With two consecutive quarters of negative real GDP growth all but on the books, 2022 is beginning to look like a recessionary year.
Granted, the second quarter’s negative 0.9% growth is still a Commerce Department first estimate that followed the first quarter’s negative 1.6%. It will be months before the National Bureau of Economic Research’s Dating Committee, the keeper of the kingdom for defining U.S. recessions, gives a final reading. But President Joe Biden is loath to admit a recession on his watch.
Indeed, Treasury Secretary Janet Yellen suggests that what’s happening is so unusual that we may need to rethink the whole notion of recessions and how to measure them. She says what we have is a transition, not a recession. And she has a point worth considering.
But before doing so, pause and recall that this is not the first time a president has battled the use of the word “recession.” Under somewhat similar circumstances — at war with inflation and a sick economy in 1978 — President Jimmy Carter ordered his senior staff not to use the word. (Inflation hit 9.0% year-over-year that December. This June’s year-over-year increase was a tick higher.) Perhaps Carter believed that repeating the word could actually make things worse if enough people behaved as if it were so.
Let’s focus on Yellen’s point, however.
Our economy is undoubtedly in a time of serious adjustment from trillions of dollars spent to offset the fearsome effects of the pandemic, a switch from low-cost to high-cost energy, and supply disruptions brought on by the Russia-Ukraine war. We still have huge cash balances in checking accounts, sold-out auto production, packed airports, and tight labor markets. But we also have negative GDP growth, rising interest rates due to Federal Reserve efforts to curb inflation, and, as a result, slowing construction and home sales.
So, recession or not, Yellin is right about an economy in transition. The question is: transition to where?
Let us hope the transition is to a more balanced economy — one in which supply chain disturbances are eased, cash balances are more in line with normal consumption patterns, and labor demand and supply are more balanced. Will the strategies currently emanating from Washington, whether it’s more spending, more debt, more subsidies, or the poorly titled “Inflation Reduction Act of 2022,” get us there?
Hardly. To give the economy a chance to breathe normally again, and to complete a transition to more normal times, we need to leave it alone for a while. Let people spend the cash they already have. Let workers reenter a job market where employers are eagerly awaiting them. Let supply issues that are already being addressed work themselves out. Let’s see if the economy can walk on its own without another dose of the government assistance that’s distorted things so much already.
Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University, a dean emeritus of the Clemson College of Business and Behavioral Sciences, and a former executive director of the Federal Trade Commission.
