About a year ago, a famous economist came out, once again, and predicted the end
of recessions all together in the "new economy." I can visualize the man giving
the interview, but I can't remember his name -- anyone? maggie coleman
Lisa & Ian Murray wrote:
> <http://www.iht.com/articles/7768.html>
>
> The Unpredictable Economy: Experts Missed Last 9 Recessions
>
> Steven Pearlstein Washington Post Service Wednesday, January 17, 2001
>
> WASHINGTON In presenting his annual economic outlook last Thursday, the
> chairman of President Bill Clinton's Council of Economic Advisers was having
> nothing to do with all the recession talk going around.
> .
> "Let me be clear," Martin Baily said. "We don't think that we're going into
> recession."
> .
> The same message was delivered the next day by Mr. Clinton in a Rose Garden
> economic valedictory. Citing the predictions of 50 private forecasters known
> as the Blue Chip Consensus - "the experts who make a living doing this," as
> he put it - Mr. Clinton assured Americans that the economy would continue to
> grow this year at an annual rate of 2 percent to 3 percent.
> .
> What the president and his adviser failed to mention was that "the experts"
> did not predict any of the nine recessions since the end of World War II.
> .
> That is true of the members of the Blue Chip Consensus as well as the
> Council of Economic Advisers, the forecasting staffs of the Federal Reserve
> Board and the Congressional Budget Office.
> .
> And if, as a few renegades have begun to predict, the U.S. economy is
> heading into a mild recession this year, that would mean one more forecast
> added to that dismal record.
> .
> "We really aren't very good at calling the turning points of the economy in
> either direction," said Murray Weidenbaum, the top economic adviser in the
> Reagan administration.
> .
> Allen Sinai of Primark Decision Economics Inc., a respected private
> forecaster, agreed. "It's probably only fair for forecasters to admit at
> times like this that we're simply not well equipped to predict turning
> points," he said. "A recession, by its nature, is a speculative call."
> .
> At first blush, such humility may seem at odds with the aura surrounding
> modern-day forecasters.
> .
> Using high-speed computers and sophisticated models of the U.S. economy,
> they constantly revise their two-year predictions for everything from
> unemployment to business investment to long-term interest rates, expressed
> numerically to the first decimal place.
> .
> But according to the forecasters themselves, what may appear to be a precise
> science is really a black art, one that is constantly confounded by the
> changing structure of the economy and the refusal of investors, consumers
> and business executives to behave as rationally and predictably in real life
> as they do in economic models.
> .
> "The reason we have trouble calling recessions is that all recessions are
> anomalies," said Joel Prakken, president of Macroeconomic Advisers of St.
> Louis, one of the leading U.S. forecasting firms.
> .
> According to Mr. Prakken, every modern recession has been caused by a
> combination of overly aggressive interest rate increases by the Federal
> Reserve Board, which weakens the economy, and some "external shock" that
> pushes it over the edge.
> .
> Because such shocks - the 1973 oil embargo, for example, or the 1990 Iraqi
> invasion of Kuwait - are random and, by their nature, unpredictable, Mr.
> Prakken argues that it is virtually impossible to predict when a slowing
> economy will turn into a shrinking one.
> .
> For the moment, Mr. Prakken, like most other forecasters, is confidently
> predicting that the economy will skirt the edge of recession early this year
> and then pick up its pace, growing at the annual rate of 2.6 percent.
> .
> A hearty band of optimists in the forecasting community still says it should
> be possible to come up with leading indicators for the economy that could
> state, with some reliability, that a recession is just over the horizon. It
> is just that such indicators have not been found yet.
> .
> James Stock of Harvard University's Kennedy School of Government said there
> had been any number of early warnings that, for 20 to 30 years, were highly
> correlated with a recession: sharp declines in the stock market, a slump in
> housing starts, a rapid expansion of the money supply and an unusual
> alignment of interest rates in which long-term bonds had lower yields than
> short-term securities did.
> .
> The problem is that just when there are enough occurrences to prove an
> indicator reliable, the economy changes in some fundamental way, and the
> model loses its predictive power, Mr. Stock said.
> .
> Victor Zarnowitz, a longtime student of the business cycle, said much of the
> problem was that forecasters had become prisoners of an economic ideology
> that assumed too much rationality on the part of the economic players or
> factors.
> .
> Thus, they spend too much time looking for recession indicators in official
> economic data, which often arrive too late to be of any use in forecasting,
> and not enough at the anecdotal evidence around them.
> .
> Mr. Zarnowitz starts from the assumption that there are natural ups and
> downs to the economy, dictated by the ability of businesses to find good
> things in which to invest.
> .
> At the end of a recession and at the beginning of a new expansion, there are
> plenty of low-risk, high-payoff opportunities and a rush of new investments,
> sparking a cycle of higher profits and greater investment that feeds on
> itself and pushes the economy higher.
> .
> At some point, however, the supply of "good" investments diminishes, Mr.
> Zarnowitz said. Businesses and investors then become overconfident and start
> paying too much for assets, assuming risks that are too great and taking on
> too much debt.
> .
> Finally, a tipping point is reached, and overconfidence gives way to an
> equally excessive pessimism, leading the economy to unwind quickly.
> .
> After a recession cleanses the economy of its excesses and imbalances,
> growth resumes.
> .
> On casual observation, this theory of investment booms and busts squares
> nicely with the run-up in the stock market that preceded the 1973 recession
> and the real-estate boom and bust before the 1990-91 recession.
> .
> But the problem for forecasters is having to acknowledge a high level of
> irrationality on the part of business executives and investors and consumers
> that, by its nature, follows no neat pattern or rational timetable.
> .
> "It's easy to say that the bubble will burst sooner or later but very
> difficult to say exactly when," said Mr. Zarnowitz, who now is a consultant
> at the Conference Board in New York.
> .
> Difficult but not impossible, said Edward Leamer, director of the UCLA
> Anderson Business Forecast.
> .
> Starting with about the same model of the U.S. economy as Mr. Zarnowitz lays
> out, Mr. Leamer last year went looking for conditions that appeared to be
> uniquely present at the end of expansions.
> .
> In each case, he found that investment spending was growing faster than
> profit. He also found that interest rates on 10 year, medium-risk corporate
> bonds fell sharply in relation to short-term notes. Finally, there was in
> each instance a noticeable reduction in the hours worked by the average
> employee each week.
> .
> Based on these three indicators and a heavy dollop of gut instinct, Mr.
> Leamer last month became the first Blue Chip Consensus forecaster to predict
> a mild recession in the United States this year.
>
> For Related Topics See:
> Business
> Front Page
>
> < < Back to Start of Article WASHINGTON In presenting his annual economic
> outlook last Thursday, the chairman of President Bill Clinton's Council of
> Economic Advisers was having nothing to do with all the recession talk going
> around.
> .
> "Let me be clear," Martin Baily said. "We don't think that we're going into
> recession."
> .
> The same message was delivered the next day by Mr. Clinton in a Rose Garden
> economic valedictory. Citing the predictions of 50 private forecasters known
> as the Blue Chip Consensus - "the experts who make a living doing this," as
> he put it - Mr. Clinton assured Americans that the economy would continue to
> grow this year at an annual rate of 2 percent to 3 percent.
> .
> What the president and his adviser failed to mention was that "the experts"
> did not predict any of the nine recessions since the end of World War II.
> .
> That is true of the members of the Blue Chip Consensus as well as the
> Council of Economic Advisers, the forecasting staffs of the Federal Reserve
> Board and the Congressional Budget Office.
> .
> And if, as a few renegades have begun to predict, the U.S. economy is
> heading into a mild recession this year, that would mean one more forecast
> added to that dismal record.
> .
> "We really aren't very good at calling the turning points of the economy in
> either direction," said Murray Weidenbaum, the top economic adviser in the
> Reagan administration.
> .
> Allen Sinai of Primark Decision Economics Inc., a respected private
> forecaster, agreed. "It's probably only fair for forecasters to admit at
> times like this that we're simply not well equipped to predict turning
> points," he said. "A recession, by its nature, is a speculative call."
> .
> At first blush, such humility may seem at odds with the aura surrounding
> modern-day forecasters.
> .
> Using high-speed computers and sophisticated models of the U.S. economy,
> they constantly revise their two-year predictions for everything from
> unemployment to business investment to long-term interest rates, expressed
> numerically to the first decimal place.
> .
> But according to the forecasters themselves, what may appear to be a precise
> science is really a black art, one that is constantly confounded by the
> changing structure of the economy and the refusal of investors, consumers
> and business executives to behave as rationally and predictably in real life
> as they do in economic models.
> .
> "The reason we have trouble calling recessions is that all recessions are
> anomalies," said Joel Prakken, president of Macroeconomic Advisers of St.
> Louis, one of the leading U.S. forecasting firms.
> .
> According to Mr. Prakken, every modern recession has been caused by a
> combination of overly aggressive interest rate increases by the Federal
> Reserve Board, which weakens the economy, and some "external shock" that
> pushes it over the edge.
> .
> Because such shocks - the 1973 oil embargo, for example, or the 1990 Iraqi
> invasion of Kuwait - are random and, by their nature, unpredictable, Mr.
> Prakken argues that it is virtually impossible to predict when a slowing
> economy will turn into a shrinking one.
> .
> For the moment, Mr. Prakken, like most other forecasters, is confidently
> predicting that the economy will skirt the edge of recession early this year
> and then pick up its pace, growing at the annual rate of 2.6 percent.
> .
> A hearty band of optimists in the forecasting community still says it should
> be possible to come up with leading indicators for the economy that could
> state, with some reliability, that a recession is just over the horizon. It
> is just that such indicators have not been found yet.
> .
> James Stock of Harvard University's Kennedy School of Government said there
> had been any number of early warnings that, for 20 to 30 years, were highly
> correlated with a recession: sharp declines in the stock market, a slump in
> housing starts, a rapid expansion of the money supply and an unusual
> alignment of interest rates in which long-term bonds had lower yields than
> short-term securities did.
> .
> The problem is that just when there are enough occurrences to prove an
> indicator reliable, the economy changes in some fundamental way, and the
> model loses its predictive power, Mr. Stock said.
> .
> Victor Zarnowitz, a longtime student of the business cycle, said much of the
> problem was that forecasters had become prisoners of an economic ideology
> that assumed too much rationality on the part of the economic players or
> factors.
> .
> Thus, they spend too much time looking for recession indicators in official
> economic data, which often arrive too late to be of any use in forecasting,
> and not enough at the anecdotal evidence around them.
> .
> Mr. Zarnowitz starts from the assumption that there are natural ups and
> downs to the economy, dictated by the ability of businesses to find good
> things in which to invest.
> .
> At the end of a recession and at the beginning of a new expansion, there are
> plenty of low-risk, high-payoff opportunities and a rush of new investments,
> sparking a cycle of higher profits and greater investment that feeds on
> itself and pushes the economy higher.
> .
> At some point, however, the supply of "good" investments diminishes, Mr.
> Zarnowitz said. Businesses and investors then become overconfident and start
> paying too much for assets, assuming risks that are too great and taking on
> too much debt.
> .
> Finally, a tipping point is reached, and overconfidence gives way to an
> equally excessive pessimism, leading the economy to unwind quickly.
> .
> After a recession cleanses the economy of its excesses and imbalances,
> growth resumes.
> .
> On casual observation, this theory of investment booms and busts squares
> nicely with the run-up in the stock market that preceded the 1973 recession
> and the real-estate boom and bust before the 1990-91 recession.
> .
> But the problem for forecasters is having to acknowledge a high level of
> irrationality on the part of business executives and investors and consumers
> that, by its nature, follows no neat pattern or rational timetable.
> .
> "It's easy to say that the bubble will burst sooner or later but very
> difficult to say exactly when," said Mr. Zarnowitz, who now is a consultant
> at the Conference Board in New York.
> .
> Difficult but not impossible, said Edward Leamer, director of the UCLA
> Anderson Business Forecast.
> .
> Starting with about the same model of the U.S. economy as Mr. Zarnowitz lays
> out, Mr. Leamer last year went looking for conditions that appeared to be
> uniquely present at the end of expansions.
> .
> In each case, he found that investment spending was growing faster than
> profit. He also found that interest rates on 10 year, medium-risk corporate
> bonds fell sharply in relation to short-term notes. Finally, there was in
> each instance a noticeable reduction in the hours worked by the average
> employee each week.
> .
> Based on these three indicators and a heavy dollop of gut instinct, Mr.
> Leamer last month became the first Blue Chip Consensus forecaster to predict
> a mild recession in the United States this year.
