Predicting a recession? Might as well predict the weatherNiall Ferguson
Edward Lorenz, the pioneer of chaos theory, famously suggested that the flapping of a butterfly’s wings in Brazil could set off a tornado in Texas. Even a tiny disturbance, he argued, can have huge effects in a complex system governed by nonlinear relationships.
But since 2016 we’ve seen the opposite. President Trump, far from being a butterfly in the Amazonian rain forest, is the 800-pound gorilla right at the center of the world. If anyone can cause chaos — in practice as well as in theory — it’s him.
Elected, unexpectedly, to the most powerful job in the world, he has spent the past two-and-a-half years not just flapping his wings, but wildly swinging his fists, as if intent on starting a global tornado. And yet the consequences of the gorilla’s antics have been remarkable for their smallness. Prophesies of political and financial disaster have proved wrong.
August is the month when a large proportion of the people in the Northern Hemisphere (around 90 percent of the world’s population) either go on holiday or work half-heartedly. Unfortunately, history consistently refuses to go on vacation in August. Indeed, I increasingly suspect history of having become a workaholic.
This August has produced a mighty storm of geopolitical and economic mayhem. It has taken longer than expected for the 800-pound gorilla to smash what is sometimes (misleadingly) called the liberal international order or the pax americana. But he has done it now. Or so it seems.
In Asia, Hong Kong teeters on the brink of another Tiananmen Square-style massacre. Meanwhile, the North Korean regime is firing rockets like a drunk teenager on July Fourth. And in the Middle East, rumors abound of an imminent showdown between Iran and Israel and its allies.
These political risks coincide with multiple signs of a global economic slowdown. Britain’s economy shrank in the second quarter, but don’t blame Brexit, because so did Germany’s, and Italy’s did only slightly better. Trade within the eurozone is down sharply.
Most worrying is the fall in long-term interest rates. Last week the yield on 30-year US government bonds fell below 2 percent for the first time ever. Long-term bond yields are now below short-maturity debt — an inverted yield curve, in the argot of Wall Street. Such an inversion has preceded every US recession since the 1960s. The only people who seem not to have noticed are American consumers, still shopping ’til they drop, according to the latest retail sales data.
So is chaos coming to Main Street? Back to Professor Butterfly. It was back in 1972 that Edward Lorenz gave his famous lecture, “Predictability: Does the Flap of a Butterfly’s Wings in Brazil Set off a Tornado in Texas?”
“Two particular weather situations,” he argued, “differing by as little as the immediate influence of a single butterfly, will generally after sufficient time evolve into two situations differing by as much as the presence of a tornado.”
However, Lorenz added an important caveat: “If the flap of a butterfly’s wings can be instrumental in generating a tornado, it can equally well be instrumental in preventing a tornado.” In Lorenz’s view, this was what made long-range weather prediction so very difficult.
The same applies even more to economic forecasting. In 1966 the Nobel laureate economist Paul Samuelson — like Edward Lorenz, a professor at MIT — joked that declines in US stock prices had correctly predicted nine of the last five American recessions. I know economists with much worse batting averages. They predict a financial crisis every year, and once a decade they are right, at which point the media hails the stopped clock as a prophet. Economic forecasters are in fact far worse at their jobs than weather forecasters.
Of 469 downturns in national economies since 1988, according to Andrew Brigden of Fathom Consulting, the International Monetary Fund had predicted only four by the spring of the year before they began. As for the great financial crisis of 2008-’09, only a handful of economists saw it coming.
That means that we should treat with skepticism those who confidently predict a US recession next year. And if there is one, we should treat with even more skepticism those who blame it on Trump.
The real point about the gorilla effect, remember, is how little the swinging of the gorilla’s fists has really mattered since he climbed atop the White House. Just like the butterfly, the gorilla may have prevented as many tornadoes as he caused. Indeed, Trump’s economic policies have almost certainly been, on balance, more conducive to economic growth than the opposite. True, he has imposed tariffs, but he has also presided over a sugar-rush of deregulation, deficit spending, and monetary easing.
As the sugar wears off, and the United States follows the rest of the world into a slowdown, if not a recession, all Trump’s opponents will have an incentive to blame him. But perhaps the truth is that the gorilla and the butterfly are not so very different in our complex, interconnected world. The only difference is that the gorilla insists it’s all about him.
“You have no choice but to vote for me,” Trump declared at a rally in New Hampshire on Thursday, “because [otherwise] your 401(k) [retirement savings plan] is down the tubes. Everything’s going to be down the tubes. So whether you love me or hate me, you’ve gotta vote for me.”
That’s a line that could come back to haunt Trump if everything goes down the tubes before November of next year, when Americans will decide if he’s a one- or two-term president. But if he gets lucky, and the economic weathermen are wrong again, it might just get the 800-pound gorilla four more years of fist-swinging.