Dan

Calabrese

Read Dan's bio and previous columns here

March 10, 2008

Stop Freaking Out: Even In a Recession, the Economy is Strong

Warning: This column will include numbers. Before you protest, “I was told there would be no math,” consider that conventional wisdom is settling on the idea that the economy is slinking into house-of-horrors territory.

That’s because you keep hearing how bad things are up and good things are down, but most people have no historical context to understand – up or down compared to what?

If you really understood the figures people use to draw this conclusion, you would wonder why so many people believe what they’re told. And you’d be right to wonder.

Stay with me.

The economy, for lack of a better term, measures the nation’s Gross Domestic Product – or the total value of all the goods and services we produce as a nation. The best way to assess the health of the GDP is in per-capita (per person, in other words), inflation-adjusted terms.

So here is a look at the value of the GDP in per-capita, inflation-adjusted terms using 2006 dollars. I selected six specific years:

1990: $34,118

1991: $33,612

1999: $40,689

2002: $41,844

2006: $45,403

2007: $46,000

OK, which year had the strongest economy? You say 2007? You win! If you measure it in terms of the actual value of the economy, on a per-person basis, 2007 is indeed the winner. But then, almost every year in our nation’s history has been the winner.

But wait, you say, this list suggests the economy was stronger in the early years of the George W. Bush administration than it was in the latter years of the Clinton administration.

That’s right. It was – again, if you measure it in terms of the per-capita value of the GDP. But you’ve always heard that the second-term Clinton economy was great and the first-term Bush economy was horrible. That’s because the economy usually gets reported in terms of how fast or slow it’s growing, not in terms of its actual value.

Most of the talk lately has focused on the question of whether we are heading into a recession, which is defined as two consecutive quarters of “negative growth” (an oxymoron if ever there was one). President Bush made a statement on Friday (a “hastily arranged” statement, the Associated Press gratuitously told us) acknowledging that growth in the economy has “slowed.”

Oh my God. Oh my God! The economy has slowed! Now what?

Relax. That’s what. All that means is that the increase in the overall value of the economy might be smaller than more recent increases. If we have a recession, it will mean there is a decrease in the overall value for two quarters or more.

We might be talking a decrease of 0.5 percent, maybe 1 percent if it’s really bad, as recessions go. But let’s be really morbid and say it loses a full 8 percent of its value. It never would, of course, but let’s say that. What would you have? You’d have the Clinton economy of 1999, which you thought was great!

Obviously, there are more factors involved than just the per-capita value of the GDP, but even most of those look pretty good by historical standards. Consider unemployment. The present unemployment rate is 4.8 percent. That’s up a little from the 2007 annual figure of 4.6 percent, but by any historical standard, it is so low as to be virtually insignificant.

When Bill Clinton was easily re-elected in 1996, the unemployment rate was 5.6 percent. When Ronald Reagan won 49 states in 1984, it was 7.5 percent!

The economy has been growing without interruption since 2002. If we have a slight interruption now, what will follow is that the economy will start growing again. It always does. And even while it’s “slowed” or even slightly receding, we’re still producing more wealth in this country on a per-capita basis than we ever have in our history. That’s a testament to a fundamentally strong economic system – and a reason for you not to worry your pretty little heads over a normal cycle correction.

So stop freaking out and get back to work.

This is Column # DC158.  Request permission to publish here.