Saturday, November 17, 2007

How bad a recession?

I read the Economist yesterday.

It's like seeing an old friend that's been hitting the sauce hard. When I left her she still had some of the old style, but now she's a gutter drunk - a slightly less stupid reflection of the WSJ's editorial pages.

She still has some of her old habits though. She's again projecting a US recession, though hoping China will save the rest of the world.

The Economist has called about ten of the last three recessions, so I pay more attention to DeLong, Krugman, and the Econbrowser. Thing is, they tend to agree that a recession is probably underway.

So then the question is how deep will it be.

I'm not an economist, so I don't have to worry anyone will act on my speculations. I'm also a "glass half empty and poisoned besides" [1] kind of guy, so I do tend to over call these things. (A bit like the old Economist, which also had a strong pessimistic streak [2].)

I think the severity range is probably wider than what we were accustomed to under Clinton or even Bush I. During those days (more with Clinton) we had governments that actually worried about national finances. With Bush II our economics is pretty much supply-side loony.

If government policies matter, then there's a good chance we're far outside a stable operational range. If the physics of economics matter, we have farther to fall.

So I'm pessimistic [2]. Of course, I always am!

[1] If the glass is poisoned, then being half-empty may result in a painful but non-lethal dose. So you see, I'm really an optimist in deep disguise.

[2] I follow the neuropsych literature on pessimism. It turns out that humans are programmed for irrational optimism -- probably because it's good for the species even if it leads to unwise individual actions (like launching a startup). So, if one adjusts for the human bias towards irrational optimism, I'm truly a rational realist.

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