February 18, 2005,
A persistent growl from the bear camp two years ago was that the U.S. economy was headed for a “double-dip recession,” meaning the economy was in danger of sliding back into a period of negative growth after having climbed out of it. I respect Stephen Roach, the Wall Street economist who popularized this idea (he was one of the few who forecast the 2001 recession). Yet the double-dip argument was always weak, although that hasn’t stopped partisan, and even some non-partisan, economists from giving it considerable attention.
Here’s a sampling. In July 2002, The Christian Science Monitor cautioned: “Rumbles of double-dip recession: Trillions in stock-market losses and sagging consumer confidence threaten to repeat a pattern last seen in 1981.” CNN/Money fussed in August of that year, “Watch out for the Double-Dip: The economy has hit an air pocket and some fear the worst.” Not to be outdone, The New York Times fretted in July 2002, “Is Economic Double Dip Lurking on the Horizon?” The double-dip gave partisans one more excuse to attack the Bust tax cuts. In September 2002, then-Senate Minority Leader Tom Daschle confirmed that “There is a real possibility for a double-dip recession.”
What gave some economists heartburn at the time? Brief, slower annualized real growth of gross domestic product in 2002, and fears of an “exogenous shock” to the economy.
Today it is clear that there was no double-dip. The 2001 recession started in March and ended in November, according to the National Bureau of Economic Research (NBER) the official business-cycle umpire. Fears about exogenous economic shocks and lagging real GDP it has grown each quarter since the third quarter of 2001 were exaggerated.
Some of us argued in 2002 that the recession had ended. NRO economics editor Larry Kudlow spoke for many bulls in May 2002 when he said, “On Wall Street today, there are too many doomsayers who believe a double-dip recession is on the way.”
Well, the doomsayers were once again wrong: The Bush expansion is now in its fourth year. In March it enters its fortieth month. That’s longer than five other postwar expansions (1945-48, 1954-57, 1958-60, 1970-73, and 1980-81). Key indicators outside of GDP have also expanded, including the Fed’s industrial production index, which measures the physical output of the nation’s factories, mines, and utilities. Industrial production reached its trough during the month the 2001 recession ended. Double-dippers ignored it at their peril.
Any review of historical industrial production data, important in the NBER’s business-cycle chronology, casts doubt on the double-dip scenario. Double-dippers argue that the economy contracts in primary and secondary movements with a period of growth in between. (Imagine the letter “W” on a chart, which partisans have called the “Dubya pattern.”) However, if you examine industrial production during recent recessions you will find the opposite: largely sequential declines and troughs near coincident to NBER turning points. Industrial production peaked in mid-2000, suggesting recession. But its growth in early 2002 suggested a double-dip was unlikely.
Partisans embraced the double-dip to attack tax cuts. Nonpartisan economists who grabbed onto the idea likely lacked a familiarity with capital-based cyclical analysis. IMF economist Stefan E. Oppers, who gets it right, penned a helpful 2002 introduction that cited “capital-based” ideas. Against Keynes, capital-based economists argue that “intervention by the monetary authorities [is] the ultimate source of recession.” (One way to appreciate capital-based analysis outside the classroom is to work in the American Heartland where “heavy industries” produce durable goods like motor vehicles.)
Capital-based analysis was a central argument for great cyclical theorists like Friedrich Hayek, who was cited in Oppers paper. In the thinking of economists like Hayek, the seeds of recession are sown when monetary authorities mistakenly set short rates below the natural, or market, interest rate during an expansion, causing malinvestments that appear first in heavy industries. This capital-based analysis is endogenous, where exogenous theories rely on factors like the external shocks of an oil-price hike or negative geopolitical events such as those in hot spots like the Middle East. Double-dip theorists hang out in the latter camp.
Arguments about exogenous versus endogenous cyclical theories are a sort of inside baseball to economists. But as the economy continues to expand the double-dip scenario is a reminder that seemingly obscure economic debates can sometimes be hijacked for other purposes like talking down tax cuts.
Greg Kaza is executive director of the Arkansas Policy Foundation, an economic research organization based in Little Rock.