How a telephone executive and a socialist economist teamed up to create an organization that decides if we’re in a recession
The debate on Wall Street and Main Street over how to properly define a recession rages on – and both sides are stubborn.
Some say that a recession occurs when the gross domestic product (GDP) of the United States contracts for two consecutive quarters, and the strength of the labor market or what the experts say is irrelevant.
By that definition, Thursday’s release by the Bureau of Economic Analysis of second-quarter GDP data could decide whether the U.S. economy is in recession, after reporting a drop in GDP in the first quarter.
But most economists and investment banks say the economy isn’t in a real recession until the nonprofit National Bureau of Economic Research (NBER) declares one. Until recently, the century-old organization remained mostly under the radar, but with recession forecasts raining down like a hurricane, it is now in the spotlight.
The creation of the NBER
The origins of the NBER go back to the meeting of two unlikely friends, Malcolm Rorty, the chief statistician of the American Telephone and Telegraph Company (AT&T), and Nachum Stone, a socialist trade unionist with a doctorate. in Economics from Columbia University.
Rorty was famous for his ultra-conservative views and his laissez-faire approach to business during the pre-World War I era. Stone, on the other hand, was known for pushing for a fair distribution of wealth and an economy “more in line with contemporary social ideals”.
In Wesley C. Mitchell’s 1945 book, The first quarter century of the National Office, Stone wrote a chapter detailing the birth of the NBER and Rorty’s role in founding it. In the book, Stone recounts how he first met Rorty when the two joust as opposing advisers at the hearings of the New York State Factory Investigative Committee and the New York State Unemployment Committee. New York City in 1915.
It wasn’t exactly love at first sight.
“In advocating the acceleration of as many public works projects as the city could undertake as an alternative or supplement to public soup kitchens, I again clashed with Rorty. He formed a definitive impression of me as a dangerous radical,” Stone wrote of their first meeting.
About a year later, however, the relationship began to improve after Stone wrote an article in the Intercollegiate Socialistan economics journal for students, in which he questions an economist’s article on the distribution of national income.
Rorty, expecting a “fiery rant about the unjust distribution of income under capitalism”, was impressed by Stone’s objective approach to the article. It gave him “a new perspective on the dangerous radical” Stone.
“This was followed by several conferences which culminated in a warm friendship, although we continued to differ strongly on many public issues,” Stone wrote.
During a working lunch, Stone said Rorty made the following profound statement, which is at the heart of what the NBER is doing today:
“Here we are looking at a most important question which profoundly affects the life of every man, woman and child in this country, and despite a great deal of statistical data, there is no agreement… Wouldn’t it be a big step forward if we had an organization dedicated to finding the facts on controversial economic topics of great public interest?”
Stone agreed, and the two sought to find “well-known economists representing all schools of economic thought, from the extreme conservative to the extreme radical”, and formed the NBER. They eventually recruited Columbia professor Wesley Clair Mitchell, a leader in the study and measurement of economic fluctuations who became NBER’s first director of research, a position he held for 25 years.
Rorty and Stone also received support from the Carnegie Foundation and the Laura Spellman Rockefeller Foundation, helping them reach their goal of $10,000 to fund the NBER. The organization held its first meeting on May 7, 1920.
Claudia Goldin, economic historian and Henry Lee Professor of Economics at Harvard University, said Fortune that the creation of the NBER “laid the statistical foundation” of the American economy.
“It played an extremely important role,” she said. “It is quite amazing that this non-partisan organization is bound and takes it upon itself to raise the standards by which we measure the economy.”
The NBER has developed statistical data to measure gross national income, gross national product, money supply, and other key economic measures. Before that, economists were “flying in the clouds” without enough information to accurately gauge the health of the U.S. economy, Goldin said.
As Solomon Fabrication, former vice president of research at NBER, wrote in a 1984 essay: “Few daily newspaper readers know how often the reports they see on the economic situation owe something to the work of a private non-profit organization. established over 60 years ago.
Who decides if we are in a recession?
All of this brings us back to the question: who decides if we are in a recession?
There is no official governing body that decides whether the United States is in a recession. Instead, most people turn to the National Bureau of Economic Research. Specifically, the organization’s bipartisan Business Cycle Dating Committee, which includes eight of America’s most respected economists, has declared the beginning and end of business cycles since 1978.
The committee defines a recession not as a specific contraction in GDP, but as “a significant decline in economic activity that spreads throughout the economy and lasts for more than a few months.” It examines indicators such as changes in non-farm wage employment, personal expenditure and industrial production.
Then, it uses three key criteria – depth, spread and duration – to determine whether these indicators illustrate a real recession. If these are not met, then even if GDP contracts, it does not consider the United States to be in recession.
Since its inception, the Business Cycle Dating Committee has been chaired by Robert Hall, an applied economist from Stanford University. Current members include the following economists: Robert J. Gordon, Northwestern University; James Poterba, of MIT; Valerie Ramey, University of California, San Diego; Christina Romer, University of California, Berkeley; David Romer, also from the University of California, Berkeley; James Stock, of Harvard University; and Mark W. Watson of Princeton University.
While the debate over what defines a recession will likely persist as soaring inflation continues to hit consumers and economic productivity. For most experts, a little-known nonprofit will ultimately settle the argument.
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