April 5, 2023 | Reading Time: 4 minutes
Where’s that recession at?
We should focus on programs, not predictions, writes Noah Berlatsky.
If a tree doesn’t fall in a forest, you can be sure lots of economists will have predicted that a tree was absolutely going to fall. You can also be sure that, when the tree doesn’t fall, the economists will shrug and shamelessly predict that the tree is going to fall next month for sure. That tree, it’s going to fall. They have models.
Where’s the recession?
We are, in theory, supposed to be in a recession right now, based on economic predictions from last year. In December 2022, CNBC confidently reported that the next recession would begin in early 2023. In October, CNN declared, “The question of a recession is no longer if, but when.”
But USA Today was undaunted by the good economic news. Sure, it acknowledged, the recession hadn’t happened. But it forged gamely ahead: “More economists think a 2023 downturn may come later than they thought.”
If you constantly predict a recession, you’ll eventually be right, just like you’ll be right sometimes if you always predict rainy days. Economic growth doesn’t last forever. In fact, according to an IMF working paper, economies are in recession 10-12 percent of the time.
Weather forecasters don’t rely on dumb luck, though. They have models that are very accurate, at least over a week or so.
Economists on the other hand have … not much.
2020 like 2008
It’s an open secret that economists are terrible at predicting economic downturns. That same 2018 IMF paper looked at recession data from 63 countries between 1992 and 2014. In April of the year before a recession, the average prediction was 3 percent growth. The actual recession year showed a 3 percent contraction. Forecasters typically didn’t accurately assess the effect of the recession until it had been underway for a full year.
As one particularly egregious example, a 2014 study found that economists “completely failed to anticipate the fall in GDP and employment” in 2008 — the year of the housing bubble and the Great Recession.
Conversely, few people remember that in August 2019, many economists were predicting a recession that could affect the 2020 race. Instead, covid hit, causing massive economic disruptions and unprecedented government expenditures. It was an economic shock for sure. But it wasn’t a typical recession.
Covid was impossible to predict with precision. Many people had warned that a pandemic was a dangerous possibility at some point. But the exact timing of natural disasters is almost definitionally unpredictable.
Economists try to figure out how world events will affect forecasts. But they can’t tell you a year out that there’s going to be the worst global pandemic in a century, or pinpoint when a Russian dictator is going to decide to invade his neighbor.
The economy is affected by global events that simply can’t be modeled. That makes predicting a recession an exercise in presumption at the best of times.
Still, sometimes economists really should know better. The 2008 recession was the result of a speculative housing bubble. That’s the kind of structural weakness that high-priced brainy economists are supposed to warn us about.
Predicting bubbles bursting in advance is very difficult, though, because bubbles are built on false confidence. Once everyone starts predicting the bubble will burst, it bursts. If economists knew the recession was coming earlier in 2008, the recession would have come earlier.
Or to put it another way, while weather forecasters can’t affect the weather, economic predictions can very much affect the economy.
If economists think inflation will keep rising, for instance, the Federal Reserve is likely to raise interest rates — which affects the likelihood of a recession.
The Fed raising rates is why so many economists have been predicting a recession — even though so far we haven’t had one.
Now, though, after the Silicon Valley Bank failure, the Federal Reserve is signaling that it will ease off on aggressive rate hikes — which should in theory make a recession less likely.
Unless, of course, it doesn’t.
Making an unpredictable future less dangerous
The economy affects millions of people. Workers are eager to know if they can count on their jobs being there for them in six months. Businesses want to know if they should hire or start firing.
If you know the future, you can make better plans. You can make a lot of money, or at least prevent yourself from being impoverished.
Economic predictions are especially valuable in a society as precarious as ours. In the US, about half of adults get health insurance through their employer. Losing your job can precipitate a personal health catastrophe.
The US also has a weaker social safety net than most peer countries. During economic downturns, most European nations can rely on established programs to kick in and help people. In the US, by contrast, we’re dependent on a slow-moving, reactionary Congress to provide aid in times of crisis.
If economists can’t tell what’s going to happen year-to-year, average non-expert workers can’t be expected to make ideal, wealth-maximizing decisions by correctly intuiting where the economy is going to be.
Instead of trying to anticipate market fluctuations, we need to accept that we don’t know what’s going to happen, and create programs that help people weather bad outcomes
Universal free healthcare, direct payments to keep children out of poverty, free college so people can make low-risk investments in the future — programs such as these would reduce our reliance on economic predictions, because we’d be less vulnerable when those predictions go awry.
The one thing we know about the future is that it is unpredictable. Economists should stop pretending they have crystal balls and start advocating for policies that take into account the fact that none of us knows what tomorrow will bring.
Noah Berlatsky writes about the political economy for the Editorial Board. He lives in Chicago. Find him @nberlat.