Forecasting Recessions

Robert Shiller recently wrote about on the value of economics. I agree with most of what he says, but he also seems to perpetuate a myth about the inability of economists to forecast downturns in the economy.

 

Shiiler states that “Indeed, economists failed to forecast most of the major crises in the last century, including the severe 1920-21 slump, the 1980-82 back-to-back recessions, and the worst of them all, the Great Depression after the 1929 stock-market crash.”

Read more at http://www.project-syndicate.org/commentary/are-economists-good-by-robert-j--shiller-2015-01#IvJFopWQS6EmSZ2Z.99

I am not going to address all of these recessions, but it is relatively easy to look back to 1980. In the New York Times I find this

“the April decline in the composite index was the fourth in the last six months and comes at a time when many private economists are predicting a mild recession during the last half of 1979.” New York Times June 1, 1979 pg. D1.

And this

“Summarizing the latest Data Resources forecast, Miss Mosser said that “the economy will at best slow down and at worst we’ll see a double dip come the first of this year.” New York Times Dec. 2 1980 pg. A1.

Not all economists agreed, but it is certainly not the case that no one saw it coming.

Forecasting recessions with a reasonable degree of accuracy is actually one of the easier things to do in economics. The yield curve, for instance, is an easy to use and pretty reliable tool. If it is upward sloping the chances of a recession in the near future are small. If it flattens out or slopes downward the chances of a recession are pretty good. Anyone paying attention to the yield curve should not have been surprised by our most recent recession.

It is harder to forecast the severity of recession, but Shiller was one of a number of economists that expressed concerns about the underlying strength of the economy in the time leading up to the most recent financial crisis, suggesting that next recession could be severe because of problems in financial markets.  

Economics needs better critics

The Washington Post describes protests at the ASSA.

They suggest that students ask their economics professors

How does climate change factor into our study of economics?
Why is there nothing about Islamic economics in our curriculum?
Should we slow down fast money with a Robin Hood Tax?


The first question is odd because the discussion of market failures, such as degradation of the environment, is a prominent part of mainstream economics. Austrian economists think that mainstream economists talk about almost nothing but market failures. One of the people they targeted was Greg Mankiw. Mankiw is one of the most prominent supporters of increased taxes on negative externalities.

Why are they concerned about Islamic economics but not Catholic social theory? Are they also concerned that natural scientists teach theories based on religious beliefs?

I have no idea what it means to slow down fast money.

I am not what most people would regard as a traditional mainstream economist. I would like to see less attention to formal mathemtical models, and more attention to institutions, to history, and to narrative forms of explanation.  But these people do not appear to have even a basic understanding of economics.

The Benefits of Doing Historical Research

Anthony Grafton and James Grossman in The American Scholar

 

"The best defense for research, however, is that it’s in the archive where one forms a scholarly self—a self that, when all goes well, is intolerant of weak arguments and loose citation and all other forms of shoddy craftsmanship; a self that doesn’t accept a thesis without asking what assumptions and evidence it rests on; a self that doesn’t have a lot of patience with simpleminded formulas and knows an observation from an opinion and an opinion from an argument."

 

In other words, doing history develops skills that all college graduates need.

Is Economics Already Open Access?

We just got the December 2014 issue of The American Economics Review. It took me about 10 minutes to find ungated versions of all the papers.

An appreciation of E.P. Thompson

This is The American Conservative's Christmas reading list. Benjamin Schwarz, the national editor of The American Conservative, chose E.P. Thompson's The Making of the English Working Class.


"Steeped in English literature—see the constant, apposite, and often starling allusions to Bunyan and Byron, Defoe and the Bible—Thompson wrote powerfully, concretely, plangently, with an exquisite sense of cadence and rhythm. That style deepens this elegiac book, elevating it to a masterpiece of literature as well as of scholarship. This is a work, Thompson unabashedly makes clear, about history’s losers, and in its embrace of the losers, as well as in other ways, The Making of the English Working Class is a profoundly anti-progressive book. Its protagonists’ values and their 50-year struggle to resist being turned into a proletariat may have seemed merely primitive and retrograde to strident Marxists (and may seem so to progressives of all stripes today), but Thompson’s historical imagination and sympathy allowed him to see the value, and the tragedy, of lost causes."

Does History Need a Manifesto?

Peter Mandler and Deborah Cohen review The History Manifesto by Jo Guldi and David Armitage. The review provides an interesting and optimistic assessment of the current state of the discipline of history.

Here is an earlier review by Pseudoerasmus, focusing on the books false claims about economic historians.

Business History from HBR

The Birth of Commercial Credit

Cotton, Slavery and Economic Growth

Recently, several historians (Edward Baptist and Sven Beckert) have attempted to make slavery and cotton the driving force behind American economic growth in the nineteenth century. I believe that they present a misleading view of economic growth and the relationship between slavery and economic growth.

1.       Slavery was predominately associated with one product: cotton. Cotton was a very important crop. It is true, as Beckert points out, that cotton accounted for over half of U.S. exports on the eve of the Civil War. But exports were only about 9 % of GDP. Similarly, cotton accounted for about 23 % of income in the South, but the South accounted for only 26% of U.S. income. See D. A. Irwin, “The Optimal Tax on Antebellum U.S. cotton Exports,” Journal of International Economics 60(2003):287) Ultimately, the value of cotton production was equal to about 6% of GDP. The attempts to make cotton the driving force of the American economy misses one of the most important finding of economic historians: do not get too focused on a single sector of an economy (see Fogel on the railroads and McCloskey on the textile industry in England). There is no Rostovian engine of growth.  

2.       Baptist’s attempts to enlarge the impact of cotton on GDP are nonsensical.

3.       Slavery appears to have had a negative effect on long run trends in per capita GDP. The more a region depended on slave labor in the past the lower its per capita income now.

 

 

 

 

These figures are from the working paper by Nathan Nunn “Slavery, Inequality and Economic Development in the Americas: An Examination of the Engerman-Sokoloff Argument (October 2007). There is no question that slaveholders benefited from slavery, but that does not mean that the economy as a whole was better off as a result of slavery. Arguments and evidence presented by Gavin Wright, Sokoloff and Engerman, and David Meyer also suggest that slavery had long term negative effects on economic growth.

 

4.       The abolition of slavery did not have a negative effect on per capita GDP in the United States or its rate of growth.
You can go to measuringworth.com and graph the log of per capita GDP from 1800 to 1900. Does it appear to you that the rate of growh declined after 1865?