WEBVTT - Why Economists Should Act More Like Weather Forecasters 0:00:15.356 --> 0:00:23.156 Pushkin from Pushkin Industries. This is Deep Background, the show 0:00:23.196 --> 0:00:26.196 where we explore the stories behind the stories in the news. 0:00:26.596 --> 0:00:30.076 I'm Noah Feldman. According to a report released by the 0:00:30.076 --> 0:00:34.236 Commerce Department this week, US consumer spending in September sunk 0:00:34.236 --> 0:00:37.596 to its lowest rate in seven months. This is just 0:00:37.796 --> 0:00:41.116 the latest data point of many that seemed to suggest 0:00:41.236 --> 0:00:45.236 we may be headed for a recession. Prakash Langani is 0:00:45.276 --> 0:00:48.796 an advisor at the International Monetary Fund. Before that, he 0:00:48.916 --> 0:00:52.596 was an analyst at the Federal Reserve Board's International Finance Division. 0:00:53.076 --> 0:00:55.916 He has spent a lot of time thinking about recessions 0:00:56.436 --> 0:01:00.876 and how economists predict them or don't. Prakash, thank you 0:01:00.916 --> 0:01:03.916 so much for joining me. I want to start with, 0:01:04.396 --> 0:01:06.876 as it were, recessions one oh one. You know, the 0:01:06.916 --> 0:01:10.396 other day, my fourteen year old son said to me, Dad, actually, 0:01:10.396 --> 0:01:13.236 what's the definition of a recession? And I got up 0:01:13.276 --> 0:01:16.356 to my two quarters in a row of negative growth 0:01:16.356 --> 0:01:20.476 of GDP and then I had to pause. So tell us, 0:01:20.596 --> 0:01:22.596 first of all, you know, what is the definition of 0:01:22.636 --> 0:01:26.156 recession that economists use? And also how did they come 0:01:26.236 --> 0:01:28.596 up with this definition, because you know, two quarters in 0:01:28.596 --> 0:01:32.796 a row seems vaguely arbitrary. Well, I think I think 0:01:32.836 --> 0:01:36.196 the first thing, if I was in charge, I would 0:01:36.196 --> 0:01:38.196 do is to ban the world real GDP. I think 0:01:38.236 --> 0:01:41.596 we should just call it incomes, and that resonates more 0:01:41.636 --> 0:01:45.956 with the general person. So a recession is a year 0:01:46.036 --> 0:01:49.556 in which incomes fall, and you're right that there's nothing 0:01:49.596 --> 0:01:52.636 magical about saying they should fall two quarters in a row. 0:01:52.676 --> 0:01:55.396 We could have picked one, or we could have picked three. 0:01:55.796 --> 0:01:57.596 Two was just kind of a rule of thumb that 0:01:57.676 --> 0:02:00.196 seemed to suggest that bad things were going to happen. 0:02:00.996 --> 0:02:03.396 So I think it's better to just think of a 0:02:03.436 --> 0:02:06.996 recession as a year in which your income is going 0:02:07.036 --> 0:02:12.916 to fall. That's an extremely superior that's definitely a much 0:02:12.956 --> 0:02:16.996 superior definition of recession. Why don't economists all use that, 0:02:17.076 --> 0:02:19.516 considering how much clearer it is. I don't know. I 0:02:19.556 --> 0:02:23.796 think we got addicted to this word real GDP, which 0:02:23.876 --> 0:02:27.356 means nothing to your son or to an ordinary person. 0:02:27.476 --> 0:02:29.476 I think if you told my son his income was 0:02:29.516 --> 0:02:32.796 going to fall, you'll get his attention immediately. But you know, 0:02:32.836 --> 0:02:35.636 I think there is you know, each each profession has 0:02:35.676 --> 0:02:37.276 its jargon. I don't want to be too harsh on 0:02:37.356 --> 0:02:40.956 my fellow economists, but it could be worse. You could 0:02:40.956 --> 0:02:44.036 be lawyers, believe me, right, always get worse. So a 0:02:44.156 --> 0:02:47.676 recession basically is a year in which your income is 0:02:47.716 --> 0:02:52.556 likely to fall. And that's unusual because at least since 0:02:52.756 --> 0:02:57.036 the Industrial Revolution the last two hundred three hundred years, 0:02:57.396 --> 0:03:00.716 incomes generally go up every year. So that's been a 0:03:00.756 --> 0:03:04.436 good thing that's happened to us as a species. But 0:03:05.036 --> 0:03:10.396 so recessions are unusual, but not that rare. Recessions happen 0:03:10.516 --> 0:03:14.276 about twelve fifteen percent of the time, so it's something 0:03:14.316 --> 0:03:15.996 to keep an eye on, and that's why I've been 0:03:15.996 --> 0:03:19.956 trying to study them. Well, that's actually conceptually very interesting 0:03:19.996 --> 0:03:22.636 and also very helpful. So the first point you made, 0:03:22.716 --> 0:03:26.316 namely that we treat a recession, at least colloquially, like 0:03:26.356 --> 0:03:29.636 it's this terrible thing. But that's against the backdrop of 0:03:29.676 --> 0:03:33.796 the assumption that our incomes should somehow always go up. 0:03:34.476 --> 0:03:36.876 And as you say, it's great for our species that 0:03:36.876 --> 0:03:41.716 that be the case. But what underpins that commitment to 0:03:41.756 --> 0:03:44.476 the idea of steady growth? I mean, that's even before 0:03:44.476 --> 0:03:46.956 you reach the thought that nothing grows all the time. 0:03:47.036 --> 0:03:48.916 And as you say, twelve to fifteen percent at the 0:03:48.916 --> 0:03:53.316 time we're actually not growing. But starting with the background assumption, 0:03:53.876 --> 0:03:56.476 this is a good opportunity to ask an economist, why, 0:03:56.676 --> 0:03:59.076 in the view of most people in the field, should 0:03:59.076 --> 0:04:02.516 we assume that somewhere between you know, eighty eight and 0:04:02.556 --> 0:04:05.236 eighty five percent at the time, our incomes will go up. 0:04:05.876 --> 0:04:08.996 I think, you know, what's happened is that since the 0:04:09.156 --> 0:04:13.636 industrial Revolution, we've generally found a way of doing things better. 0:04:13.756 --> 0:04:16.556 Every year, you know, you and I kind of find 0:04:16.596 --> 0:04:19.756 a way of doing our jobs better, aided by technology, 0:04:19.876 --> 0:04:23.236 aided by our own brains. Would say, you know, I 0:04:23.316 --> 0:04:25.836 screwed up on this and that last year. I'm not 0:04:25.876 --> 0:04:29.596 going to repeat it. I think because of what economists 0:04:29.596 --> 0:04:33.996 in their jargon called technological progress, our incomes have been 0:04:34.036 --> 0:04:36.716 going up at about two percent a year in sometimes 0:04:36.876 --> 0:04:39.996 the United States. Now, so the United States has had 0:04:40.596 --> 0:04:44.356 adjusted for inflation, it has had incomes go up two 0:04:44.356 --> 0:04:48.116 percent a year. And so because of technological progress, Now, 0:04:48.316 --> 0:04:51.716 should we always assume that will be the case as 0:04:51.716 --> 0:04:53.836 long as you know, we can find ways of doing 0:04:53.836 --> 0:04:57.596 our jobs better. Probably should we as we grow richer 0:04:57.876 --> 0:05:01.156 gets obsessed about having a two percent increase every year. 0:05:01.196 --> 0:05:04.636 Probably not, But still I think most people would say, 0:05:05.116 --> 0:05:08.716 having incomes go up at some reasonable rate is better 0:05:08.756 --> 0:05:13.116 than having them fall for sure. Yeah. So let me 0:05:13.196 --> 0:05:18.196 ask you a push about cycles. So if we had 0:05:18.636 --> 0:05:21.836 you know, a regular prediction of two percent growth over 0:05:21.876 --> 0:05:25.036 some period of time, you know, over say ten years, 0:05:25.716 --> 0:05:28.916 and yet we had some we knew that with some probability, 0:05:28.956 --> 0:05:32.036 there is going to be you know, randomness in the system, 0:05:32.076 --> 0:05:35.436 and sometimes it would go down, then we would expect that. 0:05:35.516 --> 0:05:38.076 You know, again, if you're around twelve to fifty percent 0:05:38.356 --> 0:05:40.916 more than one in ten times in a ten year period, 0:05:41.436 --> 0:05:44.916 we would have a recession. Right, So is that cyclical 0:05:44.956 --> 0:05:47.516 way of thinking about recessions a healthier way to think 0:05:47.556 --> 0:05:49.876 about it? In other words, don't panic and think that 0:05:49.916 --> 0:05:53.116 every recession is the harbinger of things in general getting worse. 0:05:53.516 --> 0:05:55.276 But just see it as you know, we're flipping the 0:05:55.316 --> 0:05:58.876 coin and you know over time it's going to even out. Yeah. 0:05:58.876 --> 0:06:02.196 I think you know. That's why you're seeing people worry 0:06:02.196 --> 0:06:05.716 about a recession right now, is because we've had an 0:06:05.716 --> 0:06:09.276 expansion of eight, nine, ten years, and people know that 0:06:10.036 --> 0:06:13.076 in the past at least expansions have not gone on 0:06:13.236 --> 0:06:16.436 for twenty years. So I think you're seeing a lot 0:06:16.436 --> 0:06:19.516 of people correctly worrying about the fact that if you 0:06:19.636 --> 0:06:23.276 have an expansion that's long in the tooth, it's about 0:06:23.476 --> 0:06:26.556 time to start worrying about whether it's going to keep going. 0:06:26.756 --> 0:06:29.156 And I think that, as you say that is the 0:06:29.836 --> 0:06:31.956 healthy way to think about it is that you know, 0:06:32.076 --> 0:06:35.676 recessions are kind of like the hurricanes of economic life. 0:06:35.836 --> 0:06:38.956 I mean, you know, with hurricanes, you have a hurricane season, 0:06:38.996 --> 0:06:40.676 so you have a bit of an edge, you know, 0:06:41.036 --> 0:06:43.996 went to look for them. But still we know that 0:06:44.396 --> 0:06:49.836 expansions don't go on forever, so having a long expansion 0:06:50.676 --> 0:06:53.836 means that we should start thinking about is the next 0:06:53.836 --> 0:06:56.436 one around the corner. And I think it's actually healthy 0:06:56.476 --> 0:06:59.276 that there has been all this concern about whether we're 0:06:59.316 --> 0:07:04.436 going into a recession. Speaking about hurricanes and predictions, you 0:07:04.516 --> 0:07:08.676 when your co authors wrote a much cited and very 0:07:08.716 --> 0:07:14.796 interesting paper which you published last year, suggesting that economists 0:07:14.876 --> 0:07:20.076 don't do that well at predicting recessions because they're, on 0:07:20.156 --> 0:07:23.916 the whole economists are too optimistic about growth and so 0:07:23.956 --> 0:07:27.116 they miss a significant number of the recessions that are 0:07:27.316 --> 0:07:30.236 out there. Tell me a little bit about what motivated 0:07:30.236 --> 0:07:32.796 you to do the study and what takeaway we should 0:07:32.796 --> 0:07:37.116 have from it. What sort of motivated me was, frankly, 0:07:37.156 --> 0:07:42.196 my own horrible forecasting record. So twenty years ago, I 0:07:42.316 --> 0:07:45.916 was my job when I was at the FED was 0:07:45.956 --> 0:07:51.396 to forecast economic growth for Korea. And you know, my 0:07:51.476 --> 0:07:54.596 boss had given me the job, saying, you know, God, 0:07:54.636 --> 0:07:57.276 I'm giving you the job of a lifetime. These countries 0:07:57.356 --> 0:08:01.236 grow seven percent a year, nothing changes, and I'm giving 0:08:01.276 --> 0:08:03.676 you the job of forecasting this. You should be thanking me. 0:08:03.716 --> 0:08:07.676 And this was, you know, nineteen ninety seven, and you know, 0:08:07.916 --> 0:08:11.196 people said, oh, something's going wrong in Korea. I said, okay, fine, 0:08:11.276 --> 0:08:14.516 I'll cut my forecast down from seven percent to three percent, 0:08:14.596 --> 0:08:18.476 which for me was like a huge deal. And people said, no, no, no, 0:08:18.556 --> 0:08:20.916 we think there's something else going on. These were, you know, 0:08:21.276 --> 0:08:24.076 people who were not even following Korea. These were people 0:08:24.116 --> 0:08:27.156 who were just talking to friends, reading the newspaper. And 0:08:27.236 --> 0:08:31.036 here I was kind of the sophisticated forecaster, and you know, 0:08:31.076 --> 0:08:35.956 I dug in my heels. I've very grudgingly, towards the end, 0:08:36.756 --> 0:08:40.276 cut my forecast to minus three as the year was ending. 0:08:40.556 --> 0:08:43.076 You know, Korea ended up at minus seven that year. 0:08:43.196 --> 0:08:46.556 So you know, I've always been intrigued about whether it 0:08:46.636 --> 0:08:50.196 was just me being terrible or if this was something 0:08:50.556 --> 0:08:54.356 that all my friends were also subject to. And lo 0:08:54.556 --> 0:08:56.876 and behold, as you said, I found that the record 0:08:56.996 --> 0:09:01.316 is just terrible. I mean, as you saw in that study. 0:09:01.596 --> 0:09:04.276 You know, we studied one hundred and fifty s recessions 0:09:04.796 --> 0:09:09.316 and only five were predicted a year in advance. And 0:09:10.156 --> 0:09:13.036 you might say that's a very very high bar to set, 0:09:13.116 --> 0:09:16.076 but you know, you can lower the bar and still 0:09:16.076 --> 0:09:20.876 the forecasting performance remains really bad. And you know, one 0:09:20.916 --> 0:09:24.716 fourth of recessions remain undetected even as the year is ending. 0:09:24.796 --> 0:09:29.836 So it's like forecasters are just not aware that the economy, 0:09:29.996 --> 0:09:32.036 it will turn out, has been in a recession the 0:09:32.076 --> 0:09:35.556 whole year, and one fourth of we can't even tell 0:09:35.796 --> 0:09:39.636 that the economy. It's only later and then the following year, 0:09:39.716 --> 0:09:42.476 the year after the rains have gone, that people will say, oh, 0:09:42.476 --> 0:09:45.036 it was raining, did you know so? But that makes 0:09:45.036 --> 0:09:46.916 it seem a little less bad, because if it's so 0:09:46.956 --> 0:09:50.516 difficult to detect the recession even when it's actually in action, 0:09:50.876 --> 0:09:52.276 it makes it seem like it will be much more 0:09:52.356 --> 0:09:55.156 difficult to predict it in advance, right, I mean, as 0:09:55.156 --> 0:09:58.156 you say, when it's raining, we know that it's raining, right, 0:09:58.236 --> 0:10:02.396 So that implies that rain is a binary, which maybe 0:10:02.436 --> 0:10:04.236 is not true if you live in England or Scotland. 0:10:04.276 --> 0:10:05.796 Maybe it's always a little bit raining. But I mean, 0:10:05.876 --> 0:10:07.836 imagine that rain is a binary either it's raining or 0:10:07.876 --> 0:10:11.676 it's not raining, and then it makes it easier to detect, 0:10:11.676 --> 0:10:13.436 and that, in turn, you would think would have some 0:10:13.476 --> 0:10:16.276 effect on our capacity to predict it. But if something's 0:10:16.356 --> 0:10:18.876 very hard even to detect, surely it should be even 0:10:18.876 --> 0:10:21.556 more difficult to predict. I mean, maybe only a handful 0:10:21.596 --> 0:10:23.516 out of one hundred and fifty three recessions doesn't seem 0:10:23.556 --> 0:10:25.556 like a very good success rate. Maybe we just have 0:10:25.676 --> 0:10:27.836 the wrong baseline. Maybe it should be hard to predict. 0:10:28.116 --> 0:10:32.036 That's the defense that many of my fellow economists offer. 0:10:32.156 --> 0:10:34.156 I mean I don't I don't fully buy it. I 0:10:34.196 --> 0:10:39.396 think that there is a bit of complacency. I think 0:10:39.756 --> 0:10:44.396 the suffering that in recessions inflicts on people is not 0:10:44.596 --> 0:10:50.076 really felt by my fellow economists and the salary jobs 0:10:50.156 --> 0:10:52.196 that you know, Yeah, I think we have to protected. 0:10:52.356 --> 0:10:54.276 I mean we are an I mean many of us 0:10:54.316 --> 0:10:58.236 are have high levels of education. We kind of managed 0:10:58.236 --> 0:11:00.956 to hold our jobs through recessions. I think if we 0:11:00.956 --> 0:11:04.556 were the common person, we would demand that economists try 0:11:04.596 --> 0:11:07.076 to do a better job. I mean, you know, fifty 0:11:07.116 --> 0:11:11.276 sixty years ago, we would completely bad at predicting hurricanes, 0:11:11.316 --> 0:11:15.156 and you know, hurricanes had used to have major loss 0:11:15.156 --> 0:11:17.916 of life following that, and we didn't. We said this 0:11:17.996 --> 0:11:21.636 is not acceptable because you know, people are dying. And 0:11:21.716 --> 0:11:25.836 I think we just don't see the damage that recessions 0:11:25.876 --> 0:11:28.076 inflict in the same way. And if we did, we 0:11:28.116 --> 0:11:32.436 would demand that economists try to do a better job. 0:11:32.916 --> 0:11:34.676 I mean, you're right that we may not be able 0:11:34.676 --> 0:11:38.396 to do so with complete success. I mean weather forecasters 0:11:38.396 --> 0:11:42.436 who are predicting hurricanes often, as we know, get us 0:11:42.476 --> 0:11:44.956 all worried, and then the hurricane changes course and they 0:11:44.996 --> 0:11:48.036 say sorry, falls along. But we don't blame them, you know, 0:11:48.116 --> 0:11:50.156 we said they're doing their best job. They're trying to 0:11:50.196 --> 0:11:53.956 protect us. I think economic forecasters should be treated the 0:11:53.996 --> 0:11:55.876 same way. I mean, these are people who are trying 0:11:55.876 --> 0:11:59.716 to protect us from job loss, which has you know, 0:11:59.796 --> 0:12:03.196 just as devastating consequences as what hurricanes do. I mean, 0:12:03.916 --> 0:12:06.596 you were asking me what got me motivated? One thing 0:12:06.796 --> 0:12:09.956 that also got me motivated in addition to My own 0:12:09.996 --> 0:12:12.556 poor forecast was that I was unemployed for a year 0:12:12.596 --> 0:12:14.356 and I could see the effects it had on me. 0:12:15.076 --> 0:12:17.836 And I've been studying the effects of what unemployment does 0:12:17.836 --> 0:12:21.676 to people, and so I've become very passionate about saying, 0:12:21.956 --> 0:12:24.356 you know, we should try to forecast recessions, we should 0:12:24.396 --> 0:12:27.596 try to take steps ahead of time so that we 0:12:27.596 --> 0:12:31.836 can prevent job loss during recessions. Well, those are That's 0:12:31.876 --> 0:12:35.876 a very fascinating perspective on it, and I appreciate that 0:12:36.036 --> 0:12:39.476 having had the experience of unemployment must raise your awareness 0:12:39.476 --> 0:12:42.636 and consciousness. And that actually brings me to the question 0:12:42.676 --> 0:12:45.596 that I wanted to follow up on, which is, let's 0:12:45.596 --> 0:12:49.356 think a little bit about the incentives of predictors. So 0:12:49.436 --> 0:12:53.756 you mentioned that when the meteorologists predict a hurricane and 0:12:53.756 --> 0:12:56.756 then the hurricane misses us or doesn't happen, we don't 0:12:56.796 --> 0:12:59.876 get that angry at them, yep. But that goes to 0:12:59.916 --> 0:13:04.196 their incentives, right, I mean, when they predict a hurricane 0:13:04.316 --> 0:13:06.956 and it doesn't come, we just think, instead of directing 0:13:06.956 --> 0:13:09.436 anger towards them or blaming them for the research us 0:13:09.476 --> 0:13:13.316 that we might have spent in preparing for the hurricane, unnecessarily, 0:13:13.356 --> 0:13:16.156 we say, oh, we're so glad, so overwhelmingly please that 0:13:16.156 --> 0:13:19.396 we weren't hit by a hurricane that that outweighs any irritation, 0:13:19.396 --> 0:13:22.916 and we might feel towards the meteorologists. And you know, 0:13:22.956 --> 0:13:26.956 if we expand from hurricanes to let's call them winter storms. 0:13:27.276 --> 0:13:28.876 You know, I'm from Boston and I still live in 0:13:28.876 --> 0:13:33.036 the Boston area, and you know, the prediction of great 0:13:33.076 --> 0:13:38.156 sizeable winter storms is an industry where great profits are 0:13:38.196 --> 0:13:41.716 made by local media, by local radio and television, because 0:13:41.956 --> 0:13:45.076 people will watch them if they predict a storm, and 0:13:45.156 --> 0:13:47.316 so they systematically I mean I've never read a study 0:13:47.316 --> 0:13:48.756 about this, but I would bet almost anything that you 0:13:48.756 --> 0:13:51.836 could show it into study that they systematically over predict 0:13:51.876 --> 0:13:54.476 storms because it's good for ratings, and as you point out, 0:13:54.516 --> 0:13:57.956 there's not that much downside for them if there's there's 0:13:57.996 --> 0:14:01.516 no storm. They don't internalize the full externality of the 0:14:01.676 --> 0:14:06.156 full spillover costs of their having made predictions. What about economists, 0:14:06.236 --> 0:14:10.396 I mean, if they predict recession, do they have something 0:14:10.436 --> 0:14:13.436 to lose? And I'm looking for some motivational account. I'm 0:14:13.436 --> 0:14:15.396 trying to be a good economist or a good you know, 0:14:15.476 --> 0:14:18.476 rational actor economists and see if there's some motivational explanation 0:14:18.996 --> 0:14:23.036 for why economists underpredict recession. Yeah, I've I've been studying 0:14:23.076 --> 0:14:25.356 that a lot too. I mean, I you know, many 0:14:25.396 --> 0:14:29.076 of these forecasters who have been studying are actually you know, friends, 0:14:29.116 --> 0:14:33.036 and I can talk to them, and for them, the 0:14:33.556 --> 0:14:39.036 reputational loss from falsely calling a recession would be huge. 0:14:39.276 --> 0:14:42.996 That's that's how they perceive it. And what they tell 0:14:43.076 --> 0:14:47.436 me is that they will make a forecast that things 0:14:47.476 --> 0:14:49.276 could be kind of bad, but they don't go into 0:14:49.316 --> 0:14:52.556 negative territory. But when they go to meet their clients, 0:14:52.636 --> 0:14:55.036 they may say, well, you know, I didn't want to 0:14:55.076 --> 0:14:59.556 move my forecast down into negative, but privately, I'm telling 0:14:59.556 --> 0:15:02.676 you I'm really worried. So they say they would prefer 0:15:02.796 --> 0:15:06.916 to do that then to go out and make a call. 0:15:07.476 --> 0:15:10.516 And there's a very good example from some years ago. 0:15:10.556 --> 0:15:15.836 There's this really nice place called the Economic Cycle Research Institute, 0:15:15.836 --> 0:15:22.516 which really tries to forecast recessions. And in September twenty eleven, 0:15:22.996 --> 0:15:28.316 their lead guy, Lakshmanachuthan, went on Bloomberg and said, there's 0:15:28.356 --> 0:15:31.316 going to be a recession called. He said, We've been 0:15:31.316 --> 0:15:34.076 telling our clients privately, but I feel I have an 0:15:34.076 --> 0:15:37.876 obligation to tell everyone else the public, that there's going 0:15:37.916 --> 0:15:40.996 to be a recession, and that recession didn't happen. And 0:15:41.516 --> 0:15:44.956 you know, for a year, Bloomberg would keep inviting this 0:15:45.036 --> 0:15:46.956 guy back. He would say, it's going to happen, It's 0:15:46.956 --> 0:15:48.876 going to happen. And then one year later he had 0:15:48.876 --> 0:15:51.996 to say, well, it turned out to be a false alarm. 0:15:52.036 --> 0:15:54.796 And my sense is that that did not do wonders 0:15:54.836 --> 0:15:58.916 for his reputation or the reputation of his company. And 0:15:58.996 --> 0:16:02.356 to me, that's unfortunate because I don't see that he 0:16:02.436 --> 0:16:07.116 was making that call either to become famous or to 0:16:07.236 --> 0:16:11.676 make money. He had already told his clients privately, but 0:16:11.716 --> 0:16:14.796 he just felt, here, we've just gone through the Great Recession. 0:16:15.676 --> 0:16:19.116 He was truly worried his company, based on their indicators, 0:16:19.596 --> 0:16:22.076 that twenty twelve would be a recession, and he thought 0:16:22.076 --> 0:16:25.756 it was a public duty. Just as with hurricanes, we 0:16:25.876 --> 0:16:28.356 think it's a public duty of forecasters to tell us 0:16:28.356 --> 0:16:30.636 if a hurricane is coming. He thought it was his 0:16:30.716 --> 0:16:34.076 public duty to do so. And the experience didn't end 0:16:34.116 --> 0:16:38.796 up well. I can picture two different stories about why 0:16:39.356 --> 0:16:42.076 in this case that you describe, it's so costly for 0:16:42.116 --> 0:16:44.676 an economist to predict a recession and not have it happened. 0:16:44.716 --> 0:16:48.276 So one is a story about safety in numbers. Right 0:16:48.316 --> 0:16:51.316 on this story, it's sort of conventional that most of 0:16:51.356 --> 0:16:55.196 the time there isn't a recession, and so economists defaults 0:16:55.196 --> 0:16:57.676 to predicting that there won't be a recession. And then 0:16:57.676 --> 0:17:00.076 if one person wants to say there will be a reception, 0:17:00.396 --> 0:17:02.436 he or she has got to put himself on the 0:17:02.476 --> 0:17:04.916 wine go out there. And then if he's right, sure, 0:17:04.956 --> 0:17:07.476 people might say he's a genius. But more of the 0:17:07.516 --> 0:17:10.236 time he's going to be wrong than right, and it's 0:17:10.356 --> 0:17:14.636 very costly because he's an outliers. He's stuck his neck 0:17:14.676 --> 0:17:19.876 out and others have not done so. And in that story, 0:17:20.116 --> 0:17:22.476 you might be able to fix this if more economists 0:17:22.796 --> 0:17:27.796 were willing to predict recessions simply by virtue of there 0:17:27.796 --> 0:17:30.156 being more numbers. You know, we're getting a group together, 0:17:30.196 --> 0:17:32.436 you might be able to fight off that that cost. 0:17:33.076 --> 0:17:35.716 The other story, though, is a story about self fulfillment. 0:17:35.756 --> 0:17:38.116 It might be that we sort of imagine that if 0:17:38.236 --> 0:17:41.396 enough economists say there's going to be a recession, that 0:17:41.396 --> 0:17:44.196 that has a recursive effect and helps drive a recession. 0:17:44.556 --> 0:17:47.596 Since there is some element of expectation having an effect 0:17:47.596 --> 0:17:50.996 on real world events, and so on that theory, we 0:17:51.156 --> 0:17:54.236 collectively we really don't want economists to say there's going 0:17:54.276 --> 0:17:56.516 to be a recession. We might know that they are 0:17:56.596 --> 0:17:59.836 under predicting recessions, but we like that because as a 0:17:59.916 --> 0:18:04.076 social matter, we prefer the optimism because we know that 0:18:04.116 --> 0:18:06.636 once in a while, too much pessimism can actually bring 0:18:06.636 --> 0:18:09.236 about a bad result. Do either these stories make any 0:18:09.276 --> 0:18:10.956 sense to either of them? Correspond to how you see 0:18:10.996 --> 0:18:13.276 the world? Yeah? No, I think the second thing that 0:18:13.316 --> 0:18:17.396 you mentioned is the only to me justifiable reason for 0:18:17.556 --> 0:18:21.916 caution in predicting recessions, because of the self fulfilling nature. 0:18:22.396 --> 0:18:26.116 You know. That's that's the difference between economic forecasting and 0:18:26.116 --> 0:18:29.156 weather forecasting. You know, we take preventative actions, but we 0:18:29.196 --> 0:18:31.756 don't influence whether or not there will be a hurricane, 0:18:31.756 --> 0:18:37.036 whereas with recessions there can be the self fulfilling nature. 0:18:37.156 --> 0:18:40.156 But to me, we are so far from having to 0:18:40.196 --> 0:18:42.356 worry about that, because, as I said, we are in 0:18:42.356 --> 0:18:46.396 a corner where we almost never predict a recession, even 0:18:46.436 --> 0:18:49.156 though they happen twelve to fifteen percent of the time. 0:18:49.596 --> 0:18:54.796 So to me, it's worth the risk of saying, let's 0:18:54.876 --> 0:18:58.476 try to move to a sort of world where we 0:18:59.436 --> 0:19:02.956 are always somewhat worried about recession. If a recession has 0:19:02.996 --> 0:19:06.476 just happened, I would say, then don't worry about it, 0:19:06.556 --> 0:19:10.916 because you know, if recovery has taken hold, it tends 0:19:10.916 --> 0:19:14.636 to be self perpetuating for a while, and it's fine. 0:19:14.756 --> 0:19:17.876 But once you get two, three years, four years into 0:19:17.876 --> 0:19:21.636 an expansion, then you start judging and trying to see 0:19:21.676 --> 0:19:23.516 what the odds are. So I think the language and 0:19:23.556 --> 0:19:28.156 the terminology should shift into more about, you know, what 0:19:28.356 --> 0:19:31.396 is the likelihood, and then you know, to be open 0:19:31.436 --> 0:19:34.636 about the fact that at at some times there will 0:19:34.716 --> 0:19:38.676 be a divergence in opinion, and then people can decide 0:19:40.036 --> 0:19:42.876 on that basis whether or not they want to make adjustments. 0:19:43.476 --> 0:19:46.076 So now we're in a moment when some economists really 0:19:46.076 --> 0:19:48.156 are starting to talk about a prediction of recessions. So 0:19:48.236 --> 0:19:51.396 let's talk a little bit about some of the indications. 0:19:52.396 --> 0:19:55.436 One is, you mentioned already that when a recovery has 0:19:55.516 --> 0:19:57.796 lasted for a good long time, it's getting I think 0:19:57.796 --> 0:20:00.596 you said long in the truth. Just statistically it seems 0:20:00.636 --> 0:20:03.476 probable there will there will come to an end at 0:20:03.476 --> 0:20:05.556 some point because you know, if you just look at 0:20:05.596 --> 0:20:08.836 the probability distributions, it's been the X number of years 0:20:08.876 --> 0:20:12.356 and so it's probably going to be over soon. Another 0:20:12.756 --> 0:20:17.196 is the so called inverted yield curve in the bond markets. Yeah, 0:20:18.436 --> 0:20:20.196 maybe let's take them in order. Let's start with the 0:20:20.276 --> 0:20:22.316 just the numbers game. You know, it's been a while, 0:20:22.796 --> 0:20:25.116 and then from there we can you can explain the 0:20:25.156 --> 0:20:27.076 inverted yield curve to us, and we can we can 0:20:27.076 --> 0:20:29.556 try to look at that a little more closely. Yeah. No, 0:20:29.676 --> 0:20:33.196 I think the you know, the duration of expansions has 0:20:33.276 --> 0:20:36.036 some predictive power for whether or not there will be 0:20:36.036 --> 0:20:39.596 a recession. So I think that's certainly one factor. But 0:20:39.716 --> 0:20:42.676 I think, off the other indicators, the yield curve is 0:20:43.436 --> 0:20:47.956 the most promising one, and the fact that it has 0:20:47.996 --> 0:20:51.796 inverted now, and that it had inverted prior to the 0:20:51.796 --> 0:20:55.596 previous five recessions, is something that we should take into account. 0:20:55.996 --> 0:20:58.236 So let me run by what I try to I'll 0:20:58.276 --> 0:21:00.676 give you my attempt to explain to my fourteen year 0:21:00.716 --> 0:21:02.916 old what the inverted yield curve was, and tell me 0:21:02.916 --> 0:21:06.076 where I where I went wrong. What I said to 0:21:06.156 --> 0:21:09.396 him was, look what's going on in an inverted yield 0:21:09.396 --> 0:21:14.996 curve is that people who are setting interest rates believe 0:21:15.836 --> 0:21:19.836 that the economy is likely to be much better over 0:21:19.916 --> 0:21:23.156 a long term than they expect it to be over 0:21:23.276 --> 0:21:26.316 the short term. And that's why it's a higher interest 0:21:26.436 --> 0:21:29.516 rate over the long term than it is over the 0:21:29.556 --> 0:21:33.676 short term. And that reflects I suggested, I think, maybe wrongly, 0:21:34.116 --> 0:21:37.236 a prediction that things are going to get worse before 0:21:37.356 --> 0:21:40.036 they're going to get better, as opposed to the more 0:21:40.076 --> 0:21:43.036 normal set of circumstances, where we think that that something 0:21:43.076 --> 0:21:45.876 out in the future is more uncertain and in the 0:21:46.316 --> 0:21:49.676 nearer future we're able to identify with a greater probability 0:21:49.676 --> 0:21:52.196 that things will go well, and so therefore the usual 0:21:52.236 --> 0:21:54.556 model is for the interest rates to be the other 0:21:54.636 --> 0:21:57.676 way around. Right, So where in that analysis did I 0:21:57.716 --> 0:22:00.596 go wrong? And I think that's that's exactly right. That 0:22:00.796 --> 0:22:04.236 is one of the channels. One channel that we typically 0:22:04.356 --> 0:22:08.076 used to say was that the FED or policymakers had 0:22:08.476 --> 0:22:11.636 somewhat more information about which way the economy was headed, 0:22:11.956 --> 0:22:14.036 and they were worried about the near term, and so 0:22:14.716 --> 0:22:18.596 short term interest rates were being lowered. But the problem 0:22:18.636 --> 0:22:21.156 this time is that the short term interest rates have 0:22:21.236 --> 0:22:25.276 been low for almost a decade now, right, So it 0:22:25.316 --> 0:22:26.916 can't be a good predictor that they think things are 0:22:26.916 --> 0:22:29.236 going to get Yeah, it can't be seems to switch 0:22:29.276 --> 0:22:31.236 to being some other thing. It's like now it's a 0:22:31.236 --> 0:22:33.556 feature of political economy that Yeah. So I think there 0:22:33.556 --> 0:22:36.756 are pressures on the FED, including from the president, but 0:22:36.876 --> 0:22:39.436 even before this president, other people were putting pressure on 0:22:39.476 --> 0:22:41.356 the FED to try to keep the interest rates low 0:22:41.596 --> 0:22:44.236 and to keep the markets happy. Yeah. I mean that's 0:22:44.236 --> 0:22:48.596 a constant of presidential wish list, is you know? Right 0:22:48.636 --> 0:22:51.436 every president, every president would like people to be able 0:22:51.476 --> 0:22:55.076