I’ve gotten a number of emails from readers asking if I think we’re headed for a double-dip recession. (In case you aren’t familiar, a double-dip recession is, well, exactly what it sounds like, and that link is an interesting overview of different recession types. I now have a new set of balloon animal shapes if nothing else, since my Phillips curve balloon animal is less than impressive.) The short answer is that I don’t know- my economic magic 8 ball keeps coming back with “outlook hazy,” and I don’t know whether that means to ask again later or I should take that as my answer. What I will say is that successful economic stimulus requires restored confidence in the economy, since people aren’t going to start spending (demand side) and companies aren’t going to start investing (supply side), unless they believe that the economy is going to stop being crappy. Call me crazy, but it doesn’t seem like we’ve gotten there.
I pride myself on being able to admit when I can’t predict something with certainty, largely because I think that there should be more transparency regarding how sensitive economic models are to their underlying assumptions and how arbitrary those underlying assumptions are. (I think business nerds would refer to such transparency as a “sensitivity analysis.”) Businessweek apparently does not share this mindset, as evidenced by an article I came across entitled “Treasuries Showing 12% Chance of Double Dip Recession.” Really, Businessweek? You’re sure the real probability isn’t 11 percent? How about 13 percent? It’s things like this that make economists get made fun of. For example:
Q: How can you tell economists have a sense of humor?
A: They use decimal points.
Sigh. There is, however, at least one economist who really does have a sense of humor and likes to talk about double-dip recessions. I present to you the latest from Merle Hazard:
Is it just me, or does all of this double-dip talk make you want an ice cream cone also?
6 responses so far ↓
1 Kevin // Aug 16, 2010 at 8:44 pm
I have heard percentages ranging from the above 12% all the way up to 80%. Personally I am about 60% sure nothing will get better any time soon. I don’t see unemployment getting better, nor do I see this stimulus doing anything any time soon. Taking all this in concert with prevailing DC wisdom and policy and I think we have some hard times ahead. Maybe we will get lucky and repeat Japans lost decade and not lose ground for 5-10 years.
2 Scott D. // Aug 17, 2010 at 8:58 am
Yogi Berra might say that 50% of the economy is 90% mental. (pardon the sacrilege)
Econgirl - “I pride myself on being able to admit when I can’t predict something with certainty”
Although I appreciate this greatly, I hope this doesn’t bar you from cnbc. They have… uh… standards.
3 Amarsir // Aug 18, 2010 at 7:10 am
Double-dip recessions seem quite unnatural to me. I don’t see them evolving organically from the business cycle. Usually they need a manual cause, such as the early 80s when Fed policy was intentionally trying to strangle inflation.
Some have argued that the tax increases will be the cause. That seems possible, but the infrequency of this type of situation would support exactly what you’re saying - that we don’t have the historical data to make any precise forecast. “Double-dip” is fun to say (if not experience), and that’s as likely driving these predictions as anything else.
4 Thermopylae // Aug 18, 2010 at 12:02 pm
ECRI forecasts a greater probability of a “W” recovery.
A link to the data (and some jokes) is here:
http://www.coventryleague.com/3/post/2010/08/double-dipping-slipping.html
5 Joao Pedro Afonso // Aug 18, 2010 at 5:29 pm
@Amarsir, consider this scenario: facing a running recession, the government spends more using its savings to push the economy. This one recovers briefly from the recession to answers government demands but private investors fail to gain trust on the ongoing efforts, that the government will be able to maintain them or that the international market will be recovered enough at that time to sustain them… so, they will not work their part to recover the economy (investing themselves too). Eventually, the government will reconsider, facing its diminished savings or credits, and will allow (or will be unable to stop) the recession again… double dip.
Doesn’t this appears natural enough? We can object if this is the natural business cycle, since I used in my example, a singular actor, the government, but where I put it, I can put any actor or actors with enough weight, power, capital or credits, to move an economy… and they don’t need to believe they are being “do-gooders”, only that a recession is the right time to prepare an expansion since everything will be cheaper. Anyway, governments are ubiquitous, just like private investors and recessions.
6 Dave // Aug 30, 2010 at 10:09 am
Not related to the post - I teach econ in a suburban Iowa high school. Is there any chance you would consider skyping with my class?
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