The Recession is Official: Where's the Free Lunch?

The official word came today on an economic fact that policymakers have generally known and the American people have certainly felt: The United States has been in a recession for about a year. The National Bureau of Economic Research, the group of seven economists who officially decide such things (it was eight until President elect Obama tapped Christina Romer to chair the CEA) issued a statement today saying that the recession began in December of last year.

As Time's Justin Fox points out, there have not yet been two consecutive quarters of negative GDP growth – a commonly understood metric for a recession – so NBER's panel was careful to explain their rationale.

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.

The committee determined that the decline in economic activity in 2008 met the standard for a recession… All evidence other than the ambiguous movements of the quarterly product-side measure of domestic production confirmed that conclusion. Many of these indicators, including monthly data on the largest component of GDP, consumption, have declined sharply in recent months.

Even before delivery of the official word on the recession, economists on both the left (Krugman, Reich) and the right (Mankiw) have been invoking Keynes so much that the words of Richard Nixon ("We are all Keynesians now") seem an appropriate descriptor for the moment.

While there is some general agreement on the need for a large economic stimulus package, disagreement exists on its ramifications for long-term deficits. Mankiw, primarily, argues that the Fed may have tools left to act creatively, but certainly understands the Keynesian optics and argues for a decentralized stimulus that gives money for infrastructure to states. Krugman and Reich argue convincingly that a free lunch basically exists in this case, as increasing output in the short term will more than overcome the deficits created.

Whatever the disagreements, one thing seems to be indisputable to both sides of the aisle: a stimulus that focuses on spending that spurs the economy now with long term benefits in mind is the best way to go. NDN has been making this argument for months; NDN President Simon Rosenberg and Globalization Initiative Chair Dr. Rob Shapiro went into specific detail on a potential package in "A Stimulus for the Long Run" and Green Project Director Michael Moynihan argued that Clean Infrastructure must be included in such a package.

The incoming Obama administration seems to be on the right track. Rahm Emanuel recently made a statement on a green stimulus, and Obama has signaled a desire to sign a stimulus package into law immediately after his inauguration. Getting the economy back on track will not be easy, but doing it the smart way, by investing in America’s present and future, is the only way to go.

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