The Biden administration is addressing historical precedent in its recent attempt to redefine the meaning of the term “recession.” Unfortunately, that precedent is the Nixon administration.
When news broke last week of a second quarterly decline in real GDP growth, Biden’s economic advisers launched an aggressive media campaign to divert attention from signs of an impending economic downturn. The two-quarters decline was a milestone, as it is usually a sign of the onset of a recession, according to the generally accepted economic definition.
When Peter Doucey of Fox News asked. White House press secretary Karine Jean-Pierre on a two-quarter cut, she replied: “That’s not a definition [of a recession]. That’s not the definition.” While this is not the only definition of the term, the two-quarters standard is actually the most common rule of thumb for referring to a recession. It is found in almost every textbook on economics. It is also the common standard used in most developed countries, including UK Treasury, German Bundesbank, French National Institute of Statistics and Economics, Australian Parliamentand Canada’s Balanced Budget Act 2015.
In contrast, the White House prefers to wait for the National Bureau of Economic Research (NBER) Business Cycle Timing Committee to determine a recession, even appointing it the “official” recession arbiter. There is no such official designation in US law, as I recently documented in Wall Street Journal. But more importantly, the NBER approach is fundamentally unsuitable for real-time political decision making. This is a rigorous and respected historical measure, but the NBER definitions are retrospective in nature. Once a recession has begun, the NBER often takes a year or more to release its findings, meaning it is functionally useless for the purposes the Biden administration is now claiming.
Instead, the Biden team wants to use the NBER approach to buy time and limit the political fallout. This is completely against the intentions of the NBER committee, but that hasn’t stopped the White House from using its powers as a diversion tactic to avoid a political backlash against an election year recession.
Biden’s tactics come straight from the script of the man who was president when he first took office as US Senator from Delaware in 1973: Richard M. Nixon. The US economy entered a recession around November 1973 and did not emerge from recession until the spring of 1975. For the next several months, Washington was buzzing with chatter that it had crossed the threshold of a multi-quarter downturn. Nixon used his State of the Union address January 30th announce that “there will be no recession in the United States of America”, portraying the previous fall’s turmoil as a temporary residual effect of the 1973 oil embargo after the Yom Kippur War in the Middle East.
When a two-quarters decline threatened, assuming the traditional definition of a recession would soon be realized, Nixon’s team set to work trying to change that definition.
George P. Schultz, Nixon Secretary of the Treasury, rejected the possibility of a recession in interview with The New York Times. “I’m sure the president will be right if we determine that,” he said at a budget briefing in February 1974. Schultz “argued that the conventional, ‘innocent’ definition of a recession, two consecutive quarters of decline in real gross domestic product, would not ‘meet’ in 1974 due to ‘energy shortage interference’.” in once report continued:
[Schultz] said there were “judgmental factors” involved in deciding what is a recession and what is not. “Ultimately,” he said, “Geoffrey Moore and the National Bureau of Economic Research will have to make a scientific judgment” about whether a recession will occur this year, adding that the bureau “will not make such a decision for the next year.” a couple of years.”
When asked why the president had said that something undefinable was not going to happen, Schultz beamed like a man full of confidence in his current job and even his next. He noted that a recession was difficult to define because the economy was very difficult.
This act of non-definition drew a quip from Arthur Okun, a former economic adviser to Lyndon Johnson, who said that “when administration officials get smart about what a recession is, you can be sure there will be one.” Okun is no stranger to playing games with definitions of economic news, but in this case he was right. The US economy entered a deep recession in 1974 and remained in it until it recovered in the second quarter of 1975.
It is noteworthy that the recession of 1974 was not immediately reflected in the unemployment rate. Although the economy began to decline in November 1973, unemployment remained relatively stable and fluctuated at about 5 percent until May 1974. It increased rapidly in summer and autumn and peaked at 9 percent the following spring.
The Nixon episode has a lesson for the Biden administration, although it is different from the lesson they seem to have learned. The White House’s use of definitions failed to overcome deteriorating economic realities in 1974, and its frequent appeals to the resolve of the NBER failed to stem a prolonged recession. Faced with similar risks today, Biden’s advisers may well face a repeat of the economic malaise of the 1970s.