I used to think of 100% confidence in a belief as being equivalent to metaphysical certitude. But in recent years, I’ve heard more and more young people use the phrase “one hundred percent” when they meant something like “I strongly agree”. So perhaps I misunderstood the meaning of this Bloomberg headline from October 17, 2022:
In all seriousness, I’m not here to gloat that Bloomberg missed this call. At that time, the consensus view of economists called for a recession in 2023. I also thought the risk of recession was substantially elevated during a time when the Fed was attempting to bring inflation down. Nonetheless, this is just one more example of the fact that economists as a group are utterly unable to forecast the business cycle. We have failed to forecast any of the recent recessions experienced in America, and on the one occasion we did forecast a recession it did not occur. That’s not just a bad record, it represents “100% failure”.
Should we be ashamed of this dismal performance? I’d say no. During my very first week of blogging back in early 2009, I did a post drawing an analogy to the work of structural engineers. We don’t want engineers to accurately predict the collapse of a major bridge; we’d like our engineers to prevent bridge failure. We’d like them to spot cracks in the steel supports and prop up the structure before it falls into the river.
Similarly, we should not ask economists to be oracles—a role they are unsuited for. Rather we should ask them to design public policies that prevent recessions, at least as far as is feasible. (I doubt that anything would have prevented a brief recession in March 2020.)
Similarly, we should not ask economists to predict how high California housing prices will rise in 2024 (recall the EMH), we should ask them to design housing policies that make housing more affordable for average people, such as deregulating housing construction.
We should not be dismayed by the fact that economists have such a dismal record at predicting recessions. In most cases, if the Fed could have predicted a recession then it would have prevented it. Did you ever accurately predict any traffic accident you were in? If you are like me, a traffic accident occurs when you least expect it.
We should be dismayed that economists have not devised better policies for preventing recessions. But we are making progress—recessions have become less frequent since 1982. With the adoption of nominal GDP level targeting, there would be a further reduction in the frequency of recessions.
PS. If I were President Biden I would ask myself why I am so unpopular despite avoiding a widely predicted recession.
READER COMMENTS
spencer
Oct 19 2023 at 1:08pm
Every recession since the GD, with the exception of C-19, was both predictable and preventable (using legal reserves, i.e., using base money).
But the bankers, the ABA, wanted to eliminate required reserves (which were labeled a tax [sic]. So, the FED’s technical staff stopped monitoring them.
As Dr. Richard G. Anderson (the world’s leading guru on bank reserves) wrote me:
“Reserves are driven by payments”
“Spencer, this is an interesting idea. Since no one in the Fed tracks reserves…”
Bernanke contracted legal reserves, which are the FED’s elephant tracks, for 29 contiguous months – the direct cause of the GFC.
Now the FED is operating without a rudder or an anchor.
Jon Murphy
Oct 20 2023 at 8:03am
I dunno. It seems exactly the opposite to me. There were tons of economists saying that shutting down the economy (as was the case in Covid 19) would cause a recession. I mean, that is almost the definition of a recession. That recession occured because of actions taken over the objections of economists. I seem to recall a distinct refrain of “we have to stop this virus no matter the cost” coming from Washington
Andrew_FL
Oct 19 2023 at 1:10pm
I prefer economists who see themselves more like seismologists than structural engineers. A seismologist knows the conditions under which earthquakes occur, but cannot predict them. An economist should know under what conditions business cycles occur, but similarly cannot predict them
Jon Murphy
Oct 20 2023 at 8:04am
I don’t see how your analogy differs
Andrew_FL
Oct 20 2023 at 10:37am
It differs in the very important way that seismologists do not deign to believe they can “prevent” earthquakes, or “engineer” tectonic plates.
Jon Murphy
Oct 20 2023 at 4:43pm
Ok, but in the anology Scott builds, the engineer fulfills the same role as in your analogy. I guess I don’t see what you think the contribution is.
Scott Sumner
Oct 20 2023 at 9:09pm
The problem with your analogy is that the Fed causes most of the “earthquakes”. I’m saying they should refrain from doing so. Is that unreasonable?
Thomas L Hutcheson
Oct 20 2023 at 11:57pm
Well, all of them. Everything if filtered through Fed policy.
There ought to be some engineering of the bus especially in the sensors brakes and steering, but day to day the Fed ought to be the driver of the bus who wants to make good time on a winding, hilly, potholed road with animals running across in front of the bus. Too slow is bad too fast is unsafe. Or maybe a bicycle is better, on a bicycle if you go too slow you fall over and that’s also unsafe.
Richard W Fulmer
Oct 19 2023 at 3:42pm
A prerequisite for preventing failures is predicting how they might occur. Engineers will look for cracks in bridges only if they first understand that cracks are the harbingers of failure. Similarly, economists will suggest deregulating housing construction only if they have reason to believe that housing regulation can cause problems.
I don’t think the problem is that economists are concentrating too much on predicting possible modes of failure. Rather, one problem is that different economists have different models of how economies work – models that point to diametrically opposed ways of preventing failure.
Another problem is that people in government tend to listen to those economists who tell them what they want to hear – namely that more government spending and more government intervention are the solution to every problem. This creates incentives for other economists to jump on the more-government-is-good bandwagon.
Finally, even when political leaders listen to the “right” economists, their short-term interests don’t always align with the good advice that those economists offer. For example, Richard Nixon imposed wage and price controls against the advice of Milton Friedman and others because he had an election coming up, and voters were demanding that he “do something” about inflation.
Similarly, there is no secret that both Medicare and Social Security are financially unsustainable, but politicians refuse to take the actions needed to shore them up because doing so would likely cost them the next election.
Mactoul
Oct 20 2023 at 1:56am
Does it imply that the predicted 2023 recession was likely prevented by Fed policy? And thus no failure in prediction.
Jon Murphy
Oct 20 2023 at 7:46am
I don’t think so. The conditional “if” matters.
Rodrigo Escalante
Oct 20 2023 at 10:11am
Professor,
Listening to Powell yesterday it does seem he is trying to talk does long rates saying they will do enough to tame inflation in the long run but if fed keeps forecasting cuts in the near future it feels as if we will fall into a situation inverse to post 2009 when they kept forecasting hikes. Meaning markets will now take 2% inflation as a floor, just as 2% was a ceiling before covid.
Understand under average inflation target market would asume inflation target for foreseeable future would be below 2% hence endogenously tighten but given current framework how does the fed manage to hit their target? Feels like we will overshoot for a long time. Fed has even forecasted taking a very long time to get back to 2% ie forecasting to fail.
Scott Sumner
Oct 20 2023 at 9:03pm
The primary problem is that they have the wrong target. But under the current target they need to tighten policy until the hit the target. Try harder.
Thomas L Hutcheson
Oct 20 2023 at 11:15am
But the predictors have not power to prevent. They can only make conditional predictions, “If the Fed does X, we will observe outcome Y.” (And to be fair, most of the “economists” being “consensus-ed” were not academics specializing in macroeconomics. SS counts, Jamie Diamond & Peter Coy do not. :))
Scott Sumner
Oct 20 2023 at 9:05pm
Well, a 100% forecast doesn’t seem very conditional.
Thomas L Hutcheson
Oct 21 2023 at 9:39am
Exactly my point.
Thomas L Hutcheson
Oct 20 2023 at 11:24am
The Fed should not speculate about its future actions. Actions should depend on data not yet observed.
Floccina
Oct 20 2023 at 11:55am
Of course 99.5% or higher = 100%.
Mark Brophy
Oct 21 2023 at 4:22am
President Biden isn’t unpopular, he has a 50% chance of being reelected, according to the polls. If Democrats feared defeat, they would’ve nominated Robert Kennedy.
Jon Murphy
Oct 21 2023 at 10:37am
Election or reelection doesn’t have much to do with popularity.
Scott H.
Oct 22 2023 at 4:50pm
If you were Joe Biden I wonder what you would tell yourself you did to avoid the recession.
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