A Recession Is Necessary, Though Unwelcome
By Eugene Ralph, Jr. - August 18, 2022

Recession is finally arrived, and if messaging from the executive branch is any indication, it hasn’t been a surprise. The White House preempted the release of second quarter GDP estimates in a blog post cautioning that “two consecutive quarters of falling real GDP” is neither an official definition of recession nor the primary mechanism by which experts diagnose the economy’s health. Media figures ranging from L.A. Times writers to Wikipedia editors soon joined an all-hands campaign to push a single message: GDP cannot singularly signal a recession. As broken clocks are apt, these writers are technically correct — if not entirely honest.

Gross Domestic Product is a flawed metric, distorted in its nature. As defined by the OECD, GDP is the total value of all goods and services sold in a country during a certain period. In short, it measures consumption — irrespective of whether the consumer is an individual or an entity. And as consumers go, governments — in contrast to their eternally belt-ratcheting citizenry — are notoriously spendthrift. While inflation-weary consumers drained their savings and shifted all their discretionary dollars toward budget goods and necessities to survive the pandemic, the federal government’s contributions to GDP only grew. The U.S. government was responsible for nearly 30% of all spending in 2021.

Trying to diagnose a nation’s economic prospects by its consumption is a dubious enough proposition; to attempt the same without excluding the balance sheets of wildly intemperate government agencies yields results as sure as measurements made with an elastic ruler. The measurements are always wrong; they are also always inflated.

That doesn’t mean the White House is right to avoid acknowledging our current economic predicament. After periods of high inflation, recessions are necessary to eliminate noise and restore clear market signals — a prerequisite for sustainable, steady growth.

It’s like former-Treasury Secretary Larry Summers said in a recent interview in Barron’s: “When you have unemployment below 4% and inflation above 4%, recession always follows within two years.”

Don’t get me wrong, recessions are ruinous events. Wherever they settle, businesses close, asset prices correct, playing havoc with the market, and unemployment often rises. But those are just the visible results of bad economic bets going bust. The same period of upheaval will see capital released to more productive enterprises — allowing for greater employment, more predictable  fluctuations in asset prices and an economic foundation to foster long term prosperity. For the long-term health of our nation, we need a recession.

Whatever jubilees or struggles are anticipated in the coming years, duty binds the government to issue honest guidance to the people — especially as they must navigate a crisis of the State’s own creation. While an incumbent party is clearly incentivized to downplay any bad news for back pocket bulge, guiding the country through this period of renewal is one of only a few true moral imperatives for the Executive Branch.

Policymakers have a brief period to disseminate realistic forecasts for the economy through the end of year — which would likely signal strong headwinds in the near term for American households. Rather than propagandizing against Americans’ felt reality, the administration should provide candid messaging about the nature of coming struggles and how to withstand them.

Eugene Ralph, Jr. is an economics student from Dallas working in construction management. Follow him on Twitter: @eralphjr

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