Are We in a Recession?

One of the educational experiences of my life that has had a lasting and profound effect on my life, philosophical development, and intellectual growth is my law school experience at The University of Chicago Law School. Not only did I get to find out what is was like to live as a Yankee, I was exposed to some amazing and powerful intellects, both among my fellow students and among the faculty. One of my law professors my first year was Richard Posner, who is the intellectual godfather of what is known as the law and economics movement, an effort to analyze legal rules and principles through the lens of economics. During my time at UC Law, he was appointed to the 7th Circuit Court of Appeals, where he still serves while continuing to teach and write prodigiously. One of his outlets is a blog he co-authors with Gary Becker, a Nobel Prize-winning economist at UC. A fascinating thing about their blog is that it is a dialog between them over current topics of interest.

Most recently, Judge Posner posted that while he believes the nomenclature is not important, he feels the current economic situation is severe enough to be considered a depression, not merely a recession. In his view, we are not out of the depression/recession until GDP returns to the long-run trend line (the secular trend line from our economics class) and this may take 2 or 3 more years before we get there. Pointing out what I have said previously about our economic theories' inadequacies, Posner writes:

A number of macroeconomists and financial economists, including leading figures in these important branches of economics, had believed until last September that there could never be another depression, that asset bubbles are a myth, that a recession can be more or less effortlessly averted by the Fed's reducing the federal funds rate, that the international banking industry was robust, and that our huge national debt was nothing to worry about, nor our very low personal savings rate. All these beliefs have turned out to be mistaken, along with influential versions of the rational expectations hypothesis, the efficient-markets theory, and real business cycle theory.

That said he does not fault the government for taking actions inasmuch as we are in uncharted lands where our theories don't fit the facts. But in a sobering conclusion, he writes:

The economy remains imperiled. If the Administration's trillion-dollar health care program is enacted in anything like its proposed form, the costs, on top of the rapidly rising public debt that is the consequence both of the impact of the depression on tax revenues and the costs of the anti-depression programs may create an aftershock to the current depression that will do almost as much harm to the nation as the--I insist on the term--depression itself.

In response though, Professor Becker writes:

The latest output and unemployment figures for the United States indicate that the recession in this country is very probably finally over, given the usual definitions of the turning points of recessions. . . . I am more optimistic about the world and US recovery than the consensus, although I do not expect a sharp expansion during the next few months. . . . So legitimate reasons exist for concern about the speed and strength of the recovery of the American economy. However, I worry much more about various regulations, spending, and controls being introduced by the present Congress and by President Obama than by intrinsic difficulties in the American economy.

Confused? I think this illustrates well how very confusing the current economy is and how difficult it is to chart a course of action when no one is certain what's going on. But the Becker-Posner blog shows how it is possible to have a civil and high-level discourse on the subject.