Monday, May 7, 2018

Recessions and special snowflakes

The 1991, 2001, and 2008 recessions.

My issues with Dirk Bezemer's academic credibility seem to have nudged the Post Keynesian hornets' nest such that they seemed to assume I was attacking Post Keynesianism in general, which I gladly took on because one thing that I really do dislike is cult-like adherence to ideology regardless of what that ideology is. But first let me clarify a few things.

  • My own work here would probably best qualify as Marxist econophysics if we're putting labels on things in the sense that Marx today would probably be a neoclassical economist but think of the results as sucky and doomed to end in revolution. I'm uncertain about the inevitability revolution, so in my own work I suggest a lot of neoclassical economics is often a fine description of reality empirically but the results are sucky and unavoidable.
  • I really don't have any problems with many thinkers associated with Post-Keynesianism (Robinson, Minksy, Godley & Lavoie), but rather the fans that try to turn a bunch of disparate ideas into a "school" and make claims about these beatified economists they likely would not themselves. Various Post Keynesian supporters have told me that Post Keynesianism is well-defined and then proceeded to give me a novel set of commandments not listed by the previous person to do so. The definition I'm going by is Marc Lavoie's [1] because it is the only one that seems to be a stable kernel.
  • Monetarism at least has hyperinflation as an empirical success; Post Keynesian empirical work is limited at best (and the right data might not even be available). As I suggested to Jo Michell on Twitter, it feels like a band that has logos and merch designs before they've played any gigs.

If you want to argue with these things, please do note that I am most convinced by theoretical curves passing through data points or their point-estimate equivalents.

Now that is out of the way, one of the other things I noticed in the trolling, I mean, discussion is that people have a lot of different stories about how different recessions happen. These stories are told with the kind of conviction that looks awkward in the context of several people telling different stories starring the same heroes and the same villains (or with the heroes and villains interchanged). The film Rashomon comes to mind. On the other hand Post Keynesian economics explains every recession, but every recession is a special snowflake with entirely different causes.

Now this isn't just a Post-Keynesian phenomenon, but is in fact extremely common from random men mansplaining the early 90s recession to economists giving what they think are unassailable descriptions of the Volcker Fed causing the 1980s recessions. The diversity of post hoc ergo propter hoc arguments identifying the cause of recessions is more likely a result of the fact that most of the time series take a turn for the bad in a recession weighted by politics [pdf].

This suggests an interesting hypothesis. Maybe the 90s recession was caused by the preceding saving and loan crisis, the 2000s recession by the dot-com bust, and the 2008 recession by the housing crisis ... but what if instead these recessions are caused by some other factor and the recession process simply undermines everything (with the news reporting on the largest collection of things that were undermined)? Like an avalanche taking everything with it, the oncoming recession undermines every source of growth if they are a bubble or not. Sure, this is just basic common sense in causal analysis: you observe X and Y seem to cause Z, but what if W causes X and Y? But I think it might be even more helpful in this case.

Now I'm not saying housing bubbles are a good thing as long as there's no recession, and it seems very likely the size of the US housing market boom contributed to the magnitude of the 2008 recession. Economic bubbles and even sustainable booms likely add snow to the eventual avalanche. But the idea that recessions pop bubbles (instead of popping bubbles causing recessions) helps us understand a few things:

  • There is as yet no consensus in economic theory as to what a recession is, and even the disparate theories individually do not describe recessions with a great deal of empirical accuracy
  • Several so-called housing bubbles (including many places in the US and in Norway) seem to have picked right back up and continued in the aftermath of the Great Recession
  • Australia seems to be having a continuing housing boom/bubble, but no recession meant no crisis
  • The theories of collapsing over-investment often are independent of what the over-investment is being invested in (e.g. over-investment in infrastructure, tulip bulbs, dot-com stocks, places to live, industry stocks). 

That last point is one of the more curious aspects. You would imagine over-investment in housing (employing millions of people and producing real assets) would be different than over-investment in random internet start-ups (employing only thousands of people and producing intellectual property). However, the two boom-bust cycles only differed by roughly a factor of 2 in scale. You could replace "housing" with "credit card debt", "corporate bonds", or "student loans" and the bubble analysis would be mostly unchanged. In fact, there are many stories ongoing today (the most common being a stock/asset bubble) that would likely be seen in the aftermath of a future recession as evidence that over-investment caused it [2]. The "dot com" or "[Dow Jones] industrial" adjectives in the market crashes are just adjectives -- not critical components of the analysis. Now this could be evidence that financial crises are universal processes, but another possible interpretation is that there's a universal process behind them — a recession cutting the booms off. An analogy:
Even though a drunk at a bar is being cut-off by last call, last call wasn't caused by how drunk he is. His drinking binge was ended by a separate process. 
I am not in any way saying this is conclusive evidence [3], but rather serves best as a palliative for confirmation bias and post hoc ergo propter hoc reasoning. Maybe each recession is a special, unique snowflake: the result of a process that starts when air with water in it reaches a certain temperature.

...

Footnotes:

[1] Marc Lavoie (pdf, H/T Jo Michell):

Essential Post-Keynesian Features (Lavoie 2006)

• The principle of effective demand
(demand-led economies)
– Both in the short and in the long run

• The importance and irreversibility of time
– Historical time
– Dynamics, the traverse
– Path dependence, multiple equilibria
– Tracking financial stocks

[2] And whoever wrote those analyses would be lauded as the ones that predicted the crisis.

[3] For one: what the @#&* is this underlying process? I am sympathetic to it being a more social process than economic one, but I'm really not convinced by anything at this point.

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