Nobody knows nothing
Everyday, my mailbox gets inundated with reports from strategists and economists. Two years ago, most were predicting a fairly rosy scenario for the global economy - and to be fair, so was I. Today, most are predicting a dire future of negative growth and economies mired in a deep and intractable recession. The predictions of the past were mostly wrong; there is little reason to believe that today's forecasts will be much better.
Of course, there were those who were warning of problems, those Cassandras that went unheeded. But many of them warned of problems unrelated to the near-collapse of the global credit system, and the fact that their predictions that something would go wrong were right doesn't actually make them prescient. It's the old "even a broken clock is right twice a day" paradox. You can seem to be right, but it's how you got there that matters. Many people correctly called a housing bubble, but almost no one identified derivatives and structured products as a pending issue that would unravel quite the way it has. The breakdown of the credit system, not the housing market, explains the particular pickle of the present.
When people look to the future, they tend to take the present and extrapolate. Industrial production is plummeting, so people forecast that it will be terrible in 2009. Unemployment is rising steeply and quickly, so predictions are that it will get much worse before it gets better. Past patterns are used as the basis of those predictions, but few question whether those patterns are indeed useful.
We should, because they aren't. Nothing quite like the present crisis has happened before. There has never been a simultaneous, global halt of economic activity. Before the information technology revolution, there couldn't have been. There weren't global synchronized supply chains and credit systems and capital flows that could halt in sync. Now there are, hence the simultaneous, nearly instantaneous cessation of activity after the failure of Lehman Brothers in September.
This also means, however, that the engine could start again in unexpected ways with unanticipated speed. I'm not saying that it will, only that the possibility shouldn't be as discounted as it currently is. Again, no one knows outcomes here, and past patterns are a misleading guide to the future. All that seems certain is that people rarely get future scenarios right, and there is no reason to believe that current projections of a dire future will be any more accurate than past projections of a rosy one.
For a look at additional blogs and other writings of mine, feel free to visit River Twice Research.
You are kinda throwing some cold water on the current TPM Book Club. And to that I really feel the need to to say: "amen, brother, say it!" Yes, despite the fact that I am very much enjoying the current Book Club posts, yours should be posted at the top of them all as a "cavaet emptor" warning about the rest.
December 16, 2008 8:34 PM | Reply | Permalink
I especially like this point:
I have collected degrees in art and cultural history and greatly value history of all kinds. Still, once in a great while, I think history doesn't have much to offer us. I think this is one of those times. I judge that from comparative history. :-)
The stock market itself is a perfect example of this the past few months. When it started swinging down 500 points every day, intermixed with rallies, there were the scared shitless comparative history headlines ala "greatest one day drop evah" blah blah blah. Now everyone in the business reporting biz is yawning when it happens. Gyrations of 500 points are the new ahistorical standard. Change... once can easily argue we quickly tolerate much more of it than previous humans.
December 16, 2008 8:48 PM | Reply | Permalink
That will change.
December 16, 2008 9:02 PM | Reply | Permalink
You forgot more than I could learn in three lifetimes. Three hundred million people collectively dealing with 6 billion people.
Economics is closer to quantum mechanics rather than a Newtonian Universe. All the leaders can do is go with the odds after careful study. That is all we have.
That great philosopher Yogi Berra said it best:
When you come to a fork in the road, TAKE IT.
Decisions must be made and they will under this New Administration.
December 16, 2008 10:17 PM | Reply | Permalink
"Nobody Knows Nothing" - I've been saying that for years. Thank you for putting it so eloquently.
December 16, 2008 10:38 PM | Reply | Permalink
Thanks for this post. There is no doubt that the future cannot be predicted. And no event truly replicates any other time. What can be guessed, however, is that people will continue to be fooled by events or other people or they will fool themselves or hoodwink others.
The problem, as I see it, of any social science research, is that it becomes fodder for people to use or misuse... but in any case people make decisions based on it - which leads, ultimately, to any research results getting further and further from the new, changed, circumstances.
I always chuckle when people talk about "the market" as if it had a mind, as if they could really understand its gyrations.
We humans seek to understand things. We're wired that way. And often we believe the explanations we're wired to seek. Sometimes we even believe what our own eyes should tell us is false.
If history "repeats itself" it's in not in the "events" themselves, I'd say. It's in our blindness and covetousness etc. - our passions run amok.
I predict more "amok."
December 17, 2008 12:17 PM | Reply | Permalink
http://www.aleablog.com/awol-us-international-reserve-position/
apropos of nothing on this thread but interesting nonetheless.
I love the thesis of Zach's essay. Forecasting is a risky enterprise. The economy must have so many interacting variables its not funny and in contrast the climate seems simpler.
I think this crisis is sui generis (I know I posted that earlier-but it bears repeating) We aren't repeating the Great Depression. Comparisons with other downturns can be misleading.
My own sense is that it is steep and short. No years of stagdeflation. I have nothing to back up that but my intuition.
December 17, 2008 3:32 PM | Reply | Permalink
Zachary, on a side note, I would like to thank you for the generous coverage you gave of HAW's campaign in your very good The Last Campaign (which I own a copy of). I can recommend this book to any interested in the events of 1947-48 with its spangled cast of characters: Truman, Dewey, Thurmond, Wallace, the Dixiecrats, etc....
December 17, 2008 8:39 PM | Reply | Permalink
"We should, because they aren't. Nothing quite like the present crisis has happened before. There has never been a simultaneous, global halt of economic activity. Before the information technology revolution, there couldn't have been. There weren't global synchronized supply chains and credit systems and capital flows that could halt in sync. Now there are, hence the simultaneous, nearly instantaneous cessation of activity after the failure of Lehman Brothers in September."
Maybe there WERE advantages to the inefficiencies of the past. I've often thought that the analogue clock is preferrable to the advanced digital clock. For one thing, it's easier to read in the dark and without your glasses because you can generally make out the positions of the two hands, whereas you really have to be able to read the digital numbers.
But to your larger point, I think it mystifies a lot of laypeople who widely economics disagree on points on which, it would seem, there ought to be a consensus. Not in the case, which is global and unprecedented, but on smaller issues like what to do about inflation or unemployment. Everyone wants low inflation, high, if not "full" employment, and growth. Why can't the economists agree on how to get to those goals?
December 17, 2008 7:06 PM | Reply | Permalink