Opinion Editorial | |
| Wednesday, July 15, 1998 | |
No One Knows When the Next Recession Will Come |
At a recent congressional hearing, Federal Reserve Board Chairman Alan
Greenspan gave a highly upbeat forecast for the economy. "The current
economic performance, with its combination of strong growth and low inflation,
is as impressive as any I have witnessed in my nearly half-century of daily
observation of the American economy," he said. Markets pay close attention to such statements, not just because of Greenspan's
powerful position but because of his long record as a professional economic
forecaster. From 1954 to 1987, except for two years as chairman of the
Council of Economic Advisers under President Gerald Ford, Greenspan was
one of Wall Street's most respected and highly-paid forecasters. Even before
being appointed chairman of the Federal Reserve by President Ronald Reagan
in 1987, Greenspan's views were eagerly sought by heads of major corporations
and policymakers. Despite his reputation, however, Greenspan's forecasts have not always
been on the mark. In January, 1973, Greenspan said, "It's very rare
that you can be as unqualifiedly bullish as you can now." Of course,
with the benefit of hindsight, we now know that at the very moment Greenspan
uttered those words the economy was on the brink of collapse. Inflation
exploded, more than doubling from 3.4 percent the year before to 8.8 percent
in 1973. Interest rates also virtually doubled and by November the economy
officially was in a recession. Greenspan's record did not improve after joining the Federal Reserve,
despite now having perfect knowledge of the direction of monetary policy,
a key economic variable. At a meeting of the Federal Open Market Committee
on October 2, 1990, he told his fellow members, "The economy has not
yet slipped into a recession." In fact, the nation had been in a recession
since July, according to the National Bureau of Economic Research, which
establishes the official dates for recessions. This is not to pick on Mr. Greenspan. Many other economists have made
equally bad forecasts at inopportune times. For example, in December, 1969,
economist Pierre Rinfret said, "There ain't going to be no recession.
I guarantee it." A recession began that very month. In July, 1990,
a survey of 40 economists in the Wall Street Journal found only one, A.
Gary Shilling, predicting a recession, even though we now know that one
was already underway. The Journal reporter who wrote the article even ridiculed
Mr. Shilling's forecast, saying he "now has predicted four of the past
zero recessions." Practice, perhaps, makes perfect. The point is that all economic forecasts, even from luminaries like Mr.
Greenspan, need to be treated with a great deal of skepticism. And the
farther out the forecast, the greater the skepticism. It is reasonable
to assume that the near future will closely resemble the recent past. But
the farther out one goes, the more tenuous the forecast necessarily becomes.
That is why it is laughable to see congressional debates over the revenue
impact of tax policies 10 years hence, as one often does. No sensible economist
would attempt to forecast the impact of any policy that far out unless compelled
to do so. Yet policy is made on the basis of such forecasts as if the numbers
were carved into stone. The truth is that no one knows when the next recession will occur. But
we can predict with certainty that one is coming, eventually. The business
cycle has not been repealed, policymakers and investors have not become
immune from making mistakes, and our economy is still vulnerable to external
shocks, like the OPEC oil embargo. Economist Ed Yardeni believes the so-called
year 2000 problem with computers will trigger a recession next year. Maybe
he will be right, maybe he won't. Time will tell. Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis,
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