Tuesday, January 15, 2008

The Greenspan-Krugman Consensus

Alan Greenspan and Paul Krugman often disagree, but they agree that a recession is now likely. Today's Wall Street Journal reports:

The U.S. is probably in or about to enter a recession, former Federal Reserve Chairman Alan Greenspan said.

Over on his blog, Paul says,
The signs point increasingly to an imminent, or perhaps already begun, recession.
By contrast, my favorite forecasting services believe that we will have a few quarters of slow growth--say, around 1 percent at an annual rate--but manage to avoid an actual recession as determined by the NBER. (This used to be called a growth recession.)

I would not put much stock in any of these predictions, however, as we economists have a terrible track record at forecasting the business cycle. For example, here is Paul Krugman the last time the economy really was on the verge of recession:

One hears that George W. Bush likes to give people nicknames. So I hereby propose that he himself be known as Chicken Little. After all, he has been running around saying ''The sky is falling! Hurry up and pass my tax cut!'' And that of course means that we should dub Dick Cheney, who has been the administration's point man for economic pessimism, Chicken Big Time.

With one exception, the economic data don't support such gloomy views. The unemployment rate has ticked up slightly, but it is still lower than anyone would have thought possible only a few years ago -- and in much of the country labor markets remain tight. Business payrolls actually expanded faster from November through January than they did in the previous three months....

There's no mystery about why the administration is so eager to pronounce the economy flat on its back -- Mr. Bush wants to use fear of recession to bully Congress into rushing through his tax cut, without worrying about little details like whether it would actually help, or whether we can actually afford it. But it's still a remarkable departure from the usual principles of economic policy. Has there ever before been a case of a U.S. administration deliberately undermining confidence for the sake of political advantage?

That was published in the NY Times on February 21, 2001. According to the NBER business cycle dating committee, the economy peaked in March of that year.