Tuesday, February 12, 2008

Is this a recession? 

A local story by a reporter I talk to frequently looks at a family to try to talk about recession.

Cindy Haupert's life has changed since the economy took a dive.

Haupert, 36, once lived comfortably with her husband and two children in St. Cloud. She was a stay-at-home mom, working every other weekend. Her husband is an attorney. They made ends meet.

But gas prices would rise. Costs for homemade dinners and lunches would increase. And in September, when it was time for her son to go to kindergarten, she wanted him to go all-day, every day, so he could be ready for first grade. But that meant a $184 hit to the family checkbook each month. That doesn't even count lunch money.

"Now it's like we're living paycheck to paycheck. I can definitely see a change," she said.

Haupert is one of many Central Minnesotans whose daily life has changed because of the state of the economy. State economist Tom Stinson said Minnesota is already in a recession. Local economists are not as quick to cry the R word, but they admit that families and businesses are feeling the pinch.

I hear myself in that last sentence. And while I "admit" that families and businesses are feeling a pinch, it's because prices are going up, which is not the usual definition of a recession. It's also because this family had a change in its expenditures, which it could have anticipated. The Hauperts could have instead to a shorter kindergarten program and not taken the "$184 hit to the family checkbook." That they chose not to do it meant the value of full-time kindergarten was worth more than the other things -- including extra time -- that the Hauperts could have purchased instead.

Indeed, look how they adjust:

She now works an additional four days a week at Office Depot as a cashier while her fifth-grader and kindergartner are in school.

She tries to make up for extra costs. She clips coupons and budgets meticulously. She's allowed herself and her husband $90 per week for gas and $125 per week for groceries.

She takes advantage of mail-in rebates and uses gas coupons. She rides the bus when she can and doesn't take frivolous drives.

So she was able to sell more labor -- hardly a definition of recession, that! -- and she diverts time from other activities to clipping coupons. Aren't these the choices we make constantly, whether or not we're in recession?

When she and her husband bought a new TV to accommodate the high-definition requirement for 2009, they shopped around. They checked prices to see where they could get the best deal.

When they settled on one with a better warranty, they got an extra 10 percent off for comparing prices.

I wonder how big it was? How did they decide the size? How much time did they save, and how much was the 10% off worth compared to their time? Again, these are choices we make daily, regardless of where we are in the business cycle. They are the product of living with scarcity, which we ALWAYS must make.
"There's changes you can make," she said. "We don't splurge like we have in the past. You just have to learn to do your homework on what you get."
A family had its expenses rise by the choices they made and responded by working harder. Same as it ever was.

UPDATE: Bill Polley takes this in a different way:

I am seeing more and more anecdotal stories like this one where what people are really concerned about boils down to the increasing cost of living (inflation) and the choices that one has to make to cope with the increased cost. Gas prices are higher. Real incomes have not increased as rapidly. Thus, one will need to cut back on gas or cut back on something else. If that means shopping around for the best deal on an HDTV or getting one that is a couple inches smaller, then that's just the way it is.

We are now experiencing somewhat slower and more uneven growth of real income than at other times in our history. The current inflation we are experiencing is also uneven in the sense that some prices are rising faster than others. Some prices (like HDTVs) are even falling. And that does create some distortions. ...

So at the end of the day, I'm not sure what to make of this. Is this just a bad article and a bad interview subject for the point the writer was trying to make? Or is this indicative of the reasons behind the dissatisfaction with the economy for a significant number of people? If the former, then this post is a cautionary tale for journalists and we can perhaps leave it at that. But if the latter, then we really need to have a talk about the difference between a real recession and other economic events that can also cause households some distress such as changing relative prices that are not necessarily recessionary.

That last sentence is a very interesting point. What do we mean by "a real recession"? And I mean this not to be the "two-quarters-decline-in-GDP" discussion, which I agree with the journalists is rather quaint (and not really how we do it anyway) but a deeper question of whether the comovement of production across industries has somehow changed in the last two decades, or whether relative price variability has increased for a given level of aggregate inflation, etc. It may be that these relative price variations create greater distortion in household budgets than in the past as well due to, for example, innovations in financial instruments and institutions. Hard to say, but intriguing to contemplate.

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