The Economic Week in Review

Just a few observations and links

John McCain laid out his economic plan.
Obama's plan to strengthen the economy is on his web page.
Hillary Clinton's web page on strengthening the middle class links to several of her plans. Her policy director, Neera Tanden, issued a statement in response to the McCain plan.

The World Bank warned of the severe effects of rising food prices around the world. It makes you stop and appreciate all you have when you realize that 100 million people are worried about where their next meal may come from. I was happy to hear that President Bush ordered $200 million in emergency aid to alleviate the food shortages in Africa and other parts of the world.

Greenspan's Policies Questioned

Finding a Scapegoat

Now that Ben Bernanke has told us that a recession is imminent, this week's hot economy topic is finding a scapegoat. The most likely candidate: Alan Greenspan. Did Greenspan, who was praised at the time for growing the US economy during the 1990s, get us into this mess?

Former Fed chairman Alan Greenspan's policies were questioned in a front page WSJ article yesterday. Mr. Greenspan responded in an interview and strongly defended his actioins as head of the Fed.

The primary criticisms were:

• The Fed lowered interest rates in 2001-2003 and kept those rates low for too long. This encouraged mortgage borrowing, leading to escalating housing prices and eventually to the housing market collapse. This criticism was mentioned by Prof Woo in last week's lecture.
• The Fed was not aggressive enough in regulating banks and their mortgage lending practices, specifically subprime lending, and their subsequent risk exposure.

One comment (by the writer of the article) that I found particularly interesting was the Greenspan "has long maintained that bubbles are an unavoidable feature of a dynamic economy."

For more criticism of Greenspan, you may want to read Greenspan's Fraud: How Two Decades of His Policies Have Undermined the Global Economy by Ravi Batra.

I'd be interested in finding a more positive (or at least balanced) retrospective view of Greenspan's policies... if one exists!

On the WSJ blog entry related to this article, there's an informal, unscientific survey that asks the question: How has your opinion of Alan Greenspan changed since he left the Fed? Ask of this writing, the results have been:
3% It has risen
45% It has fallen
27% It has remained low
21% It has remained high
4% Something else

It doesn't surprise me that the results of a survey embedded within a negative article about Greenspan and his policies would be skewed in this way.

See Greenspan's article in the Financial Times (April 6, 2008) entitled The Fed is Blameless on the Property Bubble. See also his article (March 16, 2008) We Will Never Have a Perfect Model of Risk.

Bernanke Warns of Possible Recession

Federal Reserve Board chairman Ben Bernanke testified before congress today and warned of a possible recession in the first half of 2008.

How is a "recession" defined?

It's primarily sustained, declining GDP.

Mankiw, pg 252, says "When the economy experiences a period of falling output and rising unemployment, the economy is said to be in recession." Mankiw does not specify the length of the period of decline required to constitute a recession. He then refers to the recession of 2001 in which during the first and third quarters of the year real GDP fell from the previous quarter. It seems that Mankiw does not require two consecutive quarters to define a recession.

Others, however, do require at least two consecutive quarters of declining GDP to define an economic recession. The National Bureau of Economic Research (NBER) has a Business Cycle Dating Committee which monitors economic indicators and has defined standards for defining recessions and other business cycles. Here's a link to NBER's Recession Dating Procedure.

According to NBER:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Who determines the GDP?

It's primarily the Bureau of Economic Analysis, which is part of the US Department of Commerce. Unfortunately, the BEA issues its GDP numbers on a quarterly, not monthly basis. You can download all the historic GDP numbers (since 1929 annually and since 1947 quarterly) in Excel format from the BEA site.

NBER makes reference to a group known as Macroeconomic Advisers (sic) which calculates a monthly GDP. I'm unable to find much information about this group and their web site (www.macroadvisers.com) is not currently up.