What’s around the Macro-Corner?

I have some personal business this weekend and won’t be on line again until Monday. So please write your comments but note that I won’t be able to approve and publish them until I return.

There is a lot of concern about the US and global economy. Will we have a double-dip recession? When will the unemployment rate come back down to normal? These are just a couple of the macro-things on our minds. They weigh on us in a time when there seem to be no easy answers. This may not be a replay of the Great Depression, but it is definitely the worst economy that many of us have ever seen. And we are worried the future might be worse.

So “What’s around the corner?” is a very legitimate thing to be asking. We have a lot of people competing with each other to help us know what is coming around the bend. In fact, it is hard to escape all these newscasters, politicians, and various talking heads. Many of these people base their views of the future on models. Some economic forecasters use very complex and complicated models with 100s of variables and theoretical inspirations from Keynes or Friedman, or other great economists. Other forecasters focus on what they consider to be a few key trends. Others seem to speak from their guts. Still others simply want fame and/or money.

But let’s all agree with George Will who said, “The future has a way of arriving unannounced.” You don’t have to take what I am about to say as a rejection of all forecasters. I think they are very valuable. And a lot of times they get it right. But let’s be realistic. No matter how complicated or sophisticated a model might be, its forecasts are extrapolations of the past. They are extrapolations based on theories and concepts that are as thorough as we can make them but admittedly they leave out what could turn out to be critical information that makes the future different from the past. WE DON’T KNOW THE FUTURE AND NEVER WILL. THERE WILL ALWAYS BE THINGS LEFT OUT OF THESE FORECASTS. Clearly in today’s wacky environment there is much we could be overlooking.

Here are some examples that show how far off we can be in knowing about coming big changes?

o In the 1950s, despite the end of World War II and the economic stimulus it provided, we did not enter a new age of Economic Stagnation as many economists predicted. These models missed something about confidence and private spending.

o In the early 1960s models did not account for the impact that growing government deficits and monetization of those deficits might have on the future course of aggregate demand.

o In the late 1960s and early 1970s a growing expectation of future inflation and how that would impact unemployment and inflation was not well understood.

o When oil prices rose from $3 to $12 and then from $13 to $39 in the 1970s, many economists predicted that oil prices would soon spike at $100 per barrel. They didn’t. In fact they never got much above $13- $18 for a long while.

o When the Fed pushed the Fed Funds Rate to around 20% in 1980, many hoped but few people believed that this effort would be followed by a long-term period of disinflation and economic growth.

o When productivity growth was growing much faster than anyone expected at the end of the 20^th century in the USA, few people knew why it was growing so fast and few predicted that strong economic growth could come without increases in inflation.

o Aside from a few people, who really saw the bursting of the bubbles in the US and Europe in 2008 and the consequences that would follow?

The point is that there are plenty of time periods when the future had a way of “arriving unannounced.” We get surprised a lot! So how do we use that knowledge now? First, let that be a form of assurance – maybe some of these logical folks who are worrying the crap out of you right now, should be given a little less credence. What are they missing? Second, things might turn out to be even worse than those people are saying – but then again, they might turn out better.

In the name of brevity, let me summarize this with the following. Whatever happens in 2010 and 2011 won’t be fully expected and probably won’t be the end of the world. “S__t happens.” We react and then we adjust. We adapt EVERY year whether they call it a recession or not. Every year people get unemployed and have a difficult time dealing with it. Every year firms go bankrupt. Every year there are people who hate their bosses and it makes them crazy and unhappy. Whether it is 10 million or 5 million people unemployed next year, we will deal with it. But the truth is that we can’t know the future so let’s not let it ruin a very nice day – today. Have a great weekend.