This week, EJ Antoni, a research fellow in Heritage’s Center for Data Analysis explains exactly what marks a recession and more importantly—looking beyond politics and definitions—what everyday Americans should expect now that the recession is official.
Michelle Cordero: From The Heritage Foundation, I’m Michelle Cordero. And this is Heritage Explains. Last week, the Bureau of Economic Analysis reported what we already knew. Biden's economy is in bad shape and we are officially in a recession.
Clip: Here we go. What a day. Moments ago, U.S. economy shrinking for the second straight quarter. That means a recession is well underway.
Clip: From the White House tonight, what is a recession? Does it matter? And why the President is denying something a majority of Americans say is happening? Today, the GDP numbers came out for the second straight quarter. The economy contracted. In other words, GDP growth was negative. That by almost every conventional definition is a recession. That's how it looks right now. In other words, the data supports what you are feeling about your money in a word: uncertain. In three words, uncertain and probably a little bit scared.
President Joe Biden: There’s going to be a lot of chatter today on Wall Street and among pundits about whether we are in a recession. But if you look at our job market, consumer spending, business investment, we see signs of economic progress in the second quarter as well.
Tucker Carlson: That’s unbelievable. And I’m asking you, I know you're an economist, I’m asking you a political question, but very quickly, wouldn't it be smarter for the White House to say, look, we know how bad it is and we're doing everything we can to help you? Why do they persist in telling us something we know isn't true?
EJ Antoni: Well, Tucker, I think it speaks to the aloofness and how disconnected these people are from reality and from the everyday conditions that the average American family has to deal with. For example, these people don't worry about the price of food. They don't even cook their own food. They don't worry about the price of gasoline because they don't have to fill up their chauffeured vehicle that the taxpayers are paying for. They are completely disconnected from the average man.
Cordero: That last clip was Tucker Carlson on Fox News with our guests today, EJ Antoni, a research fellow for regional economics in Heritage’s Center for Data Analysis. And Antoni’s going to quickly chat with us about what exactly marks a recession. And more importantly, looking beyond politics and definitions, we’ll focus on explaining what everyday Americans who make their own food and pump their own gas should expect now that the recession is official. Our conversation is up next.
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Cordero: EJ, thank you so much for joining us.
EJ Antoni: My pleasure. Thank you for having me.
Cordero: Okay. So I want to talk to you today about the recession, but at a 101 level. So let's start at the beginning. There's been a lot of chatter around this question lately. What is a recession or should I say, how does an economy mark a recession?
Antoni: Sure. Well, what a recession is essentially is just when the economy is shrinking instead of growing. So over time, we want that pie to grow. And whether or not you have more people, ideally you do have more people, but whether you do or not, you have a bigger pie that you can divide among all those people. In other words, people are going to be better off. We're literally going to have more stuff that everyone can can share in this economy. So when we have a recession, we have exactly the opposite of that. The pie is shrinking, which isn't good because now we have less stuff and you may think, okay, well, so what? Stop being so greedy. I'm not just talking about luxury items like yachts, I'm talking things like medicine, food, energy, things that we need to survive. This is not simply a matter of people being better off, like the wealthy getting to do things they want to do. This is about a higher standard of living, a better quality of life and longer lives for the average American.
Antoni: So when we're talking about recession, it's not a fun topic. It's nothing good. And it literally is just the economy shrinking. In terms of how we define it or what marks a recession, the basic understanding is that when the economy shrinks for two consecutive quarters, so three months, and then another three months, that's a recession. The reason that the White House has been making a lot of hay of, oh, that's not official definition, blah, blah, blah. Okay. I suppose there is no technical official definition, but I've taught plenty of economics courses. That was what we used in every single class. That's what you'll see in most, if not all economics textbooks. That's been the understanding for the last 100 years. So the idea that this is somehow new or not true, I dismiss that out of hand.
Antoni: I went back and I looked at every single time GDP was negative for two quarters, every time the economy shrank for two quarters, consecutive quarters, since World War II and every single one of those is today considered a recession. You do have an organization called the National Bureau of Economic Research, NBER. And what they will do is they will look back at the data, sometimes a year after the fact, and they will try to pinpoint the exact month when the economic expansion stopped and the contraction began. In other words, when we went from an expansion into a recession, and then they'll also do exactly the opposite, where they try to pinpoint the exact month where the recession ended. But to use a newly favorite phrase of this administration, that's backwards looking data. So it's not uncommon that they won't make that call until maybe a year after the recession is already underway.
Cordero: Okay. So talking specifically to our listeners right now, what are some of the ways everyday Americans can expect to feel this recession? Now that it's official, what should Americans be expecting?
Antoni: I'm not sure they even need to expect to feel anything. I think they've been feeling it. And I think it really speaks to the elitism of so many Washington bureaucrats when, for example, they are just shocked and surprised at how bad these inflation reports are. I mean, if you go around and ask the average American family, you would've known already just how bad things are. Because they would've told you that they don't have enough money for groceries and gasoline. They would've told you that they're having to choose between prescription medications and paying their rent. So I'm not even sure that these latest numbers really even make that much of a difference to the average American again, because they've been living it already. I don't think this is news to them and I'm not even sure there's anything different that they can do or should do at this point.
Cordero: So what causes a recession?
Antoni: Oh, that is a very good question. Let's see if I can ...
Cordero: I'm sure there's a number of things. Maybe in this instance.
Antoni: Sure, sure. I mean, in this instance, two things in particular really stand out. The first is that the government over the last 18 months, really over the last 2 years has spent, borrowed and printed trillions of dollars. And I'm sorry, but you can't do that with 6, 7, $8 trillion and expect there not to be severe negative consequences. And that has caused an incredible inflationary boom and inflation in a lot of ways is like alcoholism. Why does anyone go out and get drunk? It's because the good effect comes first and the bad effect comes later. If it started with the hangover, no one would over indulge but it doesn't. And with inflation, it starts out as what looks like an economic boom. But then over time you realize that it's just this funny money circulating around in the economy. And now all of a sudden prices start going up and up and up and up. And if you look at the stock market, for example, all of these investors are realizing that these gains that they've been seeing from corporations are not sustainable.
Antoni: And so now you're seeing corporations, for example, either miss earnings or if they're making their earnings, it's only because they were heavily revised down beforehand. So it's basically just a fancy way of saying things are nowhere near as good as we thought they were. And so now what we're seeing is as all these realities start to play out, essentially we're finding out that the economy is not in very good shape, and that people now don't have enough money, even though we all got literally trillions of dollars of extra cash, it just caused prices to go up. Now, we don't have money for all the things that we literally used to buy just 18 months ago. For the average family, for example, this has been the equivalent of losing about 68, it's 3,400 for the individual, but it's 6,800 for the average family.
Cordero: Wow. Yeah. That's no small chunk of change.
Antoni: No. I mean, when you think about it, that's more than some families spend on on vacations and food combined. Again, I think it really speaks to the elitism of Washington bureaucrats, that they have downplayed this and essentially ignored it for the last 18 months.
Cordero: Not only ignored it, but acted as if things are wonderful.
Antoni: Oh, right. Yeah, exactly. And again, this whole idea of we're going to call inflation all these different names, like we're going to call it transitory. At one point, they even said it was good for us because it meant the economy was growing, which is just baloney. And now it's all this nonsense of, oh, we're just going to redefine a recession as if somehow changing words is going to help the American family.
Cordero: Speaking of definitions, what is the difference between a recession and a depression?
Antoni: Sure. So we usually reserve the term depression for when we're talking about severe and protracted recessions. What we now call The Great Depression in the 1930s, that was a title that was previously reserved for a period from the 19th century where we had a severe banking panic. We had somewhere around, I want to say about a quarter of the banks in the country failed, which up until that time was a record, then it was superseded by The Great Depression of the 1930s. But then it took about five years for the economy to even get back to where it was before the crash.
Cordero: And is that considered a long time? This was my next question. How long do recessions typically last?
Antoni: Again, that's a very, very good question. And there's no good answer on it because it depends so heavily on government policies. So for example, there was actually very little difference in the root causes of the 1929 crash in the stock market and the economic downturn from the early 1980s, 1981. But one lasted a very short time and the other lasted more than a decade. And the difference was that in the case of the 1980s, you had a Federal Reserve that was focused on one thing, and one thing only, and that was stabilizing prices and driving a stake through the heart of inflation. And you had the Reagan administration, which wanted nothing more than to cut taxes and regulation and pursue, what we now call a supply side agenda.
Antoni: Conversely, during the Hoover and Roosevelt administrations, we had exactly the opposite. We had a Federal Reserve that essentially, it suffered from a lot of infighting between the people here in Washington, DC and the members in the New York branch of the Federal Reserve. So they were very inefficient in their actions. They allowed the money supply to shrink by something like a third in a very short period of time. And during that same period of time, the number of banks in the country collapsed by a third. On top of that, you had Hoover imposing taxes on trade, for example, tariffs on the largest scale that had ever been implemented. And then you had the Roosevelt administration pursuing more of the same, higher tax rates. He essentially tripled taxes.
Cordero: Yeah. So seeing that we've got three years left of the Biden administration who hasn't really been doing very much that makes any sense, how concerned are you?
Antoni: Very. Very concerned, particularly the fact that the Biden administration was in a very unique position in that it had such a tremendous benefit of hindsight because it could look back on the Trump administration, which did so many great things, but also had some pretty bad mistakes. And this administration, unfortunately, instead of learning from President Trump has decided to double down on any and all of the failures while ignoring all of the successes. And so in that sense, I have very little hope. Now as my friend, Larry Kudlow likes to say, "The cavalry's coming so hang in there." My only concern is how much longer can the average American hang in there.
Cordero: Yeah. Okay. In conclusion, it's a good place to end this here. In conclusion, first, what's your advice to Americans right now through this recession? And then second, what would be your advice to lawmakers and or those who have the power to pull us out?
Antoni: For Americans individually, I would say the same sound financial principles that apply any other times still apply now. Chiefly, you have to live within your means. Now that's gotten incredibly hard because of inflation. We oftentimes don't think of inflation this way, but it is a tax. It's a hidden tax because Congress didn't vote on it. The President didn't sign it, but it is still a tax. It's how the government is paying for the 6, 7, $8 trillion of unfunded spending that it issued over the last 2 years. So if you want to think of this as imagine you just got hit with a massive tax increase, now you need to change your life accordingly, that's essentially the same schema that you're trying to live by right now. So again, no good news on that front unfortunately, but it's just the reality of where we are. And we've already described how we got here. So then how do we get out of it?
Antoni: As the average American, that's going to take a tremendous amount of political pressure being exerted on those in power to get them to change course, because right now they have shown absolutely zero intent of changing course. In terms of what does that course change look like to answer your question for the people in power, the policy makers, what do they need to do? They need to reverse exactly the things that got us into this mess. So print, borrow and spend less money. I mean, full stop. We need to just take an axe, forget the scalpel. We need to take an axe to the leviathan that is the federal budget. And we need to put the political pressure necessary on the Federal Reserve to get them to get back to doing their job, which is stabilizing prices and ending inflation.
Cordero: Amen. Thank you for that. Thank you for this explainer on recession. We appreciate you and your expertise and we hope you'll join us again.
Antoni: That'd be my pleasure. Thank you for having me.
Cordero: That's it for this week's episode of Heritage Explains. Thank you for listening, and if you have any additional questions for EJ or Tim or myself, you can reach out to us at [email protected]. We would love to hear from you. You can also share this episode on social media. We would greatly appreciate that. It's the best way for us to grow our podcast. Okay. That's it. We love our listeners. Thank you for sticking with us and we'll see you next week.