This past week’s kerfuffle over the definition of a recession has been quite revealing, though I think in a way different from what has caused so much back-and-forth. If you’re just catching up to national economic news, back on July 21, the White House published a detailed account of exactly how economists define a recession and who “officially” makes that determination. Though “some maintain that two consecutive quarters of falling real GDP constitute a recession,” the piece noted, “that is neither the official definition nor the way economists evaluate the state of the business cycle.” The President’s Council of Economic Advisers produced its own thread on Twitter to explain the question. Notably, both insisted on the criteria used by the National Bureau of Economic Research, which include, in addition to just GDP numbers, consumer and business spending, incomes, employment numbers, and industrial production.
Edging closer to when GDP numbers would be announced, Treasury Secretary Janet Yellen appeared on Meet The Press on July 24 and conceded that “the common definition of recession is two negative quarters of GDP growth, or at least that's something that's been true in past recessions,” but insisted that when the Bureau of Economic Affairs announced GDP figures, “even if that number is negative, we are not in a recession now.” She even pushed back at suggestions that she was splitting hairs and maintained that “that's not the technical definition” of a recession, closely hewing to the White House’s argument that “most of the data that [we are] look[ing] at right now continues to be strong.”
Before the BEA even made the official GDP announcement on January 28, the White House and CEA’s arguments had already set off a flurry of hot takes, dunking, and spin concerning exactly how much logic chopping about the definition of a recession was appropriate. Press Secretary Karine Jean-Pierre spent a considerable portion of her January 27 briefing pushing back on recession concerns, repeating the preferred criteria, and low-key boasting about how the administration was attempting to help consumers feeling an economic pinch. After all, despite the statistics, many Americans faced significant economic challenges—from inflation to baby formula shortages and beyond—and were not shy in sharing their frustrations all across the internet. Avid consumers of all varieties of commentary on the topic might even have been treated to Instagram “influencers” asking Siri to define “recession” and then lambasting the White House for contradicting the answer. Things got so heated that Wikipedia had to lock its “recession” page from new edits and revisions.
Amid the storm of nonsense, one sane and rational voice, the ever-reliable Phillip Magness, noted in the Wall Street Journal that, technical definitions aside, the danger of playing semantics lurked in stumbling into a real situation the administration might be trying to define away. Over at the American Institute for Economic Research, Magness also aptly noted the eerie parallels between the current obsession about technical economic determinants and a similar attempt by the Nixon administration to quibble about the definition of a recession. The result in 1974 was that GDP continued to slide while other indicators like unemployment remained strong—until they didn’t—and the administration had a deep recession on its hands. But I suppose many today could be forgiven for forgetting that episode from the late summer of 1974—after all, many were not yet alive, and the others may justifiably be distracted by, I don’t know, the bigger mid-1974 headlines about the President’s resignation after the Watergate scandal?
Back to the current scene. As so many expected, the Bureau of Economic Analysis indeed confirmed last week that real gross domestic product decreased for a second consecutive quarter. Since many economists, politicians, and even a fairly famous federal law have defined a recession simply as two consecutive quarters of shrinking GDP, many cried foul and thought the White House’s insistence on the NBER determination was an attempt to draw political cover for tough times. Few, unfortunately, would turn to sober and reputable sources that explain the confusion without inflammatory rhetoric. Instead, Republicans attempted to skewer Biden, Yellen, and others by dragging up old videos of Bill Clinton or Nancy Pelosi defining a recession as “two quarters in a row of negative [GDP] growth.” This, apparently, is what constitutes high intellectual debate in Washington these days—playing endless games of ‘gotcha’ on the internet.
In the wake of the announcement, the game continued apace throughout this past weekend as Federal Reserve officials, Nobel-winning New York Times columnists, and others hit the weekend talk shows to push back. Twitter was aflutter. Key moments included President of the Minneapolis Fed, Neel Kashkari, declaring “whether we are technically in a recession or not, doesn’t change my analysis.” Ever-reliable obfuscator Paul Krugman opined “Jobs are abundant, although maybe the job market is weakening. Inflation is high, though maybe inflation is coming down. What does it matter whether you use the R word or not?” Hmm, ‘maybe’ clear as mud.
Lest the prattle escalate to the boogeyman of the day—misinformation—the fact checkers weighed in to declare the capital ‘T’ truth on the issue. Never far behind in their desire to insert themselves into contentious debates and stay relevant even through controversy, Facebook and Instagram both followed suit and slapped “false” or “misleading” labels on posts that contradicted what their wet-finger-in-the-wind told them was the status quo. Their bumbling, lumbering attempts at being the “good actors” of our information ecosystem sadly keep flailing into caricatures of the “evil political censors” so many accuse them of being. It’s like Zuck is actively trying to disprove Hanlon’s razor but is ironically incompetent to do so.
If you were only paying the issue a glancing attention, you might have formed the impression that a serious debate about technical economic issues was afoot. Alas, instead, everyone collectively played out a story of “The Emperor’s New Body Paint.” The original fable, in its many versions, has always involved deceptive weavers who provide a sovereign with invisible clothes that can only be seen by certain special people. Royal sycophants and hangers-on all praise the beauty of these new garments until a commoner, a child, or some other non-believer points out the utter nakedness of the emperor.
In my adapted version, instead of walking about the city fully nude, the emperor has donned a fancy and colorful “outfit” made entirely of body paint. It is still just as revealing of all the intricacies and folds of the royal body, but now with the semblance of clothes. After all, the body paint artists have used intricate shading and illusion to convey the appearance of clothes on the emperor’s body. When the naif among the citizenry brazenly declares that the emperor is “unclothed,” rather than a swift royal embarrassment and resolution of the story, we’re treated to the population engaging in deep debate. Does unclothed mean “having no clothes” or does it mean “being uncovered by garments of any kind”? Does body paint in the simulation of clothes constitute being “covered”? After all, isn’t paint a “garment” of some kind? What after all are “clothes”? Does it have to be fabric of some kind? But doesn’t the essence of clothing imply that the finer details of one’s body are at least partially obscured? And so on. Instead of reaching a resolution, though, the people of this fable have collectively decided that whoever can be more clever in their game of one-upmanship about how to fashion a definition or to catch their opponents in a contradiction must win. On it goes.
I’ve always taken the lesson of the “Emperor’s New Clothes” fable to be the value of independent judgment and the need to think for oneself. When the emperor in Hans Christian Andersen’s most famous version of the story sends his trustworthy ministers to inspect the garments being produced, each one in turn sees nothing and worries he is a fool, and so cons himself by praising the cloth and reporting on its fineness. Even the emperor himself is ashamed to accept the evidence of his senses that the looms are empty because he fears being declared incompetent by evidence of his inability to see the special fabric. So he doubles down and refuses to recognize his own nudity and evades the obvious fraud committed upon him by the weavers producing imaginary clothes. It is precisely why he triumphantly walks the streets until the child removes the illusion by stating the facts—that he is naked. Andersen’s story ends, you may recall, with the emperor walking on, even more proudly, in complete defiance of the facts.
On inspection, the narrative offers us a small clue about this massive self-delusion. Surely, the craven bows to groupthink and the fear of being found out a fool or a fraud have been a foible of humanity through the ages. But what drives the emperor so fully to embrace the fraud? At the outset of the story, we learn that the emperor has a revealing character flaw that sets him up for the fraud. He was so “exceedingly fond” of new clothes that he not only spent all his money on them, but he also allowed his fondness to consume all his time and effort and to ignore his actual job as emperor. In other words, he allowed his obsession to overwhelm the fundamentals of his situation.
I hope I’ve crafted my adapted version to the same end. But here, instead of the lesson of the fable centering on the emperor and his self-delusion, I think the emphasis is on the public and their inability to focus on the fundamental issue for them—that body painted or not, they have just seen, in close-up detail, all of their emperor’s naked body. Instead of recoiling from such an affront, they busy themselves with arcane arguments about definitions and technical issues regarding what constitutes a garment or what counts as being clothed.
So it goes with the debate about recessions. Substitute here, if you will, the idea that the naked emperor is a stand-in for the glaring, and indeed naked, fact that the United States and its government on a daily basis intervene extensively in the American economy, violate the rights of the American people systematically, exert distortionary and manipulative effects on the simple productive pursuits of average citizens, and attempt to guide and control economic life through a welfare-state economic system.
They are, after all, fairly open about their desire to control and rule over the economy. As Fed Chair Jerome Powell opined: “You tend to take first GDP reports with a grain of salt. The reason is, there are just too many areas of the economy, performing too well. I would point to the labor market in particular.” In other words, job growth and employment—you know, when one person voluntarily agrees to transact with another to exchange wages for labor—is out of sync with the controllers’ desires, so policy will be used to adjust (read: command) those relationships to change. Or as David Leonhart explained in the New York Times, the Fed is “trying to cause a large enough decline in spending to reduce inflation but not such a large decline that companies cut jobs, unemployment rises and the economy falls into a vicious cycle.” In other words, the government-sanctioned central bank is intentionally attempting to cause people to spend less of the money that they earned in their jobs on goods that they desire, but not so much that employers lose out from declining spending such that they have to reduce job offers and employment levels. All of this to match the arbitrary inflation rate and monetary supply chosen, you guessed it, by government bureaucrats.
I ask simply, why is no one shouting like the little child? Why is no one protesting this naked truth? Who will ask: what gives them the right? By what rightful provision of government were government officials granted the power to direct and control our economic lives without our consent and to put us in the position of asking permission to conduct our lives? To dictate to us how much the rate of interest should be, to compel us to accept the swings of malinvestment and distortionary monetary policy that are the hallmark of the Fed, and so on. Morally, what kind of human beings are assumed to live under such a regime? Ones who have fully developed rational faculties, with individual rights to guide their peaceful coexistence in civilized society? Or does such a system assume a different kind of creature? Servile and driven by whim and irrationality, lusting after one indulgence after another and desperately in need of rule by its betters, the anointed masters of macroeconomic tinkering?
So we return to the excessive fondness for new clothes. Today’s debate about capitalism (and more narrow and technical economic questions like whether we are actually in a recession) fizzles into the background while everyone is busy discussing non-fundamentals and demonstrating their excessive fondness for non-essentials.
To return to those fundamentals, we would have to focus on the proper definition of individual rights—what are they, where do they come from, and how do we know, to borrow an apt formulation from Craig Biddle—and their role in limiting government. We would have to ask ourselves, does the government properly have any role in “managing” the ebbs and flows of economic action? For the more economically minded, it would be worthwhile investigating whether such ebbs and flows are a natural consequence of free human choices, or if they are inevitably artificial and driven by intervention. For the historically minded, it might be useful to review whether the performance of the American economy under differing politico-economic conditions through our past might illustrate the value of different approaches. For the philosophically minded, a review of the ultimate fundamentals about the nature of rights and government will be essential. For everyone, though, the lesson from our little parable about naked emperors is well worth heeding—do not be distracted by the non-essentials; always think radically, by driving to the root issues in any question; do not follow the crowd for fear of being thought different, but instead exercise your independent rational mind. For that is the path that will reveal the truth.