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The recession took place in 2001 to
2002 period was largely determined by contractions of the gross domestic
product. Continuous decline in GDP prompted Bush administration and the
Federal Reserve to take extreme monetary and treasury actions.
Fed lowered the interest rates massively for two consecutive years and
the administration repeated cut the taxes on top bracket groups during
the same period. These extreme actions led the United States to a new
episode of rapid expansion. Unfortunately, it is such an sustainable
expansion that buried a detrimental bomb that eventually took down the
entire financial market in 2008.
Therefore, we must ask a serious question, how much should we read into
GDP numbers? Does this economic indicator really mean anything? Should
we define a different index measuring the health of macro economy?
Answers to all of the questions above are obvious if we really
understand what is GDP.
There is a great story told by a real MBA student.
Once upon a
time, there were two business school students, A and B, walking in
campus. They suddenly discovered a pile of dog dung sitting on the
street. A joked with B by saying I will give a million
dollars if you swallow the pile. B pandered for a moment and
determined it is a great deal. So he moved the entire pile into his
stomach. He asked student B for one million dollars. A shook his head
and replied,
"put it on my account". Several days later, they discovered the same thing
while walking together again in the campus. B said to A,
if you do what I did last time, your account will be cleared. A
swallowed it immediately with a relief as he felt he wouldn't have to carry the debts for
life. They then went to see their professor and told professor the
story. The professor jumped from his chair and
shouted, "that great, congratulations, you two have contributed two million
dollars to our nation's GDP!"
So, can we really declare a economic recession merely based on GDP
numbers?
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