The Bureau of Economic Analysis (BEA) has released GDP figures for the third quarter. This "advance" number indicates that the economy contracted in the past three months at annual rate of 0.3 percent. This number, however, may change when the BEA releases the "preliminary" figure -- an estimate based on more comprehensive data -- on Nov. 25.

If you've heard or read news media reports of this number, they've probably also informed you that a recession is defined as "two consecutive quarters of economic contraction (or negative GDP growth)". This is an oversimplification. The private, nonprofit National Bureau of Economic Research (NBER), which is authoritative in declaring recessions, defines a recession as:

...a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.

In an FAQ on their recession dating procedure, NBER elaborates on the "two-quarter" rule:

Q: The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP. How does that relate to the NBER's recession dating procedure?

A: Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. The most recent recession in our chronology was in 2001. According to data as of July 2008, the 2001 recession involved declines in the first and third quarters of 2001 but not in two consecutive quarters. Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, "a significant decline in economic activity." Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology.

Image by Flickr user su-lin used under a Creative Commons license.

If anything, the collapse of the nation's financial markets has forced even the staunchest of believers in the Free Market^® to consider the possibility that sometimes the "market" doesn't know best.

Testifying before the House Oversight and Government Reform Committee, free market high priest Alan Greenspan expressed "shock" at the current economic situation.

Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief....I've found a flaw [in my ideology]. I don't know how significant or permanent it is. But I've been very distressed by that fact.

Good on Greenspan for admitting flaws in his ideology. Hopefully the frame of the debate will shift from whether or not the government has a role in the economy to what kind of role the government should play.

But revealing is this statement:

I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.

It shows precisely why Free Market^® policy usually ends up not really working out as planned. Organizations do not have self-interest. The people that run corporations, however, do. And when executives are rewarded handsomely (AIG, Lehman, Merrill Lynch, etc.) even when their leadership ruins the firm, then one should hardly be shocked when executives engage in the sort of risky behavior that ultimately destroys the business and trashes shareholder equity.

Image by Flickr user mattyp_ used under a Create Commons license.

While the monthly number is an important component in summarizing the state of economy, it's an incomplete indicator. For example, at the state level in August, 20 states had unemployment rates greater than the national average of 6.1 percent, while 31 states had unemployment rates below the national average. Yet, the trend is unmistakable: compared a a year ago, 48 states have seen their unemployment rate increase with 34 percent increasing more than one percentage point.

The Economic Policy Institute reminds us that there are more dimensions to employment than the unemployment rate. In a slowing economy, millions of workers are forced to take lower-paying or part-time jobs, squeezing family budgets. This aspect of the jobs market rarely makes headlines, but it results in real hardships for millions of families.

At 11%, the underemployment rate in September was at its highest in more than 14 years. The underemployed currently includes about 9.5 million unemployed workers, 6.1 million involuntarily part-time workers, and 1.6 million workers only marginally attached to the workforce.1 The fact that one out of every nine U.S. workers is now either unemployed or underemployed is clear evidence of the need for a second stimulus package targeted at job creation.

Pushing back against Democratic congressional leadership's call for another stimulus package, White House spokesperson Dana Perino told reporters:

A lot of their discussions yesterday, as I understood it, are not necessarily items that we think would stimulate the economy. Additional benefits to individuals who may need support during an economic downturn aren't necessarily stimulative.

And yet, about three weeks ago, the non-partisan Congressional Research Service issued a report on the economic slowdown saying just the opposite.

...different proposals could get modestly more "bang for the buck" than others if they result in more total spending....The primary way to achieve the most bang for the buck is by choosing policies that result in spending, not saving....Presumably, recipients in economic distress, such as those receiving unemployment benefits, would be even more likely to spend a transfer or tax cut than a typical family.

Simple ignorance or blind devotion to ideology or a toxic mixture of the two?

Following a closed-door meeting with economic experts, Speaker of the House Nancy Pelosi (D-CA) said that she is instructing various committee chairs to begin holding hearings on what should be included in an economic stimulus package that could be voted on in November should the House return to Washington for a lame-duck session. No price tag has been placed on a potential, a backtrack from statements made last week an adequate stimulus package would cost $150 billion.

The package would likely include funds for infrastructure projects, an unemployment insurance extension, a boost to the Food Stamp program and Medicaid, and financial aid to states. While Pelosi stated that tax cuts were "in the mix of consideration," she emphasized that other components would be prioritized.

But first we want some of the issues that were not dealt with in the last package, because we want this to truly be a recovery package.

And therefore we have to make the investments in rebuilding America, and in doing so in a green way, with innovation and job creation; and to, again, recognizing the unemployment in our country, have an extension of unemployment benefits and some improvement on that policy, as well; to have emergency food assistance, recognizing the dire straits of many people in our country; and to do, also, in this very strong component of aid to the state to meet the health needs of our children and our seniors, to name a few.

Those would be our priorities. We'll look at what else we might do, in terms of tax cuts.

The Democrats' push for economic stimulus comes days after the president signed the $700 financial rescue plan. But, as we noted in The Watcher last week, the Wall Street bailout would do nothing to mitigate the effects of the impending recession. Quick action on such a stimulus indicates that Congress believes more action is necessary to protect millions of American families.

Photo: REUTERS/Hyungwon Kang
U.S. House Speaker Nancy Pelosi (D-CA) is flanked by former Securities and Exchange Commission Arthur Levitt (L), and Joseph Stiglitz of Columbia University (R) at a forum with economic experts to help Congress develop an economic recovery plan that focuses on creating jobs and strengthening our economy in her office on Capitol Hill in Washington, October 13, 2008.

Citizens for Tax Justice released a timely report yesterday examining the special tax breaks and subsidies that are currently handed out to Wall Street firms (and other companies). One in particular this report dissects is the special low rate on capital gains and dividends.

The report's introduction frames the relationship between current proposals to cut capital gains further as a solution to alleviate the financial turmoil:

Americans are in no mood to subsidize Wall Street. This became clear Monday, when the House of Representatives rejected the financial rescue plan that was supported by leaders from both parties as well as the President. Reasonable people can differ on whether the government should step in to prop up the financial system right now. There are progressives and conservatives on both sides of that issue. But what seems indisputable is that Wall Street has mismanaged its affairs and Americans are in no mood to pay for its mistakes.

...

Oddly, the conservative Republicans who say they oppose the financial rescue plan because they don't want to subsidize Wall Street have simultaneously called for more subsidies for Wall Street in the form of a further reduction in taxes on investment profits! We think these GOP conservatives are seriously confused.

The report concludes by citing a reform proposal that would go a long way to make the tax code more simple, fair, and progressive - a reform that happened to be supported by Ronald Reagan:

If House Republicans are sincere about protecting middle-income taxpayers and not giving away the store to Wall Street, then they should abandon their proposed tax cuts for Wall Street. Instead, they should join us in advocating a return to President Reagan's approach of taxing investment profits at the same income-tax rates as wages and other kinds of income.