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Home Publications Blogs Beat the Press Will There Be a Recession in the Next Decade?

Will There Be a Recession in the Next Decade?

Friday, 07 March 2014 13:42

Annie Lowrey's Economix blogpost on President Obama's budget concludes by telling readers:

"But it is worth noting that perhaps the single most important factor when it comes to deficits is largely out of the White House’s hands: economic growth. Mr. Obama’s budget assumes that there will be no recession for the next decade – indeed, he sees a moderate but strengthening recovery. History suggests those might be the most unrealistic numbers in the document."

Actually the lessons of history on this point are less clear than this comment implies. Historically we have gotten recessions for two reasons, either the Fed raises interest rates to slow the economy in response to a rise in the inflation rate, or a bubble bursts throwing the economy into a tailspin. While both scenarios are in fact possible (if the Fed lets another bubble grow, can we exile these doofusses for the rest of their lives?), at the very least they would imply more rapid growth in the period leading up to the recession.

In other words, if we get a recession it is likely to be preceded by a period of faster than projected growth. The net effect on the deficit, compared to the Obama administration's projections cannot be known in advance. Anyhow, it is remarkable how much time ostensibly intelligent people spend speculating about events 6-10 years in the future when all the historical evidence shows we don't have a clue.

Take a look at the CBO projections of budget surpluses for 2014 from back in 2008 or the projections of large budget deficits in 2000 from back in 1996. I'm fine with make work jobs in a weak economy, but let's not imagine these projections for are worth anything more than the cyberspace they are printed on. 

Comments (11)Add Comment
Aren't we witnessing bubbles?
written by Dave, March 07, 2014 1:14
I think the Fed needs to keep rates near zero as almost everyone does, but it seems to me the growth trend we're on now is partially due to the beginnings of a housing bubble and stock market optimism. I don't worry about the stock bubble so much, but I do worry about the housing bubble. So the growth we have now might be higher than baseline would be without bubbles.

I repeatedly tried to explain the problem with the shadow banking system combined with GSE guarantees. Nobody will heed my warnings, and many seem fine believing that bubbles are the right way to run an economy. It would be understandable for individuals to be set in their ways, buy how they get away with repeatedly throwing the same wool blanket over reality needs more scrutiny. The people who cover their eyes, the politicians, are always too myopic, which is largely a result of the existing campaign finance structure.

Somebody has to do something different eventually.
Long-Term Unemployment
written by Tyler, March 07, 2014 1:30
Thirty-seven percent of the people who are unemployed have been looking for work for 27 weeks or longer. How is that not a depression?
written by Sandwichman, March 07, 2014 3:54
"...if we get a recession it is likely to be preceded by a period of faster than projected growth..."

Actually, the lessons of history on this point are less clear than this comment implies.
wrong about this one
written by jeff S, March 07, 2014 4:29
I think you're wrong about this one. It is optimistic to assume there won't be a recession in the next 10 years. Every decade since the end of the Civil War has had at least one recession. Something that re-occurrs regularly historicaly can't be attributed to errors in policy making. Given the history of the last 100 years it's more likely than not that there will be another recession.
I'm pessimistic about growth
written by Mike B., March 07, 2014 7:27
I don't know about a recession, but I'm not optimistic about continued recovery. I'm not any kind of expert, but I've been reading stuff about labor share being low, making potential output low (about where we are now), which could prevent further recovery. I don't see how we can have a healthy economy with so much money going to the top, so I think this might be right.
hokay ...
written by Squeezed Turnip, March 07, 2014 7:55
maybe it is being optimistic to think no recession will occur (but I'm an optimist like MInsky: regulate the bubbles and credit disruptions away!). But did W's budgets include recessions in their 10 year plans. I mean, it's ridiculous for reporters to think that a sitting president might even conjecture that there's going to a recession in the next 10 years, because then the next obvious question/attack is going to be "well why are you letting it happen?" or something like that …
Accepted wisdom?
written by ThorntonHall, March 07, 2014 8:09
So are we just supposed to nod our heads at the idea that the Fed can stop bubbles? I mean, there are lots of phony debates in macro that are clearly the product of delusional Freshwater guys who won't give up, but isn't this one a genuinely open question?
written by jonny bakho, March 08, 2014 5:20
Obama brings it on himself by always preaching about deficits. That is the wrong message. If more people were working, the deficit would be lower. As unemployment dropped to 4% under Clinton, deficits unexpectedly turned into surplus.
The key focus needs to be JOBS.
Obama is off message and tone deaf. Republicans talk about jobs but what they propose (Tax cuts for the wealthy) doesn't create jobs. There is too little voice saying there are too few jobs and better regulatory and fiscal policy can create more jobs.
written by LSTB, March 08, 2014 7:53
Lowery's comment sounds like she's really reaching for an excuse to criticize the Obama budget on deficits. I'm sure the document doesn't predict oil shocks either, or another product-cycle boom like the Internet. Hey, they could happen.

But the issue isn't the clairvoyance with which the proposal predicts the future; rather, it's the reasonableness of its assumptions. Dismissing the proposal for not addressing every single contingency that has little present-day basis sure smells of a breach of Occam's razor.
written by skeptonomist, March 08, 2014 9:33
Nobody can predict the future quantitatively - too many assumptions must be made. But probably some predictions can be made just on the basis of history. Since WW II expansion phases have lasted an average of 58 months according to the NBER - we are approaching that now. Since 1854 there has never been an expansion phase longer than 10 years (1991-2001).

The "potential" GDP level assumed by the CBO (and used by Dean for his calculation of the cost of the housing bubble) passes through the bubble level of 2007. It's easy to say that authorities could act to prevent bubbles, but if the economy does turn up in the near future to approach that "potential" GDP level would any authorities really take the responsibility of killing the recovery? It is pretty safe to predict that sooner or later there will be some kind of overexpansion followed by a recession.

The economy does not have to be anywhere near "potential" for a recession to occur - take the 1937-8 recession. Unemployment got no lower than 14% in 1937. Because recovery was so fast 1933-6 (GDP growth about 10%/yr) it was thought that it was safe to balance the budget, but many economists now blame the Roosevelt administration for the recession. Sometimes you just can't win, if your actions are judged post-facto by economists.
Take a look at the CBO projections of budget of Yore
written by JMarco, March 08, 2014 3:13
Amen, amen to Ann. I have been repeating the question "why has no one examined CBO's projection before Great Recession of 2008?" When it comes to predicting bad years I would say CBO rates a grade of F. I agree with jonny bakho's comments. Pres. Obama and Congress should concentrate on getting more unemployed people back to work. Bringing the unemployment rate down with real job growth instead of just people who have stopped looking. Also bringing the focus of economic growth from financial sector to sectors that have investments in new software/internet ideas and more major public works like roads, power grids etc.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.