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.
