- As President of the National Bureau of Economic Research and a member of the Business Cycle Dating Committee, James Poterba helps determine when a recession officially begins and ends.
- CNBC interviewed him about his work in dating downturns and why it matters.
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As President of the National Bureau of Economic Research and a member of the Business Cycle Dating Committee, James Poterba helps determine when a recession officially begins and ends. Why is that important? What does this data tell us?
When NBER was founded in 1920, its economists primarily studied workers’ income, businesses and capital, said Poterba, who is also an economics professor at the Massachusetts Institute of Technology. However, realizing that things didn’t stay good or bad for long – they were always changing – the Office soon turned its attention to economic cycles as well.
Although less economic data was available a century ago, “it was clear to anyone who was watching the economy that there were times when economic activity was going faster and slower, and when more or less was going on,” Poterba said.
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The NBER economists wanted to know whether these fluctuations are unavoidable. And so they set out to understand why they were performing.
To pinpoint the factors that triggered a downturn, they would need to find a precise way to pinpoint exactly when the economy began to contract. Today, NBER’s Business Cycle Dating Committee, a private organization of academics based in Cambridge, Massachusetts, is considered the authority on the timing of recessions.
With Federal Reserve economists predicting the economy will take a hit later this year, I spoke to Poterba about his recession research. While NBER does not provide forecasts, he still had many interesting things to say about our downturn concerns. (Our interview has been edited and shortened for clarity.)
Annie Nova: Why is the main purpose of dating the beginning and end of a recession?
James Poterba: So that when we look back as students of economic fluctuations, we can try to understand what caused certain rises and falls in the level of economic activity.
AN: How does this information help us as a society?
JP: It ultimately helps shape policy for the future. So we can look back and say, for example, what are the implications of rate hikes? What is the probability that an increase in interest rates will be accompanied by a period of contraction in economic activity some time later? Or does a sharp rise in oil prices typically lead to a recession?
AN: Some economists say that recessions are inevitable in our current financial system. Why this?
JP: This is a very complicated question. If you go back to the days of agribusiness in US history, I always think this is an easy way to understand some of it. If you’ve had a very severe winter or drought, these are times when the economy would take a hit. So if you have a shock today like a rise in commodity prices or a transportation disruption that affects the ability to trade, these are all variables that can affect what happens in the economy.
AN: Do you have any idea what language was used to describe downturns before the term “recession” came about?
JP: If you go back to NBER’s earliest work, and now I’m talking literally 100 years ago, they used terms like “business panics” or “crashes”.
AN: What factors does the committee use to determine that the US is in a recession?
JP: A recession is a period of widespread decline in economic activity that is prolonged and of significant depth. So depth, spread and duration – the three Ds.
AN: Your committee’s recession timetables don’t tell the full story of a downturn, right? Some people continue to face financial consequences long after the economy begins to recover.
JP: One of the places where the long-lasting effects of recessions have been demonstrated is with college graduates. A bachelor’s degree in the middle of a recession is less good from an earnings perspective than a degree in a very tight job market. Even if you look a decade later, their earnings are still slightly lower. Also, when workers have dropped out of the labor market when they cannot find work, this can lead to some deterioration in their skills. And that also has longer-lasting effects.
AN: Maybe because there’s so much data available today, or maybe it’s the nature of the news cycle, but it feels like we’re always talking about a recession now. Even if we’re not in one, we can’t stop talking about the next one. do you feel that
JP: You are right that the question of whether the economy is slipping into a downturn is very big in the media? Or is the economy likely to recover if it’s bad? Honestly, I think that’s sort of shorthand for the conversation about, are things getting better or worse? The words “recession” or “recovery” have become shorthand in these conversations.
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