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In 2023, the economics profession preserved its near-perfect record in terms of forecasting recessions—it’s always wrong.
discusses some reasons why the forecasts were so inaccurate:
As Holmes would put it, the non-arrival of a recession is a curious episode. What about the assumptions at the beginning of the year can have been wrong to explain this? The key premise was that higher interest rates would slow the economy down. That they didn’t, as summarized by Skylar Montgomery Koning and Andrea Cicione of TS Lombard, was due to “the long duration of US debt as well as to a large positive fiscal impulse and the associated high levels of net wealth.” In less technical language, borrowers didn’t have to start paying the higher rates because they’d locked in lower ones while the going was good. And the US government was spending money and expanding the deficit in a very unusual way for a year when unemployment was low. (Military aid to Ukraine, much of which meant more money for US factories making armaments, had something to do with this.)
These excuses are obviously pretty weak. The war in Ukraine started in early 2022, and forecasters were certainly well aware that the US was providing military aid to Ukraine (in an amount that is trivial as a share of GDP.)Yes, some people locked into long-term debt at low rates—but that’s always true. In any case, interest costs are a zero sum game; the gain to one side of the contract equals the loss to the other side. If forecasters really believed that higher interest rates don’t matter because there’s lots of long-term debt in the economy, then why did they insist there was a near certainty of recession in 2023?What makes this theory especially silly is that back in March people were making exactly the opposite argument. Again, here’s Bloomberg:
When longer-term rates are lower than short-term, the traditional banking business model of borrowing short-term and lending long-term stops working. When a rise in 10-year yields in March was instantly followed by news of the insolvency of several large banks, led by Silicon Valley Bank, it appeared that full-blown crisis was inevitable. The fire sale of Credit Suisse Group AG, one of the most systemically important banks on the planet, to rival UBS deepened the expectation of an all-out crisis.
I find all this excuse-making to be quite disappointing. You’d think that economists might reconsider their flawed model, which relies on reasoning from a price change—something that every economics textbook says we should never do. High interest rates are neither expansionary nor contractionary. There are cases where the thing that causes high interest rates might be contractionary. But there are even more cases where the thing that causes high interest rates is expansionary.Economists have no business trying to forecast the business cycle—they just make fools of themselves.PS. In my book The Money Illusion, I argued that the banking crisis did not cause the Great Recession. Do you think the failure of the March 2023 banking problems to lead to the sort of economic slowdown that economists predicted at the time will cause anyone to give any credence to my argument?Not a chance. The profession has made up its mind.More By This Author:Delete Fiscal Policy From Macro Is Inflation Actually Normalizing? Why Not Fiscal Policy?
