ECONOMICS and FINANCE EDUCATION ∙ Volume 18 ∙ Number 1 ∙ Summer 2019
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JOURNAL OF ECONOMICS andFINANCE EDUCATION editor E. F. Stephenson MANAGING EDITOR Editorial Staff Volume 18 SUMMER 2019 Number 1 Editor: E. Frank Stephenson, Berry College <1> Teaching Double-Dip Recession in Macroeconomics Co-Editor (Finance): Ben L. Kyer and Gary E. Maggs Bill Z. Yang, Georgia Southern University Senior Editors: <6> Considerations for the Organization of the Introductory Financial Richard J. Cebula, Jacksonville University Derivatives Course Joshua Hall, West Virginia University Robert B. Burney Luther Lawson, University of North Carolina- <18> The View from 30,000 Feet: Using Paper Airplanes to Wilmington Understand Economic Modeling Board of Editors (Economics): Wayne Geerling, G. Dirk Mateer, and Brian O’Roark Steven Caudill, Rhodes College Joy Clark, Auburn University at Montgomery <25> The Second-Generation Theory of Fiscal Federalism: A David Colander, Middlebury College Research Lesson from the Classroom Stephen Conroy, University of San Diego Giampaolo Garzarelli Mike Daniels, Columbia State University Paul Grimes, Pittsburg State University <34> Adam Ruins Everything, Except Economics John Marcis, Coastal Carolina University Jadrian Wooten and James Tierney Kim Marie McGoldrick, University of Richmond <54> Financial Analysis of the Beer Logistics and Transportation Franklin Mixon, Jr., Columbus State University Industry: A Unique Interdisciplinary Finance Travel Course J. Wilson Mixon, Jr., Berry College Jocelyn Evans, Kent Gourdin, and Alan Shao Usha Nair-Reichert, Georgia Tech Inder Nijhawan, Fayetteville State University <67> Does Order Matter? Micro- and Macroeconomics Principles Carol Dole, Jacksonville University Courses at an Access Institution James Payne, University of Texas at El Paso Jason J. Delaney, William B. Holmes, P. Wesley Routon, J. Christopher Coombs, LSU - Shreveport Taylor Smith, Andrew V. Stephenson, and Amanda L. Wilsker Jason Beck, Armstrong Atlantic State University Board of Editors (Finance): <81> The Power of Interest: Connecting the Real World to the Robert Boylan, Jacksonville University Finance Classroom Kam (Johnny) Chan, Western Kentucky University Alma D. Hales, Laura Cruz, and Jacob Kelley S. J. Chang, Illinois State University Edward Graham, University of North Carolina at Wilmington John Griffin, Old Dominion University Academy of Economics and Finance Srinivas Nippani, Texas A&M University - Commerce Mario Reyes, University of Idaho William H. Sackley, University of North Carolina at Wilmington Barry Wilbratte, University of St. Thomas Bob Houmes, Jacksonville University Shankar Gargh, Holkar Science College, India Christi Wann, Tennessee-Chattanooga Shelton Weeks, Florida Gulf Coast University Production Editor: Doug Berg, Sam Houston State University JOURNAL OF ECONOMICS AND FINANCE EDUCATION ∙ Volume 18 ∙ Number 1 ∙ Summer 2019 Teaching Double-Dip Recession in Macroeconomics Ben L. Kyer and Gary E. Maggs1 ABSTRACT This paper modifies the customary pedagogical approach to the business cycle found in many macroeconomics textbooks. A logical definition of double-dip recession, a relatively neglected yet potentially important concept, is offered. The proposed definition is then applied to real gross domestic product data for the United States from the Bureau of Economic Analysis. It is confirmed that the United States has experienced ten recessions from 1947 to the present and that three of those may be classified via our approach as double-dip recessions. We also suggest here the useful corollaries of multi-dip recessions and deepened trough recessions. Introduction A neglected concept in macroeconomics pedagogy is double-dip recession. Indeed, this idea is mentioned but not defined in just two of more than a dozen macroeconomic textbooks surveyed at both the principles and intermediate levels (Dornbusch et al. 2011, p. 275; Krugman and Wells 2017, p. 463). Moreover, the documentation of or empirical evidence on double-dip recession is, to our knowledge, absent with respect to the teaching of macroeconomics.2 There are, however, numerous, vague, and inconsistent definitions of double-dip recession within the non-academic, financial, and popular presses. For example, the Financial Times defines a double-dip recession as occurring “when an economy goes into recession twice without having undergone a full recovery in between.” The Oxford English Dictionary states that a double-dip recession is “a recession during which a period of economic decline is followed by a brief period (usually one or two quarters) of growth, followed by a further period of decline.” According to BusinessDictionary.com, a double-dip recession is “a second recession following a brief period of growth. A double-dip recession must come after an initial period of general economic decline. Essentially, the country’s GDP slides from negative to positive and eventually back to negative.” Investopedia declares that “a double-dip recession is when gross domestic product (GDP) growth slides back to negative after a quarter or two of positive growth. A double-dip recession refers to a recession followed by a short-lived recovery, followed by another recession.” Finally, Wikipedia states, “In a W-shaped recession, (also known as a double-dip recession), the economy falls into recession, recovers with a short period of growth, then falls back into recession before finally recovering, giving a ‘down up down up’ pattern resembling the letter W.”3 From these citations, it appears that at least the non-academic world is interested in the phenomenon of double-dip recession. The purpose of this paper is twofold. First, we extend the standard classroom approach to the business cycle and propose a rather more specific and empirically useful definition of double-dip recession. Second, we apply this definition to quarterly data on real GDP provided by the Bureau of Economic Analysis (BEA) 1 The authors are, respectively, the Benjamin Wall Ingram, III Professor of Economics, Francis Marion University, Florence, SC, and Professor of Economics, St. John Fisher College, Rochester, NY. We thank two anonymous referees for helpful suggestions and guidance. Any remaining errors are our own. Corresponding author email: [email protected]. 2 This is probably because academic investigations to document the occurrence of double-dip recessions in the United States are rare. Indeed, the only paper we found along those lines is that by Elwell (2011). 3 These definitions of double-dip recession come from www.ft.com, www.oed.com, www.businessdictionary.com, www.investopedia.com, and www.wikipedia.com (“recession shapes”), respectively. 1 JOURNAL OF ECONOMICS AND FINANCE EDUCATION ∙ Volume 18 ∙ Number 1 ∙ Summer 2019 from 1947 to the present in order to chronicle the existence of double-dip recession in the United States.4 The Analysis The usual pedagogical treatment of the business cycle5 identifies and distinguishes between the four stages of expansion, peak, recession, and trough, with the peak and trough sometimes referred to as turning points in the cycle and the term ‘recession’ frequently referred to as a ‘contraction.’ We modify this common approach in order to arrive at a logical and uniform definition of double-dip recession which is both suitable for use in macroeconomics classrooms and applicable to real world data. To begin, we adopt the historical academic definition of a recession as a circumstance when real GDP decreases for at least two consecutive quarters.6 Second, we make the distinction for our students between “recovery” and “expansion,” with the former being an increase of real GDP from the trough to the previous peak level of real output and the latter being an increase of real GDP beyond the previous peak level. Third, we refer to this previous peak level of real GDP as the “reversion point,” or that point at which the economy has fully recovered from the recession and beyond which it reverts to net growth in aggregate real output. Fourth, we define a double-dip recession as a situation in which another decrease in real GDP takes place after the trough of an economic cycle but prior to its reversion point. In other words, and as the name itself suggests, a double-dip recession occurs when real GDP decreases for a second time and the economy returns to a recessionary condition prior to completely recovering from an initial two quarter or more decline of real GDP. To demonstrate the aforementioned discussion and definitions, we draw Figure 1, in which a double-dip recession takes place from point A to point A’, with point A’ being the reversion point. The first dip or decline of real GDP is illustrated by the movement from point A to point B and the second dip is shown by the movement from point C to point D. At this juncture in the classroom discussion, we inform our students that a direct application of this suggested methodology to real GDP data for the United States reveals that ten recessions have occurred since 1947, with the three occurring shortly after World War II, in the early 1980s, and in the Great Recession of 2008 qualifying as double-dip recessions. Figure 1: Double-Dip Recession Time 4 Quarterly data on real GDP is available from the BEA beginning only in 1947. See www.bea.gov. 5 We note for our classes here that we prefer the broader and more inclusive term “economic cycle,” which we use through the remainder of our macroeconomics courses. 6 We contrast for our students this “academic” definition of a recession with that employed by the NBER, that a recession is “…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.” See “Business Cycle Dates,” under “Data” on the NBER website www.nber.org/cycles/cyclesmain. 2 JOURNAL OF ECONOMICS AND FINANCE EDUCATION ∙ Volume 18 ∙ Number 1 ∙ Summer 2019 The first double-dip recession in the United States dates to the late 1940s as real GDP reached a peak of about $2.04 trillion in the fourth quarter of 1948.7 As shown in Figure 2, real output then decreased for two quarters and attained its trough during the second quarter of 1949.