The Recession Myth

I am not an economist, nor do I pretend to have a crystal ball, but I am tired of hearing about the unavoidable recession when we have yet to have a single month of declining GDP.  It is frustrating to me than many public figures and media outlets can say essentially whatever they want without accountability for their positions.  We saw this in the Duke LAX case, the Iraq War, and, I believe, with regard to the US economy.  We very well may face a slight recession in the future, but I am tired of all this "the sky is falling" nonsense that preys on the ignorance and read of the reader/listner/watcher.

The 'Recession' Is a Media Myth

Tuesday , April 01, 2008
By John R. Lott, Jr.

During the 2000 election, with Bill Clinton as president, the economy was viewed through rose-colored glasses. According to polls, voters didn’t realize that the country was in a recession. Although the economy started shrinking in July 2000, most Americans through the entire year thought that the economy was fine.

But over the last half-year, the media and politicians have said we were in a recession even while the economy was still growing.

Gas prices are going up. The economy is slowing. Talk of recession is seemingly everywhere. While the majority of people rate their personal finances positively, consumer confidence in the economy has plunged to a 16-year low, well below what it was during the last year of the Clinton administration when we were in a recession.

A Nexis search on news stories during the three-month period from July 2000 through September 2000 using the keywords “economy recession US” produces 1,388. By contrast, the same search over just the last month finds 3,166. Or, even more telling, take the three months from July through September last year, when the GDP was growing at a phenomenal 4.9 percent. The same type of Google search shows 2,475 news stories.

Over 78 percent more negative news stories discussed a recession when the economy under a Republican was soaring than occurred under a Democrat when the economy was shrinking.

A little perspective on the economy would be helpful. The average unemployment rate during President Clinton was 5.2 percent. The average under President George W. Bush is just slightly below 5.2. The current unemployment rate is4.8 percent, almost half a percentage point lower than these averages.

The average inflation rate under Clinton was 2.6 percent, under Bush it is 2.7 percent. Indeed, one has to go back to the Kennedy administration to find a lower average rate. True the inflation rate over the last year has gone up to 4 percent, but that is still lower than the average inflation rate under all the presidents from Nixon through Bush’s father.

Gas prices are indeed up 33 percent over the last year, but to get an average of 4 percent means that lots of other prices must have stayed the same or gone down. On other fronts, seasonally adjusted civilian employment is 650,000 people greater than it was a year ago. Personal income grew at a strong half of one percent in just February.

Despite all that, this last week, Barack Obama proclaimed “As most experts know, our economy is in a recession.” Hillary Clinton made similar statements last fall. Yet, as any economist knows, a recession is two consecutive quarters of negative growth, and we haven’t even had one single quarter of negative growth reported. The economy slowed down significantly during the end of last year, but that was after a sizzling annual GDP growth rate of 4.9 percent in the third quarter.

Housing has obviously been a big drag on the economy, but many other sectors of the economy, such as exports, have been doing well, some extremely well. For example, aerospace exports increased by over 13 percent last year.

The media’s focus on the negative side of everything surely helps explain people’s pessimism. In a recent interview Fox’s Neil Cavuto claimed this bias “is all part of the media’s plan to get a Democrat in the White House.” I am not sure that this is a fair assertion.  While the media may have a political 
bias, their first and foremost task is to sell their product.  I think the pessimism 
is driven by the fact that sensationalism sells, not necessarily a desire for
Democratic leadership.

Indeed, research has indicated that media bias is real. Kevin Hassett and I looked at 12,620 newspaper and wire service headlines from 1985 through 2004 for stories on the release of official government releasing numbers on the unemployment rate, number of people employed, gross domestic product (GDP), retail sales, and durable goods.

Even after accounting for how well the economy was doing (e.g., what the unemployment rate was and whether it was going up or down), there was still a big difference in how positive or negative the headlines were. Democratic presidents got about 15 percent more positive headlines than Republicans for the same economic news.

Yet, the hysteria created by this coverage can have another cost. It creates pressure for government to “do something,” even if that rush to do something actually ends up hurting the economy.  See the earlier post today for more on this subject. For example, Obama's promises last week “to amend our bankruptcy laws so families aren't forced to stick to the terms of a home loan” will only further drive down the value of mortgage-backed securities, making any unstable financial institutions that hold them even more likely to fail. In the long term, who is going to want to loan money when the contract can be rewritten at a later date?  

The news media have generated a lot of fear. Ben Stein has a point when he says “The actual economic conditions are not that bad. I think if we have a recession, if we have a serious recession, a great deal will lie at the media’s feet.” Hopefully a little perspective will enter the picture before even more harm is done.