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The Right Way to Spot a Recession


"What recession?" (News: Analysis & Commentary, Feb. 11) raises questions about the National Bureau of Economic Research's approach to determining whether the economy is in recession. I am responding [as chairman] for the NBER's Business Cycle Dating Committee.

First, let me correct some important factual errors. Industrial production has been in decline since June, 2000, not October, 2000, as the article states. Further, you fail to mention that the decline in production has been far larger than the average of the previous six recessions, hardly consistent with your theme that this may not have been a recession at all. Second, you state incorrectly that "real incomes are still growing solidly." In fact, real income peaked in September. Again, the facts do not support your hypothesis.

Your article raises the important question of how to determine when the economy is in recession during periods of rapid productivity growth. A recession is a time when labor and capital are not employed as intensively as normal--unemployment rises, and capacity utilization falls. In the current recession, employment has fallen 1.1 percentage points below its peak in March of last year--a larger decline than the average of the previous six recessions. This fact, more than any other, has convinced the committee that there is no question that a recession has occurred.

With continuing substantial productivity growth, output and income have shrunk relatively little in this recession. Real gross domestic product, according to preliminary data for the fourth quarter of 2001, is about 0.3% below its peak in the second quarter. Real income is also not far below its earlier peak. But in normal times--with normal growth of employment, rather than shrinkage--output would be growing robustly, not contracting. Again, there is no doubt that the economy is in recession.

We support your call for better data. But we depart vigorously from your claim that our view of the available data has failed to keep up with changes in the economy. We stand by our determination that the economy reached a peak in March, 2001, and contracted in the months following that date.

Robert E. Hall

Stanford University

Stanford, Calif.

Editor's note: After peaking in June, 2000, industrial production rose in both August and September, and it "has been falling since October," as we said. We did not ignore the drop in industrial production. We said that manufacturing was in its "worst slump since the Depression," but as the NBER has noted, industrial production is a small and declining share of output. Also, since the NBER's March, 2001, recession date, real income has not declined in any month except October--following the September shock--and it has rebounded strongly. Our main point: High productivity growth places less importance on employment as a business cycle indicator, because output and real income can rise even if employment falls. You say that bankers, analysts, and accountants "have enormous conflicts of interest," which the 1933 Glass-Steagall Act aimed at overcoming. Its 1999 repeal "has ushered in their return" ("Can you trust anybody anymore?" Cover Story, Jan. 28). The way in which a lot of financial deregulation was rammed through during Clinton's second term was unfortunate, especially in these supervisory areas. I am worried about what may come as a result of the introduction of value-at-risk models, where the banking supervisors admit that they cannot track all the pieces of banks' portfolios, especially the off-balance-sheet derivatives--and supervisors ask the banks simply to provide what their strategies are for managing risk. This form of semi-self-regulation may hide a lot of vulnerabilities from supervisors, especially as barriers between financial services erode.

I have consistently been impressed with BusinessWeek's willingness to consider the positive role of government policy while keeping its (correct) fundamental belief in the need for active markets and entrepreneurial rewards.

Adam S. Posen

Senior Fellow

Institute for International Economics

Washington

It is tragic that Enron Corp. employees lost so much value in their 401(k) retirement plans ("Bracing for a backlash," Special Report, Feb. 4). However, to regulate how employees may allocate their contributions to their 401(k) plans would be yet another governmental invasion of privacy and curtailing of freedom in the name of saving people from themselves. If I wanted to put 100% of my 401(k) investment in my company's stock but regulators would not allow it, what happens if the company's stock doubles? Can I sue the government? Regulators are there to make sure corporations are not misrepresenting their financial situation, not to make investment decisions for people.

Jim Mason

Castle Rock, Colo.

"Can you trust anybody anymore?" (Cover Story, Jan. 28) carefully and accurately examines the failures and misconduct of Enron executives and board members. The problems are said to be systemic. Inexplicably, there is nary a mention of the enactment in 1995, over a Presidential veto, of the Private Securities Law Reform Act. The PSLRA established near-herculean obstacles to prosecuting securities fraud--including addressing the very kinds of behavior by Enron executives and their accountants from Andersen that were so universally criticized by the White House and Capitol Hill.

In the absence of any "smoking gun" information or any evidence of intent elsewhere unheard of in civil litigation, such cases were to be dismissed--without even allowing discovery to find out what documents remained after the shredder. In passing this thinly reasoned law, Congress opened the door; former Enron Chairman Kenneth L. Lay and his happy band simply walked right on through.

Those bipartisan "shocked and appalled" members of Congress now in search of who was responsible for Enron might start by looking in the cloakroom mirror.

Al Meyerhoff

Milberg, Weiss, Bershad,

Hynes & Lerach

Los Angeles

Editor's note: The writer's firm seeks to become lead counsel among the dozens of Enron cases filed, and is one of the top filers of shareholder suits in the U.S. In "Bush's new reality" (Cover Story, Feb. 4), it is interesting that you say "Bush [is] now basking in a Churchillian glow." I wonder if the President's advisers are aware that only two months after the defeat of Nazi Germany, Winston Churchill lost a bid for reelection primarily because of the public's concern over the postwar economy.

Some glow.

Lee Dribin

Los Angeles

Public accounting is like being in the CIA--when you do your job well, no one notices (or cares), but failures are always front-page news ("There's no positive spin on this one, Mr. Lindsey," Special Report Commentary, Jan. 28).

J.C. Boakes, CPA

Westampton, N.J.

"How to prevent future Enrons...And campaign finance shenanigans" (Editorials, Jan. 28) cites the $5.8 million that Enron spent during the past 12 years buying politicians--a measly $483,000 per year. It is obvious that the $80 billion company known as Enron, once the seventh-largest corporation in the world, was headed by a bunch of pikers! Are politicians unhappy because Enron didn't spend more?

John Stadler

Fox Island, Wash. In "Brutal honesty could force a market correction" (Special Report Commentary, Feb. 4), everyone is focused on the symptoms rather than the problem behind the pro-forma-numbers controversy. The answer lies in the operating results, debt load, and debt maturities. Notice the number of companies that get little notice when they take on off-balance-sheet activities or sizable debt at an early stage without earnings or assets to cover the maturities of the obligations. But, then again, we are too busy staring at the incomprehensible net-income line. Who has time to look at the company's cash flow, footnotes, and balance sheet?

Harvey N. Gillis

President & CEO

Sunrise Capital Corp.

Snohomish, Wash.

Your Enron Watch series fails to deal with an important aspect of this debacle: Until the last moment, both Standard & Poor's Corp. and Moody's Investors Services were giving it investment-grade ratings. Many investors, including pension funds, were misled. It seems to me that the filter used to devise ratings must change: The real challenge is to come up with new rules (probably mathematical in nature) that could really evaluate risk in the present environment. The Long-Term Capital Management affair should have concentrated everybody's mind a long time ago.

Max Papadopoulos

Montreal

I read the twisted tale of former Enron Chief Financial Officer Andrew Fastow's financing scandals and bumptious behavior with utter disdain ("The man behind the deal machine," Special Report, Feb. 4). While there's much to be said about self-confidence and driving a hard bargain, at the end of the day, adhering to professional decorum and acting responsibly keeps the playing field level. Looking back, I'm surprised the Enron empire did not fall sooner.

Hunter Lynne

San Diego "Accounting in crisis" (Cover Story, Jan. 28) says: "There isno substitute for personal integrity." CPAs are required to study professional ethics only at the beginning of their careers. To be successful in the profession, one learns quickly to cater to the requests of the clients who pay the highest fees, regardless of ethical considerations. Or, one seeks other employment.

John Mitchell, CPA

Sparks, Nev.

There is another solution to this problem not mentioned in your articles: Vote "no" when your next proxy is solicited if Arthur Andersen is proposed as the outside auditing firm. If we all do this, the message will be loud and clear to all accounting firms.

Donald G. Manly

Salem, S.C.

I suggest the following "attest" paragraph for Big Five audits: "None of us at this firm has the slightest idea what or how this company is doing. We will attest, however, that the pictures of the president and chairman of the board did represent what they looked like at the time--although we have no idea what they look like now."

Len Gold, CPA

East Windsor, N.J.

Bruce Nussbaum's pronouncement, "In short, most certified public accountants feel little duty to the public at large," is uninformed and unfair ("Can you trust anybody anymore?" Special Report, Jan. 28). To infer from Andersen's failings that most CPAs must likewise have little regard for the public interest would suggest a similar inference that some uninformed journalists define the level of honesty and accuracy we can expect from the entire media.

Melody L. Pound, CPA

Oakland, Calif. Not-for-profit community provider networks such as California's Sutter Health play a critical role. Despite the impression given in "The new power play in health care" (Social Issues, Jan. 28), community hospitals are being forced to shut down or eliminate services at an alarming rate. By pooling resources, provider organizations of our network have built or replaced more than a dozen hospitals and care centers in recent years. We've also reduced overhead, saved millions through joint purchasing, and improved quality.

The emergence of provider networks pales in comparison to the earlier, more aggressive, nationwide health maintenance organization consolidations--the 20 separate plans we negotiated with in 1990 have consolidated into just five super-HMOs. Their leverage and clout over providers has never been so strong or threatening.

Most California hospitals and doctor groups lose money. Among health-care power players, providers are outgunned, overmatched, and underfunded.

Cyndi Kettmann

Sutter Health

Sacramento


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