Can you still believe anybody in this crazy, hill-of-beans, overstimulated, double-dipping world? From the United Queendom, Steve Stone's Keynesian take on the mismeasurement of recessions is getting heavy #recession-hashtag rotation, and while it's not especially deep or broad, it's got a kernel of truth:
A recession now only 'officially' exists in an economy if there are three successive quarters of negative growth, and as soon as that's no longer the case, it's 'officially' over, and we can all look to the future.
The definition is of course a load of old tosh. If it were true, the long and deep British recession of the 1970's was barely a recession at all - there was just one case of three successive quarters of negative growth, 1973-4, see GDP changes since 1955. And yet I lived through the miners' strike, the power cuts, the three-day week, and the 1978 Winter of Discontent....Stone concludes by urging readers, "If you enjoyed reading this, please take a look my series of time travel novels," which you should definitely do unless you live in China. But his imagination fails him when he predicts based on past econometric models that "without doubt...the number one indicator of economic activity is house prices."
That may have been true once, and it may be true again, but at least on this side of the pond we're still working our way back through nearly four decades of well-above-CPI real estate inflation. And although, as Reason's Anthony Randazzo is diligently showing, our rulers have come pretty close to nationalizing the industry, real estate markets are still subject to a vast number of distortions by local busybodies, planners and property tax laws. If your predictive measure is the recovery of a market that still needs double-digit percentage price declines just to get back to historical inflation, you should get a new measure.
Well, I would firstly like to thank Tim for his constructive comments. And it's good to know I'm getting heavy rotation across the pond.
I'd like to say that I was trying to put the argument across in a way that would be palatable to the large majority of readers, not just those people that read The Economist or The Wall Street Journal. What's definitely true is that House Prices are by far the number one economic indicator of demand, so if House Prices are heading upwards, then so will monetary sales of the large majority of common consumer products, such as food, drink, telecommunications products, and many other non-food items. Yes, of course there are many other factors at play, such as unemployment, seasonality, local influences - but if you put a good House Price Index into your econometric sales forecasting model, it will generally stand out from the others as an explanatory variable.
That's really important, because it's consumer sales that ultimately drive us in and out of recession. I think the importance of House Prices as a driver of demand, and thereby a key driver of the level of economic activity, comes from the fact that they are most people's number one 'feelgood' factor. Many people have large mortgages, and movements in House Prices are regularly reported on news stations. If the price of a guy's house is going up, his equity position has improved, and he may well feel more confident going out, and spending his money. If House Prices are going down, he worries about his equity position in the context of the other important things in his life, and might well choose to stay in with the DVD player. And people who don't own their homes also keep up with the news, and know whether the value of their nation's property is going up or down.
Coming out of a recession isn't about "working our way back through" the past, it's about getting to where we need to go. That's why the economies of Britain and America won't truly recover until their housing markets pick up. "That may have been true once, and it may be true again...."
Tim's article continues with an in-depth discussion of how recession might be best defined. Should it be based on two quarters of negative growth, three quarters? My central point is that you can't define the beginning or end of a recession, based on these numbers. But you can feel a recession - it's when there isn't as much traffic on the road as you remember, when there are less people in the local shopping centre than before, when yet another of your local shops or pubs closes down, when sent CVs don't even get an acknowledgement, when another of your friends loses his job, when he can't sell his house anymore for the price he needs to move on.... and yet, courtesy of any quarterly-based growth definition of recession, the politicians can use the numbers to talk things up, and tell you that everything's going to be all right, just around the corner.
That's not necessarily a bad thing. In today's expectations-based world, talking success can often breed success. But when the politicians say that the recession is 'officially' over because of a small positive growth figure one quarter, it's a lie, and a lie that some people will base important decisions on.
Finally, I'd like to thank Tim for plugging my top 100 Kindle bestselling science fiction adventure novels. You can view or buy these great time travel adventures by visiting http://stevestonechat.blogspot.com/2011/06/oh-my-god-steves-gone-mad-hes-offering.html.
I guess time travel is one sure way of getting yourself out of a recession....
