Portfolio manager Ben Carlson had some common sense comments about investing in general, fear of an impending recession in particular, and maybe a reason recessions aren’t called “panics” any more.
The historical record shows that the U.S. has had at least one recession every single decade since the 1850s but not one yet in this decade. What stands out, however, is how much less volatile the U.S. economy is now than it once was. From the 1850s through the end of World War II, the average contraction in economic activity was more than 22%; since then, the average contraction has been just 2.3%. “It’s hard to argue,” Carson said, “that the Fed hasn’t helped the U.S. economy become less volatile over time.”
Despite past experience, timing does not demand that there be a recession at regular intervals. “Expansions don’t die of old age. Economic cycles don’t care who the president is and they certainly don’t care what the calendar says,” he insisted. “Something as complex as economic activity is mainly controlled by human behavior, not rational economic textbook theory,” said Carlson.
Kai Ryssdal, host and senior editor of Marketplace, also pointed out that many macroeconomic statistical models have problems because their predictions don’t account for human behavior and “human beings are not always logical.”
According to University of Chicago professor Richard H. Thaler, said Ryssdal, economists in the 1940s started creating models of highly rational behavior because they weren’t smart enough to develop models of real behavior. As a result, their equations didn’t act like humans do.
As an example, in his graduate thesis, Thaler pondered the answers people give to these two questions:
- How much would you pay to eliminate a one in a thousand risk of death?
- How much would you have to be paid to take on an extra one in a thousand risk of death?
He contended that economic theory says the questions should have basically the same answer but, in fact, they elicit very different answers from most people.
An increasing number of behavioral economic theories attempts to include these inconsistencies, but forecasting the next recession will remain a problem for the foreseeable future because, as Carlson said, “human behavior isn’t predictable enough.”