Do you remember the dress photo? Was it white with gold stripes or blue with black stripes? People argued about it for weeks. Eventually, the dress debate shifted from, what color is the dress? to, how are people disagreeing on something that should be objective? The recession debate has followed this general path as well. We went from, are we in a recession? to, why are economists not on the same page about this?
I got that dawg in me, so I’ll tackle both questions. Let’s start with the latter.
The Debate Within The Debate
The National Bureau of Economic Research (NBER) is tasked with being our economic weather center of sorts. NBER signals when recessions begin and end. They are not in the business of forecasting, though. How useful is a weather service if they only tell us when it’s already raining? NBER defines a recession as, “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
If we asked a bunch of economists to tell us how we measure a decline in economic activity—give us a set of conditions that must be met—that would yield a surprisingly wide range of answers. You can’t just, “whatever you feel is valid!” a recession. Right?
If you’ve participated in debate competitions, you know the chaos that ensues when opposing sides disagree on how to interpret a key definition. Entire speeches devolve into arguments focused on how one definition is more correct than another—it became such a frequent nuisance that debate leagues incorporated new rules to prevent it, giving the affirmative side authority to define terms during opening speeches. They usually do so with precision.
The recession debate has no such precision. Our starting point is vague, but the general consensus is that a recession is a time of economic downturn. Let’s break that down. What is an economy? A system in which people work together to meet their material wants and needs. Therefore, a time of economic downturn is when people are meeting less of their material wants and needs than usual.
The traditional view asserts that two consecutive quarters of Gross Domestic Product (GDP) decline indicate a recession. The first quarter of 2022 saw a 1.6% decline, and .6% in the second. Technically, a recession. However, things turned around in Q3, we had an annual growth rate of 2.9%. Some people said we were in a recession after Q2, others said not quite.
Using GDP as the sole indicator of a recession is an outdated approach—good macroeconomists use more data points than just one to assess economic wellbeing. So, why doesn’t GDP suffice to tell us how well most people are meeting their material wants and needs anymore? It turns out, our measure of productivity doesn’t tell us about distribution.
The chart visualizes hourly compensation and productivity data from 1948-2021. Until about 1979, wages and productivity increased in tandem. That makes sense, labor produces goods and services, and wages compensate labor. Workers should be paid more if they produce more. After 1979, hourly compensation and productivity began to diverge. From 1979-2021, wages increased at a much lower rate than productivity. What does that mean?
It’s important to understand that the majority of people who live within our economic system are workers—they have to sell their labor to someone else, and buy goods and services with their wages to meet their needs. If productivity goes up more than wages do, the money made off of that productivity is going to someone other than the workers. If prices are going up while wages are stagnant, people can not meet as many of their material wants and needs as they used to (unless they live in a society with extensive and easily accessible social programs—we don’t).
For many years, productivity was a good measure of economic well-being because wages increased and decreased parallel to productivity. If productivity went up, wages went up proportionately, and vice versa. Wages do not fluctuate proportionately with productivity anymore, and therefore if we were to use GDP as an indicator for economic downturns, we would fail to capture the real economic state of the working class—who makeup the majority of people in the U.S. economic system. This has been true for about 40 years.
You may be wondering, why did the great divergence of 1979 occur? Some argue, the increase in productivity is the direct result of rapid technological advancement (namely, the computer) and technological advancements are somehow disconnected from labor. I would argue the two are irreversibly intertwined. The additional education and skill required to develop and utilize such technologies suggests labor should be compensated proportionately. Any productivity gains from technological advancement can be credited to additional labor input(s), and therefore workers should receive their fair share of revenue. In summary: it is all labor. Always has been.
The technological advancement argument holds no water for me, it’s an excuse for the divergence, not a real reason. So, what is the real reason? Monopoly capitalism! In regard to technological advancement, we have the problem of intellectual property theft by bosses—workers sign over the rights to any inventions they create in exchange for employment. Not exactly a fair trade. Major tech corporations take patent rights from their workers, and profit from the use and sale of their inventions.
There’s also the problem of wage theft. Workers are often not paid for all of their time spent laboring. The more firms get away with this, the more common it becomes. Then, we have classic labor exploitation—workers being paid less than the value their labor is worth. The consolidation of corporate power has worsened exploitation on all fronts. When corporations control significant proportions of a given industry, they have undue power to raise prices, set wages, determine standard practices, etc.
Price setting power is important to consider here. Productivity is typically calculated by summing the dollar value of the total goods and services sold in an economy. Productivity can go up without any increase in the quality or quantity of goods and services sold. Corporations can simply raise prices, and with this measurement, it is technically a productivity increase. If that pisses you off, I think it should.
Thanks to price increases and stagnant wages over the last 50+ years, the average American has enjoyed 0 growth in purchasing power. That’s right, zero. Inflation-adjusted wages are literally stagnant, see the chart below.
Regardless of why the divergence in wages and productivity occurred, it is clear that it did. Changes in productivity no longer directly translate to changes in wages. It follows that if an economist still thinks GDP should be the indicator of economic wellbeing, they care about returns to shareholders more than workers.
Again, the reason the debate regarding the recession is so divided is because people have different views of what an economic downturn really is. Some people think the economy is good when we are producing a bunch of stuff that sells for more dollars, others think the economy is good when people are meeting their material needs well.
A fascinating explanation by vision scientist Pascal Wallisch outlines why people saw the dress differently. In 2017, he wrote: “Up until early 2015, a close reading of the literature could suggest that the entire field had gone somewhat stale—we thought we basically knew how color vision worked, more or less.” This all changed with—I’m not even kidding—the dress.
Before I studied economics I thought very smart people who are talented mathematicians at our fanciest institutions had all of this stuff figured out. Wrong. Hopefully, the current recession debate changes our approach to fiscal and monetary policy, and how we analyze economic activity generally. Wishful thinking?
When economists have debates like this one, I’m reminded that most of them don’t have sociological training. The economy is a social system, so it’s glaringly obvious when economists ignore that fact. Unfortunately, the study of economics is often abstracted away from the actual economy.
Still, I disagree with the criticism that economists treat the field like a hard science. That’s too generous. That would imply the scientific method is used to test assumptions before they are widely accepted. No such rigor is standard. That would be nice. All too often, theories dominate discourse for decades despite having no data to support their validity, models based on these theories inform policy, and policy outcomes are measured with firms in mind rather than the majority of the population living within a given economy. This is true from the Phillips Curve and NAIRU, to the prediction, diagnoses, and handling of recessions.
A debate like this one exposes the cracks. It’s not just about accuracy in quantitative assessment and predictions, it’s also about morality. To put it gently, I think anyone who believes we should judge the quality of a social system based on how well it works for 1% of the people living within the system, are at best ignorant and at worst cruel.
Since the economy is a social system, there are no independent observers, every person analyzing it also participates in it. No matter how impartial you think you are, your perspective is influenced by your own experience and position. Finances are tight for most households in the United States, but if you don’t live in one of those households, you might not look at data that would reflect that. An assessment that we aren’t in a recession ignores this reality, even if unintentionally.
Unfortunately, the majority of people who write economic analysis are members of the aforementioned 1%, aspire to be, and/or are funded by them. Considering the majority of participants in the economy are workers, people who are best equipped to analyze the state of our economy have experienced what it’s like to be a worker. My favorite sports analysts were athletes themselves.
So… Are We In A Recession?
It is important to acknowledge that the baseline economic conditions in the United States are unacceptable, still, I would argue things are worse than usual right now. If a period of economic downturn only negatively affects the working class, is it still a recession? Of course it is. You can steal all of the umbrellas and tell the workers it isn’t raining.
Record price increases and stagnant wages have been the recipe for harder than usual economic times. At the end of 2021, the inflation rate was at about 7%. The most common figure cited in the news when inflation is reported is the Consumer Price Index (CPI). CPI is a measure of price changes over time. A lot of people confuse inflation with hyperinflation. Hyperinflation would mean the dollar is losing comprehensive value, prices for every good and service would be going up, and the dollar is losing purchasing power globally, we are not experiencing hyperinflation.
Some people will say, “we created too many dollars.” We don’t have a gold-backed currency, creating more dollars does not mean every dollar in existence is immediately worth less. That’s not how it works. It’s possible to print too much money, but the economic data tells a different story.
A big source of this misunderstanding, is many people having no clue how inflation is calculated. The Federal Reserve chairman doesn’t have a precise tool like a thermometer that they stick into the economy, read back the answer, and report out to the public. To calculate CPI, they run surveys to households, asking people what they bought, how much of it they bought, and at what price. They take an average market basket of goods—a typical household’s purchases in a month—and measure the change in price over time (usually month to month).
Another common misunderstanding is a bit of a chicken or the egg situation. Some folks think that corporations have no choice but to raise prices during inflationary periods. The Fed reads out the magic number from their magic thermometer, and prices magically are up 7%. Not how it works. Price changes come first. People at corporations and businesses set prices. There are real human beings making these decisions—to raise prices and for how much. They can do it just because they feel like it!
Look at this chart, keeping in mind: 1) inflation is a measure of price increases, and 2) there are real people at corporations who decide to raise prices.
Labor costs (wages or salary and benefits paid out to workers) contributed to about 62% of growth in unit prices from 1979-2019 on average. In simpler terms, when prices went up during these years 62% of that money went to pay workers. From 2020-2021, labor costs contributed to a measly 7.9% of price increases. From the beginning of the pandemic to now, prices went up a lot, and only about 8% of that money went to workers.
Pandemic-related supply chain breakdowns led to increased production costs. That is reflected in the data, but it doesn’t explain everything, not even the majority of price increases. Non-labor input costs—rent, materials, shipping, tools, etc. all of the stuff that would go up in price due to supply chain breakdowns—contributed to only 38.3% of overall price increases from 2020-2021.
The remaining variable that explains the 53.9% growth in unit prices 2020-2021: profit. In simple terms, about 54% of the money made from price increases during the pandemic went to profit. If they were just raising prices to deal with additional costs due to supply chain breakdowns and shortages, they wouldn’t have all of this extra revenue. Compare this to the 11% profit contributed to price increases 1979-2019. The data tells the story for us. They did it to amass more money. The cries of inflation were used as a cover for their greed, while they caused inflation.
Workers are being squeezed from both sides. Prices are extraordinarily high, and wages are not increasing proportionately. People are working 40+ hours per week and can’t afford to meet their most basic needs. We could collect and analyze data that clearly assess this, but the alphabet soup of economic organizations in the United States hasn’t prioritized it. It wouldn’t be hard, considering the extensiveness of economic data collected and analyzed to calculate CPI. You’d think they could add a simple question at the end: are you making enough money to meet all of your needs?
Instead, we have to look at a range of less-direct economic indicators. Beyond what I already shared, there are a few key data points that signal most people are doing worse than usual economically right now. Shifts in consumer behavior are a major indicator of that. CEO of Walmart, Doug McMillon, reported higher-income earners are increasingly shopping at Walmart. Doug suspects inflation caused customers to find a store with lower prices than their usual destination(s).
There aren’t many stores offering lower prices than Walmart, so they’re not losing low-income customers, either, Doug confirms: “I think we are holding at the lower end and adding at the upper end, generally speaking.” Doug’s buddy, John David Rainey, the CFO of Walmart, offered more insight, explaining that their regular shoppers are cutting back. Lower-income shoppers are making trade-offs to purchase more affordable goods, and, "biasing spending toward everyday essentials." Fox Business reported John said this during Walmarts monthly earnings call in December.
Doug is banking on this trend continuing, he said to Fox Business. “We certainly hope to hold shares around the world, and I think this inflationary environment is going to last for a while, so people are going to be value conscious, which plays to our strengths." CEOs have a big job in our economy, they direct how our resources and labor are used. They are our unelected economic decision makers—and they like inflation.
John and Doug are doing well, but for the rest of us, the rent is too damn high. An analysis published in Redfin shows median rent in the US surpassed $2,000 for the first time in May. Rent inflation outpaced the overall inflation rate of 9.1%, reaching 14% year over year in June 2022.
The Federal Reserve’s rate hikes have made buying a home more expensive. When the Fed raises rates, they make it more costly for banks to obtain money. Then, banks make it more expensive for those seeking loans to borrow money. It’s understood to be a causal relationship—when the Fed raises interest rates, mortgage rates go up.
When mortgage rates are high, less people buy homes. In December 2022, existing home sales retreated for the sixth consecutive month, down 34% year over year. Would-be home buyers have entered the rental market thanks to how expensive it’s become to purchase a house. When more people are driven into the rental market, landlords take advantage of the increased demand, and raise rents.
The consequence of housing inflation is more people experiencing homelessness. Shelters have reported waitlists doubling and tripling in size. Not all cities closely track their homeless population, so shelter waitlists serve as a decent proxy. Cities that do, like Durham, NC, have reported 30% increases year over year this winter.
Still, reports about flights reaching pre-pandemic levels have led news hosts to say things like: “How can we be in a recession? It feels like everyone is on a European vacation!’ Perhaps her neighbors and friends were. It appears the upper class is doing alright, while the working class takes the hit. Apparently, a lot of us are in recession, while some of us are in recess.
A big reason economists don’t like forecasting recessions is because they worry about manifesting a recession. Not in a spiritual way. If people think a recession is coming, they tend to spend less. They save for the forecasted rainy days ahead. This decline in spending can cause a recession. Here’s the thing: consumer confidence is already down. It is not likely down right now because there’s talk of a recession. It is likely down because high prices and low wages don’t exactly scream, “great time for a shopping spree.”
When an economic system begins to collapse the moment people stop spending on excess goods, it becomes clear it is flawed by design. Moreover, when the majority of firms decide that a decline in revenue should result in price increases and a reduction in wages and benefits for workers before a cut into profits, it is clear that this arrangement is not working for the workers.
Things are turning around a little bit, we’ve seen some wage growth, and inflation cooling down a bit. Unfortunately, if we don’t get our act together when it comes to fiscal and monetary policy, things may get worse in the near future.
Economists that see through an MMT lens will remind everyone: a huge factor in economic growth and stability is a well-managed money supply. You hear people say this all the time, “you need money to make money.” You must pay workers, buy tools, purchase materials, rent land, etc. To put productive capacity to use, you need money. So, it follows that a rapid plunge in the money supply can curb growth and plunge economic activity. Stephanie Kelton writes about this quite often.
Wynne Godley put it this way, there are three possible sources for an increase in the money supply:
The Private Sector
The Public Sector (US Government)
The Foreign Sector
The money has to come from somewhere. For any sector to be in surplus, another has to be in deficit. When the national deficit increases, the private sector is in surplus. The national deficit is a record of dollars that have been created but not taxed back out of the economy. Unlike the private sector, the federal government issues the currency and will never run out of its own money.
Not everybody sees it that way. The sticker shock surrounding the American Rescue Plan and Inflation Reduction Act distracted people from the fact that the IRS had a record collection year. We’ve actually been in a period of tightening. The deficit fell $1.2 Trillion in 2022 (from $2.6T to $1.4T). The Biden Administration has been bragging about this non-stop, very cringe in my opinion. Stephanie Kelton warns us that reducing the public sector deficit too much can drive the private sector (households and businesses) into deficit—a condition that has led to recessions in the past.
If we don’t have enough dollars in the economy to mobilize our productive capacity, we operate below our maximum potential, and sometimes below baseline. Raising interests rates accelerates this decline—it makes it more expensive for people to start businesses and invest in businesses, which results in less growth and increased unemployment. What’s going on with monetary and fiscal policy right now suggests things will likely get worse before they get better. The looming “debt ceiling” situation insists that present trends will likely continue, unless the administration shifts their approach.
Still, corporations and the wealthy taking such a big piece of the pie is the main reason most people are struggling. It’s like a big game of chicken. They keep refusing to raise wages while they increase prices and cut employees to maximize profits. Workers are the consumers. If you don’t pay them more, who do you expect to buy your product? Chicken doesn’t always end in a chicken. I don’t think anybody is going to swerve here. There will be a collision. Workers will realize it’s not worth it to show up to work anymore under these conditions.
Let’s reflect on the dress situation some more. I’m not taking the analogy too far, I swear. It’s literally perfect.
Read this quote from Wallisch’s article about the dress:
Even outside of vision scientists, most people just assume everyone sees the world in the same way. Which is why it’s awkward when disagreements arise—it suggests one party either is ignorant, is malicious, has an agenda, or is crazy. We believe what we see with our own eyes more than almost anything else, which may explain the feuds that occurred when “the dress” first struck and science lacked a clear explanation for what was happening.
I could literally change a few words, and it holds:
Even outside of economists, most people just assume everyone sees the economy in the same way. Which is why it’s awkward when disagreements arise—it suggests one party either is ignorant, is malicious, has an agenda, or is crazy. We believe what we see with our own eyes more than almost anything else, which may explain the feuds that occurred when “the recession” first struck and economists lacked a clear explanation for what was happening.
Fuck. I love a good analogy.
More from Wallisch:
The brain cannot be accused of epistemic modesty. It is well-known that in situations like this—where it faces profound uncertainty—it confidently fills in the gaps in knowledge by making assumptions.
Come on! Are you kidding me?
Just changing a few words:
Neoliberal economists cannot be accused of epistemic modesty. It is well-known that in situations like this—where they face profound uncertainty—they confidently fill in the gaps in knowledge by making assumptions.
This is where it gets really really good.
Wallisch outlines why people see the dress differently:
As the illumination conditions are impossible to clearly assess in the dress image, people make assumptions about what they are.... My research showed that if you assumed the dress was in a shadow, you were much more likely to see it as white and gold. Why? Because shadows overrepresent blue light. Mentally subtracting short-wavelength light (which would appear blue-ish) from an image will make it look yellow-ish. Natural light has a similar effect—people who thought it was illuminated by natural light were also more likely to see it as white and gold. Why? Because the sky is blue, daylight also overrepresents short wavelengths, compared with relatively long-wavelength artificial (until recently, usually incandescent) light. Just as mentally subtracting blue light leaves the image looking more yellow, mentally subtracting yellow light from an image leaves an image looking more blue, which is what I found empirically. Now, why would some people assume one set of lighting conditions and others a different one? That probably depends on the viewing history of the individual observer.
Why do people answer the recession question differently? We all have a different viewing history. We have studied economics from different perspectives, some never being exposed to a worker’s perspective. Many economists have never had to sell their labor to survive, a reality for the majority of people living within the economic system. I think that’s why they have so many blindspots. They, “confidently fill in the gaps in knowledge by making assumptions.”
Naturally, when we are exposed to narratives that don’t hold up against our experiences—the evidence in our everyday lives—we seek different answers. You seek out an article by a vision scientist who can explain why we see the dress differently, and you search up what the actual color of the dress in real life.
The dress was posted to Facebook by the mother of a bride in advance of a wedding in Colonsay, Scotland. Everyone on the island, and the internet, was talking about this dress. Imagine being the bride and more people get more excited to see your mother’s dress on your wedding day? That’s probably how Larry Summers feels about MMT. The dress was photographed by attendees, it turns out, the dress is blue and black.
I really liked this piece. The framing of recessionary conditions in real terms (i.e. standard of living changes) rather than in terms of GDP, which feels obvious now that I type it out but has eluded me as I watched and read orthodox economists talking about it for the past year and change, was super helpful. As a fellow enjoyer of a good analogy, I can't believe how well the dress thing tracks with this line of thinking. The only thing I'd ask for going forward is a list of sources to do some further reading -- in particular from this piece I'm interested in where you got the EPI graphs about productivity and unit-price growth. Keep up the good work though, looking forward to reading more.