite distinct from, the definition of the term. The concept and the jargon aren’t fully connected to each other. I think this kind of thing is bad PR for economists and promotes sloppy thinking, but what else is new. There are lots of terms like this (“rational”), and anyway I don’t know if it’s avoidable when studying people and social things. Folks who study critical race theory are getting a particularly nasty version of the bad PR angle, with a general use of the concept being actively shaped to push an inimical agenda.
Sometimes there’s a clear theoretical reason behind keeping a bit of jargon around despite its disconnect from the concept. “Rational” is a great example here. The disconnect between “complete and transitive preferences” (technical sense) and “doing smart things” (general sense) is large, especially when talking about things like epidemics and coordination failures. It’s still bad PR, and I still think it can promote sloppy thinking. But the technical-use definition maps to a real theoretical construct, the precise definition of which is important for a lot of other theory and empirical approaches. Even if we changed the name we’d still keep the definition because it’s important on its own terms. Is the peak-to-trough definition important for any theoretical reasons? If we changed the name, would “peak-to-trough decline” still be an important part of the edifice of economics rather than just one among many statistics we use to describe “the time when the economy isn’t doing well”? Or is it a case of “we’ve always done it this way, so let’s be consistent”/”that’s just the definition”? The latter feel like lazy reasoning to me, especially in the macro world where things like unemployment statistics aren’t directly comparable across certain periods because of definitional changes.
Suppose we take the definitions we’re given. In that case, let’s be very clear that epidemic recessions are quite different from financial recessions. The coordination failure isn’t about “expectations” or other residuals, it’s about a real biological phenomenon that can be meaningfully measured. (I’m skeptical of our ability to measure expectations meaningfully, but that’s another story.) The coordination failure can be resolved (in part) through Pigouvian/Coasean policies—though fiscal and monetary policy have a role to play, this isn’t about getting shovels in the dirt or scaring the bond vigilantes. In the absence of policy that actually addresses the failure, the recession will be severe. The severity of the COVID recession for so many people in the US is an indicator of realtime policy failure. It’s a really bad failure, especially given how well-prepared we were by historical standards.
A recession definition that’s focused on the duration of the decline instead of its magnitude, or recovery time, or dispersion of losses, or some combination, or even a composite Ramsey-like indicator of welfare losses (let’s dream) isn’t really equipped to describe an epidemic recession. I’m not sure what the NBER/current macro definition is equipped to describe. I’m not sure why I (as a person experiencing the economy, or even as an economist studying it) should care about what it does describe beyond its attenuated connection to the suffering people experience when the economy isn’t doing well. True, the Committee decided to call this a recession despite how short it was (“what’s duration got to do with the price of milk?”). A sociobiologist friend once described economists as “phenomenal mathletes playing Calvinball”. To me, this announcement has strong Calvinball energy.