In their efforts to explain downturns, economists tend to connect unrelated data and occurrences. How forecastable are recessions?
By Diana Furchtgott-Roth. She reviewed the book Recession: The Real Reasons Economies Shrink and What to Do About It by Tyler Goodspeed.
Furchtgott-Roth is a Distinguished Fellow at the Energy Policy Research Foundation.
Goodspeed is a former acting chairman of the Council of Economic Advisers who is now ExxonMobil’s chief economist.
Excerpts:
"As early as 1662, the physician and statistician William Petty asserted a cycle of “dearths and plenties” every seven years. In the 20th century, Nikolai Kondratiev had his “long waves.” Simon Kuznets believed in “secondary secular movements” or “long swings” linked to population and capital formation. Joseph Schumpeter held that creative destruction, in response to new technology, created economic swings. And Friedrich Hayek suggested that recessions occur regularly, as maladjustments build up from misguided interest-rate policies."
"“Recessions are fundamentally unforecastable,” writes Mr. Goodspeed"
"recessions don’t cleanse or restructure economies, the way wildfires clear forests of their dead wood. When one examines statistical deviations from trend for output and employment, economies look similar before and after recessions, and he sees little support for the Schumpeterian creative-destruction hypothesis. Recessions such as the Great Depression aren’t punishment for the excess of the Roaring ’20s, but interruptions."
"the timing, cause and depth of recessions may be attributable to a series of unfortunate events"
"the apparent business cycles that economists have spent careers documenting are “apophanies” rather than epiphanies: illusions of pattern imposed on noise."
"recessions are generally characterized by a confluence of overlapping and often interacting factors"
"“History simply offers a warning,” Mr. Goodspeed writes, “that we cannot look to the state to arrest episodes of economic contraction ex post, let alone to prevent them ex ante, except in both instances by way of the Hippocratic advice to first do no harm.”"
"The author organizes shocks into three categories"
"Acts of God are environmental: droughts, floods, locust plagues and the unusual winters"
"government-caused disruptions, such as Fed Chairman’s Paul Volcker’s move to raise interest rates to almost 20% at the same time as the federal government imposed credit controls, causing the 1980 recession"
"Acts of Man are human-made but not policy-driven, including frauds such as Edwin Ludlow’s misappropriation of funds from the Ohio Life Insurance and Trust Co. in 1857, or the savings-and-loan failures in the mid-1980s."
"Mr. Goodspeed rarely finds recessions caused by a single one of these shocks"
"the frequency of recessions doesn’t determine the fate of an economy. Since 1945, Britain has had a 6% annual probability of entering recession, while the U.S. has had a 15% annual probability. Yet Britain’s gross domestic product per capita, which was 70% of that of the U.S. in 1970, has now declined to less than 60%."
"In 1914 America had 27,000 banks, 95% of them with only a single location. Interstate banking was not substantially allowed in the U.S. until the 1990s. This inability to spread risk made U.S. banks, and the economy they served, inherently fragile, with a financial infrastructure prone to amplifying shocks rather than absorbing them."
[there were] "two-cent taxes on bank checks that contracted the money supply by 12% during the Great Depression"
"what people thought was a financial shock in 2008 was also linked to energy and fertilizer. “As the cost of energy soared, so too did the price of highly energy-intensive fertilizer,” he writes. “By the time Lehman Brothers failed in September 2008, nitrogenous fertilizer prices had jumped by an unprecedented 86 percent year over year.” This caused ammonia prices to double, and food inflation exceeded 6% in the fall of 2008."
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