A recession by any other name

The Biden administration says two straight quarters of negative GDP is much ado about nothing. Like accusations of Hero’s lost chastity in Shakespeare’s play, Biden’s economy is falsely accused of being in recession, the president’s spokespeople say.

Biden’s defenders in the media concur. The Hill informs us that two straight quarters of negative GDP defines a recession in many countries but, contrary to public opinion, not in the United States. Here, there is no recession until the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee – the “experts” – declare one.

The committee looks at a broad range of economic indicators to determine whether the economy is in recession. While declining GDP is one factor, it is not the only factor. And the chief reason the NBER has not declared a recession, according to the Biden administration and others, is the “red hot jobs market.”

Nobel Laureate Paul Krugman helpfully tweeted a chart showing the relative number of jobs “added” to the economy during the presidencies of Presidents Trump and Biden.

It is true that unemployment is near historic, pre-pandemic lows at 3.6%. And although that doesn’t count the vast number of people who have left the workforce due to retirement or discouragement, the administration can still point to over 2.7 million jobs created in 2022, according to the BLS jobs report.

But arguing there is no recession because new jobs are being created rather misses the point.

Jobs are not an end in itself. The purpose of creating jobs is to produce products. One would only want to create more jobs if it would lead to producing more products. Creating more jobs to produce the same or less products wastes scarce resources.

Just imagine a manager triumphantly reporting to the owner of a company that, although production decreased in the last two quarters, the lower output was accompanied by higher payroll costs. He’d be fired immediately; perhaps referred for a mental health evaluation.

What makes a company profitable is to satisfy demand for its product with as few employees and other costs as possible. The wealth of an economy is no different. As fewer employees are needed to produce each product, more are available to produce others.

Not only does this contribute to greater wealth for the economy as a whole, but it also represents higher worker productivity and thereby higher wages.

This is why tax incentives to corporations tied to the number of jobs they’ll create is economically idiotic. While in most cases, companies will take the tax breaks and only create the jobs they need, leaving the politicians and their constituents to complain the jobs never materialized, it is really the complaining that is erroneous. Had the company created more jobs than necessary to produce its products, it would by definition be wasting resources and thereby making the population poorer in the aggregate.

It is also important to remember that what is produced matters as much as how much. A population does not become wealthier merely because the total amount of goods produced rises. It only becomes wealthier if more of what consumers value is produced.

Value can only be determined if consumers are free to refuse to purchase the increased output. Only by freely choosing whether to purchase at all and at what maximum price can the value of the new output can be determined.

This is why output resulting from government spending is at best of unknown and often of no value whatsoever. Since taxpayers have neither the opportunity to decline to purchase nor to set their own maximum price, there is no mechanism to determine the value of this output.

That government spending, currently at massive levels, is counted in GDP and GDP is still declining accentuates the fact that Americans are getting poorer in the aggregate. Not only are they producing less, but a significant percentage of what they are producing – like missiles sent to Ukraine – provide no value to American consumers.

Government bureaucrats can arbitrarily define the word “recession” any way they wish. But creating less wealth by any other name would smell as foul.

Tom Mullen is the author of It’s the Fed, Stupid and Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty, and the Pursuit of Happiness?