Wednesday, April 8, 2020
Introductory Section For Recessions: Volume I
It is somewhat interesting timing to release a book on recessions near the inception of what is projected to be the most rapid contraction of economic activity recorded in modern history. The question that a casual reader would ask: did I predict this recession? The answer is that I did not do so (except perhaps too late to do anything useful about the prediction). This is not too disconcerting for me, as the thesis of my book is that recessions are inherently hard to predict using economic models.
In order to predict this downturn, one would have needed to look at the characteristics of the virus, which first showed up in China. One could have used models of epidemics, and predicted the need for severe reactions to stop the virus spread. However, that forecast required medical knowledge, and an ability to cut through the fog of the reports from China. Some people did accomplish this feat. However, they had to rely on alternative sources of information; one could not have trawled through a database of standard economic time series to predict this outcome. (It would have been possible to look at Chinese data and react more quickly than many other investors or governments, but the lead time was so short that it does not meet the criteria for recession predictions that I have in mind in my discussions.)
This text lists a wide variety of triggers for recessions. Other than a few parenthetical comments added a month or so ago, there was no discussion of the economic risks created by a pandemic. From a narrative point of view, this appears to be justified. I believe that the pandemic lockdown is one of the few cases where neoclassical Real Business Cycle models appear to be somewhat plausible. The discussion of those models is deferred to Volume II, and so it would be most natural to discuss the topic there.
Nevertheless, only the recession trigger seems unusual. In my view, most of the economic difficulties are easily understood from the post-Keynesian perspective discussed in this volume. The closure of businesses obviously cut income flows within the economy. Loss of income flows leads to financial stress and failures, leading to a liquidation cycle.
Rather than hold off publication of this volume, I will add a discussion of the current recession to next volume, and examine how it fits in with competing theories.
Most of the sections in this volume were written in 2019, and a good portion of those were written in the first half of the year. Figures typically cut off in 2019, as was discussion of the current situation. There was a recession scare in the middle of the 2019, with models based on the yield curve predicting recession. It appeared that those recession predictions would be incorrect in late 2019, when my initial draft was wrapped up, as activity was starting to tick up. Rather than risk mangling my text with a hasty re-write, I have left my assessment of the situation as stood in late 2019. To what extent my cautious statements look silly in retrospect, they offer an example of how quickly events can catch up to commentators.
There is already a debate whether the global economy was headed to recession (as signaled by the yield curve), and that the pandemic shutdowns just magnified the effects. This is slightly reminiscent of the situation in the United States in the Financial Crisis: the official recession dating starts on December 2007, ahead of the total seizure of financing activity that coincided with the Lehman Brothers default in autumn 2008. I will wait for the second volume -- when the full set of non-revised data are available -- before confronting that debate.
Montreal, April 6, 2020.
(c) Brian Romanchuk 2020