Lot's wife looked back at a scene of devastation and was turned into a pillar of salt. Salt--as in the salty tears we shed last week as we looked back on 2008, a year of deepening economic recession, and the worst for share prices since 1931. Worse: most forecasters are expecting an even bleaker 2009. The unemployment rate is expected to climb into double digits, output to drop by between five and ten percent, repossessions of homes to soar, protectionism to stalk the international economy, more firms to file for bankruptcy as they find themselves unable to refinance the $1 trillion in loans that Reuters Loan Pricing Corporation estimates are coming due in the next three years--fill in your own predicted horror to round out the list. "Most major economies will remain in recession or at least in relative stagnation through most of 2009," says John Greenwood, chief economist at Invesco.
Greenwood is only one of the many economic forecasters who are gloomy--and he is far from the gloomiest, since he sees the possibility of a modest recovery in 2010. These forecasters are admirable men and women who study their models of past behavior for a clue to the future in an attempt to meet the demands of clients and readers seeking help in peering through the fog of economic crisis. I fear I am not a member of that fraternity, but a mere guesser of what might be in store for us in 2009, a year in which government policies--some
new, some of unprecedented magnitude--will drive events. As the estimable Robert Samuelson writes in the Washington Post, "The great lesson of the past year is how little we understand and can control the economy." The equally estimable Matthew D'Ancona puts it this way in Britain's Sunday Telegraph, "The Sibylline Books remain closed. The crystal ball yields no secrets....Almost nothing is certain about the next twelve months."
True, economic theory provides us with tools that are helpful in analyzing the possible impact of some of the policies at the top of politicians' and central bankers' agendas. But in the end we economists cannot, or should not, confidently predict the consequences of any policy--after all, if economists could predict the consequences of pushing this or that button, the Soviet Union's economy, under complete control of central government and its economic advisors, would still be with us, prospering and outstripping the United States, as our intelligence services confidently predicted it would. Humility should be the order of the day.
If you doubt just how little we know about what makes a modern economy tick consider this. Mortgage rates and home prices are at historic lows, but builders can't persuade anyone to buy their houses even though "affordability" is no longer a problem. The government is showering consumers and businesses with money and running up a huge deficit, but there is no sign of inflation: Indeed, consumer prices fell in November at the fastest rate in 60 years. The Fed's decision to cut interest rates to zero was followed immediately not by a burst of joy on the floor of the nation's stock exchanges, but declines in share prices. As we say in New York, "Who'd-a-thunk it?" Certainly not Fed chairman Ben Bernanke.
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