Consensus Economic Forecasts
Submitted by Businomics Blog
A couple of folks have asked if my forecast, described here, is out in left field. That prompts me to offer a comparison of my economic outlook to two survey averages. The Wall Street Journal surveys (subscription required) 54 professional forecasters, mostly from financial institutions. The National Association for Business Economics surveys its members, with 47 participating in the latest tabulation, from a somewhat more diverse group of companies. Here’s my forecast compared to the average of these two consensus forecast surveys:
Near term we’re all pretty close, but I’m more optimistic about next year.
The most important point: recent press coverage would lead a person to think that no one was forecasting an end to the recession. However, an economic recovery beginning later this year is the consensus forecast.
February 18, 2009
The Great Depression: A Good Summary
Lots of folks are asking if we’re having another depression. I very much think not. But it’s worth reviewing just what happened in the 1930s. An excellent summary is the article in the Concise Encyclopedia of Economics. That link takes you to the article, but here are some good passages for you skimmers:
Interestingly, given the importance of the Great Depression in the development of economic thinking and economic policy, economists do not completely agree on what caused it. Recent research by Peter Temin, Barry Eichengreen, David Glasner, Ben Bernanke, and others has led to an emerging consensus on why the contraction began in 1928 and 1929. There is less agreement on why the contraction phase was longer and more severe in some countries and why the depression lasted so long in some countries, particularly the United States.
…
In previous depressions, wage rates typically fell 9-10 percent during a one- to two-year contraction; these falling wages made it possible for more workers than otherwise to keep their jobs. However, in the Great Depression, manufacturing firms kept wage rates nearly constant into 1931, something commentators considered quite unusual. With falling prices and constant wage rates, real hourly wages rose sharply in 1930 and 1931. Though some spreading of work did occur, firms primarily laid off workers. As a result, unemployment began to soar amid plummeting production, particularly in the durable manufacturing sector, where production fell 36 percent between the end of 1929 and the end of 1930 and then fell another 36 percent between the end of 1930 and the end of 1931.
Why had wages not fallen as they had in previous contractions? One reason was that President Herbert Hoover prevented them from falling. He had been appalled by the wage rate cuts in the 1920-1921 depression and had preached a “high wage” policy throughout the 1920s. By the late 1920s, many business and labor leaders and academic economists believed that policies to keep wage rates high would maintain workers’ level of purchasing, providing the “steadier” markets necessary to thwart economic contractions. When President Hoover organized conferences in December 1929 to urge business, industrial, and labor leaders to hold the line on wage rates and dividends, he found a willing audience.
…
As the public increasingly held more currency and fewer deposits, and as banks built up their excess reserves, the money supply fell 30.9 percent from its 1929 level. Though the Federal Reserve System did increase bank reserves, the increases were far too small to stop the fall in the money supply.
…
President Roosevelt came into office proposing a New Deal for Americans, but his advisers believed, mistakenly, that excessive competition had led to overproduction, causing the depression. The centerpieces of the New Deal were the Agricultural Adjustment Act (AAA) and the National Recovery Administration (NRA), both of which were aimed at reducing production and raising wages and prices. Reduced production, of course, is what happens in depressions, and it never made sense to try to get the country out of depression by reduc ing production further. In its zeal, the administration apparently did not consider the elementary impossibility of raising all real wage rates and all real prices.
The entire article is quite readable. Here’s what I think:
Contraction of the money supply was the greatest problem in the Great Depression.
The various measures to prop up wages and prices contributed to the problem. When economists create mathematical models of business cycles, they have to add some element that prevents wages and prices from falling. Some are just ad hoc assumptions, other elements are theoretical based on monopolistic pricing. However, we should remember that falling wages and prices are a natural adjustment mechanism.
The Smoot-Hawley tariff, along with other countries’ movements toward protectionism, worsened the depression.
The many gyrations of policy lowered business investment.
Banking laws, which limited opportunities for geographic diversification, caused bank failures and much of the financial crisis.
My reading of America’s post-World War II recessions indicates that multiple causation is common. The economy is resilient enough to withstand a variety of shocks and policy errors. Sometimes, though, the shocks and errors keep piling up.
Another Great Depression? Not while the Fed is aggressively easing.
Visit 1800blogger to see all of our industry leading blogs.
Are you an investor? Have something you want to say about the economy? Register on Econoimist Blog now and get published within minutes. Before posting, it is recommended that you review our posting guidelines.
