About that recession timing and the 2020 election

I’ve already noted[1] that as a field, economics is bullshit. And even economists acknowledge that they’re terrible at forecasting recessions.[2] Add one more article[3] to the pile of evidence.

But there are a couple points here. The business cycle is the business cycle. Saying there will be a recession doesn’t mean much. Of course there will be a recession. The real question is when it will come and whether it arrives in time to affect the 2020 elections.[4]

This phenomenon [the inverted yield curve], which suggests investor faith in the economy is faltering, has preceded every recession in the past 50 years.

“The stars are aligned across the curve that the economy is headed for a big fall,” said Chris Rupkey, chief financial economist at MUFG Union Bank. “The yield curves are all crying timber that a recession is almost a reality, and investors are tripping over themselves to get out of the way.”[5]

Second, psychology affects the timing. Sure the inverted yield curve suggests a recession is coming. But the association between that curve and a recession is a correlation. It does not show causation.[6]

According to [Campbell] Harvey, recessions have followed inverted yield curves by anywhere between six and 22 months. That’s not a small range, especially in political terms — it’s the difference between an economic slowdown that begins just before the Iowa caucuses and a recession that starts five months after the next presidential inauguration.[7]

Economists are used to thinking of people as rational,[8] which, as I’ve noted,[9] is bullshit. And because economists aren’t good at weighing (qualitative, not quantitative) psychological factors, that means they aren’t good at figuring out when a recession will arrive.[10]

So what about that psychology? Donald Trump is very persuasive for authoritarian populists, because that’s how he campaigned and how he’s handled his presidency. This is part of what has enabled him to capture the Republican Party as politicians look over their shoulders at his base.[11]

That doesn’t mean they’re actually convinced. It means they’re afraid of appearing to cross him.

But not all functionalist conservatives are in political positions. Most are investors. Many run corporations or are in senior management positions. And many of these functionalist conservatives oppose Trump’s trade war. This shows up in stock market reactions and in a lot of the blame for a recession should it materialize.[12] When Trump tweets that “trade wars are good, and easy to win,”[13] they aren’t reassured. Meanwhile, Trump’s trade war isn’t the only issue: There are a lot of reasons to worry.[14]

I think the psychology sucks. Which is why I think we’re probably headed into a recession sooner rather than later. But when? My guess (yeah, I’m hedging big time) is it’s probably in time to have an impact on the 2020 election, but I don’t know. And anybody who thinks they do know is almost certainly full of shit.

  1. [1]David Benfell, “Lies, damned lies, and … economics. Oh, and Donald Trump,” Not Housebroken, August 25, 2019, https://disunitedstates.org/2019/08/19/lies-damned-lies-and-economics-oh-and-donald-trump/
  2. [2]Hites Ahir and Prakash Loungani, “‘There will be growth in the spring’: How well do economists predict turning points?” Vox, April 14, 2014, https://voxeu.org/article/predicting-economic-turning-points; Richard Alford, “Why Economists Have No Shame – Undue Confidence, False Precision, Risk and Monetary Policy,” Naked Capitalism, July 19, 2012, https://www.nakedcapitalism.com/2012/07/richard-alford-why-economists-have-no-shame-undue-confidence-false-precision-risk-and-monetary-policy.html; Ha-Joon Chang and Jonathan Aldred, “After the crash, we need a revolution in the way we teach economics,” Guardian, May 10, 2014, https://www.theguardian.com/business/2014/may/11/after-crash-need-revolution-in-economics-teaching-chang-aldred; Barry Eichengreen, “Economists, Remove Your Blinders,” Chronicle of Higher Education, January 12, 2015, http://www.chronicle.com/article/Economists-Remove-Your/151057/; Paul Krugman, “How Did Economists Get It So Wrong?” New York Times, September 2, 2009, https://www.nytimes.com/2009/09/06/magazine/06Economic-t.html; Paul Krugman, “Triumph of the Wrong?” New York Times, October 11, 2012, https://www.nytimes.com/2012/10/12/opinion/krugman-triumph-of-the-wrong.html; Andrew Simms, “Economics is a failing discipline doing great harm – so let’s rethink it,” Guardian, August 3, 2019, https://www.theguardian.com/commentisfree/2019/aug/03/economics-global-economy-climate-crisis; Mark Thoma, “Restoring the Public’s Trust in Economists,” Fiscal Times, May 19, 2015, http://www.thefiscaltimes.com/Columns/2015/05/19/Restoring-Public-s-Trust-Economists
  3. [3]Amelia Thomson-DeVeaux, “Economists Are Bad At Predicting Recessions,” FiveThirtyEight, August 21, 2019, https://fivethirtyeight.com/features/economists-are-bad-at-predicting-recessions/
  4. [4]Amelia Thomson-DeVeaux, “Economists Are Bad At Predicting Recessions,” FiveThirtyEight, August 21, 2019, https://fivethirtyeight.com/features/economists-are-bad-at-predicting-recessions/
  5. [5]Damian Paletta, Thomas Heath, and Taylor Telford, “Stocks losses deepen as a key recession warning surfaces,” Washington Post, August 14, 2019, https://www.washingtonpost.com/business/2019/08/14/stocks-tank-another-recession-warning-surfaces/
  6. [6]Amelia Thomson-DeVeaux, “Economists Are Bad At Predicting Recessions,” FiveThirtyEight, August 21, 2019, https://fivethirtyeight.com/features/economists-are-bad-at-predicting-recessions/
  7. [7]Amelia Thomson-DeVeaux, “Economists Are Bad At Predicting Recessions,” FiveThirtyEight, August 21, 2019, https://fivethirtyeight.com/features/economists-are-bad-at-predicting-recessions/
  8. [8]N. Gregory Mankiw, Principles of Economics, 6th ed. (South Melbourne, Victoria, Australia: Cengage, 2012).
  9. [9]David Benfell, “As a possible or probable recession looms, neoliberalism evades challenge. Yet again,” Not Housebroken, August 14, 2019, https://disunitedstates.org/2019/08/14/as-a-possible-or-probable-recession-looms-neoliberalism-evades-challenge-yet-again/
  10. [10]Amelia Thomson-DeVeaux, “Economists Are Bad At Predicting Recessions,” FiveThirtyEight, August 21, 2019, https://fivethirtyeight.com/features/economists-are-bad-at-predicting-recessions/
  11. [11]David Benfell, “How Donald Trump captured the Republican Party,” Not Housebroken, July 1, 2018, https://disunitedstates.org/2018/07/01/how-donald-trump-captured-the-republican-party/
  12. [12]Aaron Blake, “How a recession could doom Trump’s 2020 reelection,” Washington Post, August 12, 2019, https://www.washingtonpost.com/politics/2019/08/12/how-recession-could-doom-trumps-reelection/; Stephen Collinson, “Fretful Trump goes on attack as economy fears cloud 2020 hopes,” CNN, August 19, 2019, https://www.cnn.com/2019/08/19/politics/donald-trump-economy-2020-election-china-trade-war/index.html; Thomas Heath, “U.S. stocks suffer big across-the-board losses as trade war escalates,” Washington Post, May 13, 2019, https://www.washingtonpost.com/business/2019/05/13/dow-plunges-points-market-open-investors-fear-escalating-trade-war-threatens-economy/; Damian Paletta, Thomas Heath, and Taylor Telford, “Stocks losses deepen as a key recession warning surfaces,” Washington Post, August 14, 2019, https://www.washingtonpost.com/business/2019/08/14/stocks-tank-another-recession-warning-surfaces/; David Randall, “World stocks drop, bonds rally as trade tensions fan growth fears,” Reuters, May 28, 2019, https://www.reuters.com/article/us-global-markets/global-recession-fears-hit-stocks-bonds-rally-idUSKCN1SZ02F
  13. [13]Donald Trump, quoted in Thomas Franck, “Trump doubles down: ‘Trade wars are good, and easy to win,’” CNBC, March 2, 2018, https://www.cnbc.com/2018/03/02/trump-trade-wars-are-good-and-easy-to-win.html
  14. [14]Jon Hilsenrath, “After Record-Long Expansion, Here’s What Could Knock the Economy Off Course,” Wall Street Journal, June 3, 2019, https://www.wsj.com/articles/after-record-long-expansion-heres-what-could-knock-the-economy-off-course-11559591043; John Kemp, “Global economy is probably in recession,” Reuters, August 7, 2019, https://www.reuters.com/article/uk-global-economy-kemp/column-global-economy-is-probably-in-recession-idUKKCN1UX1OF; Colin Kruger, “‘Insane levels’: Can a world where profitless companies are flying last?” Sydney Morning Herald, August 10, 2019, https://www.smh.com.au/business/companies/insane-levels-can-a-world-where-profitless-companies-are-flying-last-20190808-p52f3d.html; Damian Paletta, Thomas Heath, and Taylor Telford, “Stocks tank as another recession warning surfaces,” Washington Post, August 14, 2019, https://www.washingtonpost.com/business/2019/08/14/stocks-tank-another-recession-warning-surfaces/; Tim Wallace, “‘Very real’ recession risk as economy contracts for first time in seven years,” Telegraph, August 9, 2019, https://www.telegraph.co.uk/business/2019/08/09/recession-risk-now-real-economy-contracts-first-time-seven-years/; Tim Wallace, “World economy faces a risk that’s far bigger than Trump’s trade war,” Sydney Morning Herald, August 9, 2019, https://www.smh.com.au/business/the-economy/world-economy-faces-a-risk-that-s-far-bigger-than-trump-s-trade-war-20190809-p52ffs.html

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