Where economists say the economy is going

Larry Summers (Obama's economics advisor) said a few weeks ago that, when it comes to forecasting the economy, there are only two categories of economists:

Category 1: Those who know they don't know;
                        and...
Category 2: Those who don't know they don't know.

I thought that was worth a chuckle. Then, yesterday, a Wall Street Journal article about economists' forecasts reminded me of a brief exchange from about fifty years ago ...between Curly and Moe, as I remember:

Q: "What kind of an idiot do you take me for?"
A: "Why, is there more than one kind?"

Turns out, there is more than one kind. The Category 2 economists break out into four different groups, according to this article by David Wessel. [I counted four scenarios, notwithstanding the title they chose for the article.]

Here's a pie chart of the chances our economy will go in each of four possible directions, according to the data Wessel collected from those who don't know they don't know:

Definitions (my summaries):

V: Very steep recovery. The way the business cycle always bounces back—as will this one. Due largely to fiscal and monetary stimulus prodding the "natural dynamism of capitalism" into reasserting itself.

U: Unimpressive, slower recovery. Takes longer, but at least it's an eventual recovery. "Less painful than a Lost Decade."

L: Lengthy stagnation. Not a recovery, at least for a long, long time (2-10 years). Financial markets stabilize, but don't improve.

Big-D: Depression, double-digit unemployment, social unrest, and who knows what else. Possible triggers: "virulent deflation that pulls down prices and incomes"; "political gridlock that stops governments in the U.S. or Europe from spending enough to fix the banks before a big one fails"; and higher interest rates due to a collapse of the dollar.

Anyway, please read the article. David Wessel did an excellent job compiling the details he obtained from the Category 2 economists.

Comments

[Harun]

No choice of a double dip recession? VV or UV or VL?

I am curious about your assertion about V "the way the business cycle always bounces back." My reading about financial crisis inspired recessions versus inventory recessions are that they are very different.

Though I hope you are right.

[Bret]

What's interesting to me is that if I had to guess the probabilities of the four possibilities, the percentages in the pie are very close to my gut feeling.

Which also means there's probably a 3rd category of economist. One who realizes he doesn't know but is willing to make probabilistic assessments.

[Bob]

Whew. I'd like to be able to jump on a V but can't get my arms around that scenario. Have no fear about the D. That leaves a U or L.

While the Fed appears to be doing all the right things I'm in the camp that says household deleveraging has a long way to go and that it matters. And, if the pundits are correct that significant inflation is in the offing ahead then the case for an L is tough to argue with.

And we haven't yet seen the affects of a ramped up cap and trade system that will most assuredly increase energy costs to the household.

I'm really trying to be more upbeat but it is tough.

[Optimist123]

Forgot to mention that the article completely left out one category of economists: those who are more alarmed about deficits than about the possibility that the economy won't get back on track. (Could it be that category contains few if any economists, even though it contains millions of ideologues? I suspect that's the case.)

[woodchuck64]

The most debt-ridden Americans have an easy process called Foreclosure to get back to financial freedom. Those without homes are mostly in good shape. Increased spending will help fix the banks. But the biggest positive but underestimated force I believe is the developing world: China's retail sales are still growing at 15%, India 5%, Brazil 5% and this during the depths of a global recession (US = ~ -9%). The developing world wants to spend and it doesn't take much to double the productivity and income of a vast majority of the world's population. Feels like a V to me.

[Jimmy the Dhimmi]

and...

Category 3: Peter Schiff

[Optimist123]

I had almost forgotten about Peter Schiff. Last time I saw him was on CNBC three months ago, and I was surprised that he was still sticking with his story that everyone should flee from the dollar. I already knew how that was working out for him.

[Harun]

"Forgot to mention that the article completely left out one category of economists: those who are more alarmed about deficits than about the possibility that the economy won't get back on track."

Many Austrians. I agree with you that deficit spending need not be bad, but I also suspect that the stimulus may not really do as much as the financial pumping we are doing to resolve the crisis. So, why do it? Need to be seen as "acting." Perhaps to "restore confidence."

Its as if I had Pneumonia and the doctor said, that in addition to the correct drugs, he was going to give me anti-fungals, gout medicine, chemotherapy, and hair implants...you know, just in case.

Anyways, I have a suggestion for your technocratic side...why not plan for 50 nuclear power plants. Get the sites and plans approved, etc. And then save them for the next recession.

These would be truly shovel ready. These would be necessary in the sense that we can always use more power and they have long life times.

I chose 50 so that each state could get one. Maybe it should be 100, so each Senator gets one named after him or her?

[Harun]

You could even pay for them in good times, by placing funds in the account to be only spent when economic growth hits some specific benchmarks, sort of how they are thinking about making banks keep more reserves in booms.