NCPA - National Center for Policy Analysis

MYTHS ABOUT RECESSION

January 29, 2008

Listening to the economic stimulus talk coming out of Washington, you could be forgiven for thinking that the recession is just around the corner.  The main result of all this chatter is that far too many myths about recessions have made their way into popular culture, says Kevin Hassett, director of economic policy studies and a senior fellow with the American Enterprise Institute.

For instance:

  • Nobody knows if we are already in a recession; the Business Cycle Dating Committee of the National Bureau of Economic Research uses a number of indicators, and it's not true that they declare a recession if economic growth is negative for two quarters in a row.
  • Conventional wisdom is that stock prices drop during recessions, but the market tends to look ahead and starts to respond favorably to the expected end of a recession long before it occurs.

Also:

  • Recessions today aren't inherently milder than before; while the past three recessions may have seen slightly smaller drops in economic growth on average, there is no guarantee that the next one will be mild.
  • Recessions aren't bad for your health; economist Christopher J. Ruhm of the University of North Carolina at Greensboro has found that a temporary one percentage point increase in the unemployment rate leads to about 14,000 fewer deaths per year.

Finally, the term "business cycle" is imprecise.  Economic fluctuations are anything but regular.  In the nine recessions since 1949, the shortest time between two recessions has been three quarters (the recessions of 1980 and 1981-82), while the longest has been just short of 10 years (the recessions of 1991 and 2001). When the next recession ends, a good guess will be that the expansion that follows will be somewhere between one year and 10 years in length.

Source: Kevin Hassett, "Five myths about recession," Dallas Morning News, January 28, 2008.

 

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