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OPINION

Why recessions matter

Why recessions matter
April 15, 2013
Why recessions matter

The figures we'll see next week will show GDP after statisticians have removed seasonal fluctuations from the numbers. Such fluctuations – which will be reported in the full national accounts in June – are large. Real GDP before seasonal adjustment has fallen in Q1 by an average of 2.8 per cent since 1992, with every year bar one (2003) seeing some drop. And it usually drops in Q2 too; on average it has fallen by 1.5 per cent since 1992. All of the growth in the economy since 1992 has come in the second half of the year.

So, it's highly likely the UK is in recession now, simply because it almost always is in the first half of the year. If you're surprised by this, it is because nobody pays attention to the "raw" GDP numbers, the ones before seasonal adjustment.

But should they? Certainly, it is the "raw" numbers that tell us about people's actual experience. After seasonal adjustment, it is neither cold in winter nor hot in summer. But most of us have the heating on in January and off in August.

What's more, some of the reasons to ignore the unadjusted numbers don't make sense. For example:

"The fact that seasonal recessions happen every year mean we've become accustomed to them." But non-seasonal recessions are quite common too; since 1948 we've had (seasonally adjusted) real GDP fall in eight calendar years - one year in eight. Shouldn't we have become used to this too?

"Seasonal recessions are natural and inevitable, but non-seasonal recessions are due to policy errors and thus are eliminable." But policy errors are natural and inevitable too. The idea that policy-makers have sufficient knowledge and foresight to prevent boom and bust is a utopian dream as daft as any fantasy of the land of Cockaigne..

Instead, there's a different reason to think that non-seasonal fluctuations matter more than seasonal ones. It's that seasonal slumps affect the same people as benefit from seasonal booms – for example retailers who enjoy Christmas booms but quiet periods at other times, or construction workers who are laid off in winter but get good work in summer. But the winners and losers from non-seasonal booms and slumps are often different people. And losers might suffer long periods of losses if, say, they lose their job and cannot get as good a one.

If this is right, it tells us something important about non-seasonal recessions. What matters about them is not their size - the average seasonal recession sees GDP fall by over four per cent, which is very bad by non-seasonal standards – but the distribution of pain, with some people losing a lot.

But there is, in principle, a simple solution to this. We could have better insurance mechanisms to share the pain - either through a more generous welfare state or private sector insurance. Insofar as recessions matter, therefore, it is because governments and markets have failed to provide adequate insurance to pool income risks. And neither is showing the slightest interest in changing this.