Expecting the unexpected

Both of the following might be true:

1. A recession became much more likely after 2021.

2. During any given year, a recession is unlikely.

I’ll use a numerical example to illustrate the way I think about recession risk.

Assume that during normal times, the Fed aims for steady NGDP growth, say 4%/year. Because the Fed is a bit “clumsy”, actual NGDP growth fluctuates over time. Let’s suppose that 30% of the time the growth rate is at least 2% too high, and there’s also a 30% chance that it’s at least 2% too low. There’s a 10% chance that NGDP growth is at least 4% too high, and a 10% chance that growth is at least 4% too low.

Now assume that a more than 4% drop in NGDP growth leads to a recession. In that case, there’s a 10% chance of recession in a given year during normal times.

Now assume that inflation has become a big problem. The Fed knows that a 4% drop in NGDP growth leads to recession, so they aim for a “soft landing”. They hope to reduce NGDP growth by 2% each year. Now there is a much higher risk of recession. A mere 2% error to the downside causes NGDP growth to fall by 4%, triggering a recession. The risk of recession rises from 10% to 30%. That’s still not particularly high, but if the anti-inflation policy is done two years in a row, then the recession risk rises to 51%. Over three years it’s over 65%.

To summarize, it’s possible to enter a period where recession clearly becomes increasingly likely, even as it remains exceedingly difficult to predict the timing of a recession with any confidence.

The term “soft landing” can be defined in several different ways. An extremely soft landing would allow inflation to fall while growth continues and unemployment remains below 4%.

The Fed is forecasting a rise in unemployment to roughly 4.5%. That sort of moderately soft landing might be called a “mini-recession”. It might seem odd to forecast a mini-recession, as (AFAIK) the US has never experienced that phenomenon. Unemployment always rises by less than 1% (percentage point) or more than 2%. But that seems to be roughly what the Fed is aiming for, and lots of other countries have had mini-recessions. There’s no obvious reason why we could not have that outcome.

The recession scare of 1966 offers another lesson. In that case, the Fed failed so badly in its attempt to bring down NGDP growth that they ended up overshooting to the upside in 1967-68 (after a brief dip in 1966.) This illustrates an important point—policy failure is much more likely under an anti-inflation regime than under a normal regime. A bit too tight and you end up in recession. A bit too easy and the high inflation continues. There’s far more room for error under a normal regime. Thus NGDP growth slowed a couple percentage points in 2016 without triggering a recession (but it did cost Hillary the election.)

All macro models are wrong, including the one I provided here. In reality, NGDP misses are not normally distributed. If my model were exactly true, then the US would have more mini-recesisons than outright recessions. But we haven’t had any mini-recessions. Errors on the contractionary side can easily snowball into a sharp downturn, due to the Fed’s flawed policy regime (lack of level targeting.)

Nonetheless, this numerical example illustrates a few points that recession forecasters in the media don’t seem to grasp. Just as it’s really hard to predict when a bus driver will accidentally steer a bus off the road, it’s difficult to predict when the Fed will accidentally steer NGDP growth too slow (or too fast). On the other hand, just as buses are more at risk on narrow mountain roads, the economy is more at risk when he Fed is engaged in an anti-inflation policy.

Fed policy actually seems roughly on track at the moment, even though the policy regime remains highly flawed. In other words, the central point in the distribution of possible outcomes is a roughly appropriate slowdown in NGDP growth, but the distribution is much too wide due to the Fed’s flawed policy regime. I’m worried about both recession and high inflation.

How could the Fed make accidents less likely? How can they reduce the “fat tails” in the NGDP growth distribution? How can they become less “clumsy”? Check out my license plate:

PS. Soon the US will announce a big drop in 12-month CPI inflation, to the low 3s. Don’t believe the hype—inflation remains a big problem. Base effects.

There’s no such thing as “rolling recessions”

You predicted a recession and it didn’t happen? You are about to be interviewed by CNBC? Have no fear, you can always claim that there has been a “rolling recession”. It’s like a get out of jail free card.

Rolling recessions do not exist. The fact that weakness in housing was followed by weakness in manufacturing and then a few layoffs in tech doesn’t mean a thing if the overall economy continues booming. Claims of rolling recessions are used merely as an excuse for failed macroeconomic predictions that flowed from bad models. Here are a couple reasons why they don’t exist:

1. It’s true that recessions often involve fairly modest reductions in GDP, say 2% or 3%. But that does not imply that a similar decline in a single sector is equally significant. Individual sectors are far more volatile that overall GDP, which aggregates all sectors of the economy.

Consider the following analogy. You meet two children, one of which is 3 inches taller than the other. Is that a significant difference? Does that sort of difference prove that one must be considerably older than the other? Not really, height varies a great deal from one person to the next. In contrast, if told that a class of 30 students had an average height that was 3 inches higher than another class of 30 students in the same school, you can be pretty confident that the taller class is in a higher grade. The law of large numbers is quite powerful.

Thus while a 2% or 3% fall in GDP is quite important, a 2% or 3% fall in housing or manufacturing is hardly worth commenting on. Those sectors are far more volatile than GDP. There is no sign of a significant fall in either construction employment or manufacturing employment.

2. Recessions are an aggregate phenomenon, and hence are quite distinct from economic shocks that only impact a single sector. Recessions are distinctive because they are the product of shocks that have broad effects across the entire economy. Even in an economy that is doing fine, some sectors will grow while others contract. To call this natural churn a “rolling recession” is to drain all meaning from the term “recession”.

It’s like when people talk about “eggflation”. Rising egg prices are certainly an interesting phenomenon, but they have nothing to do with the sort of inflation associated with a general depreciation in the purchasing power of money. (Except that portion of rising egg prices that reflect a rise in the overall CPI.)

Stop talking about “rolling recessions” and just admit that your 2022 recession call was wrong!

And please, when we finally do get a recession, don’t claim, “See, I called it.”

PS. According to Bloomberg, tech’s rolling recession is now over:

Thanks to AI, San Francisco’s Tech Companies Are Hiring Again

PPS. Paul Krugman has a column that discusses the way that tech entrepreneurs like Elon Musk confuse their own sector with the aggregate economy. Here are a few typical Musk tweets:

We may well have a recession. But no, a recession was not “already here” in April.

PPPS. And someone should tell Musk that when he’s wrong the gracious thing to do is admit the mistake, not attack the messenger:

One area where I surpass Trump

Trump is much richer and more famous than me. But in one area I clearly come out ahead—bad taste.

In the recent secret document case, Trump got a lot of ridicule for pictures showing that he had a fancy chandelier in his bathroom. Here’s a Bloomberg headline:

Berlusconi Would Have Loved Trump’s Bathroom Chandelier

I agree that it’s bad taste to have a chandelier in a bathroom—the scale is all wrong and there’s something especially tasteless about combining chandeliers with basic bodily functions.

But I can think of even worse examples of bad taste—indeed I have one in my own house. As you can see in the picture below, I have a chandelier in my half bath right off from the entrance hall:

Trump has the sort of ostentatious bad taste that one often sees with the nouveau riche. But I’m even more newly rich, and ensconced in the global center of nouveau riche excess—Orange County, California.

PS. It was hard to get a good picture, as the room is tiny (sink only) but has a 12 foot ceiling. Notice the tasteless “crown molding” that was added to this tiny room.

That same crown molding disfigures much of what was intended by the architect to be a mid-century modern home. See how in another room it crosses an opening for a cabinet:

Films of 2023:Q2

Before getting into my film list, a few comments:

1. I strongly recommend Michael Powell’s autobiography. Highly entertaining. I also recommend the book “Alone”, by Norman Douglas. Why isn’t this guy more famous?

2. I did a podcast with Russell Hogg and Jasper Sharp. I was a bit disappointed with my own remarks, as I hadn’t seen some of the films for quite a while and my memory is increasingly shaky. Jasper Sharp is an expert on Japanese films, and his comments were especially interesting.

3. I visited the very impressive Bahai temple in Evanston. I’m not religious, but the Bahai religion appeals to me more than most others.

4. I visited the Huntington Gardens near Pasadena. Highly recommended—much improved over when I visited 30 years ago.

5. I finally got around to reading The Marble Faun. The second addition is slightly inferior to the first, as it adds a 5 page conclusion to tie up some loose ends. Hawthorne caved in to the pressure of readers who abhor ambiguity. I liked it even more than The Scarlet Letter, which is generally regarded as the better novel. Perhaps this reflects the fact that literary critics are more interested in people and I am more interested in places.

2023:Q2 films

Newer Films:

Asteroid City  (US)  3.7  Like all Wes Anderson films it’s full of delightful images, including an homage to Cindy Sherman.  Even this sort of sub-par Anderson is better than almost anything else coming out of Hollywood these days.  Actually filmed in Spain.  Takes place in September 1955, the month I was born. 

The Velvet Queen  (France/Tibet)  3.7  When viewed in the right frame of mind, this nature documentary is a near masterpiece.  Be aware, however, that the pace is extremely slow. 

The Innocent  (France, CC)  3.6  It’s basically one of those one joke comedies, but the joke is nicely played out.

Kubrick by Kubrick  (France)  3.5  A viewer of 2001 might assume that Kubrick was opposed to AI.  Not so.  He was so pessimistic about human intelligence that he believed that, “man’s survival depends on the ultra intelligent machine.”

Past Lives  (US/Korea)  3.4  An intelligent film with appealing characters.  I just wish it had a bit more cinematic creativity.  I felt I’d seen it all before.

Godland  (Denmark/Iceland, CC)  3.4  The first third has some stunning scenes of Iceland’s landscape.

Living  (UK)  3.3  Handsome remake of Ikiru, done in a very traditional British style.  Not surprisingly, it falls well short of Kurosawa’s version.  Heartwarming—but a bit too heavy handed.

Suzume  (Japan)  3.0   Maybe I need to stop looking for the next Miyazaki.  This film lacks originality, but does reflect Japanese anxieties about a falling population and the threat of earthquakes.

Air  (US)  2.9  Pleasant exercise in 1984 nostalgia.  Strictly paint by numbers—not an ounce of originality.  Michael Jordan’s aura can cover up a lot of faults.

Older films:

A Matter of Life and Death  (UK, 1946, CC)  3.9  What a pleasure to see this masterpiece (fully restored) on the big screen.  The second time around I already knew the basic plot, and was transfixed by the technical brilliance of Powell and Pressburger’s filmmaking.  I’ve always regarded Black Narcissus as my favorite Powell film, but this is just as good.

The film was censored when it showed in America, as puritanical viewers were offended by an innocent scene depicting a naked little shepherd boy playing a flute.  Americans have such dirty minds!

The Seventh Seal  (Sweden, 1957, CC)  3.9  The Middle Ages as imagined by Swedes in 1957.  Today we’d make a grungier version.  But this was far ahead of almost anything Hollywood would have been capable of doing.  Otherwise, not much to say about this classic; the highest rated film that I’d never gotten around to seeing.  A masterpiece in almost every respect.  Even if you don’t care for the philosophical musings, the acting, dialogue and cinematography are all outstanding.  Hard to believe that Max von Sydow was only 27.  His portrayal of a much older man is even more impressive than Welles in Citizen Kane

Modern directors are presumably just as talented, but working in the shadow of film’s Golden Age.  I presume that’s why they don’t make them like this any more.

On the Waterfront  (US, 1954, CC)  3.8  First time I’d seen the film in 50 years (when it was screened in a high school social studies class!)  Right off the bat I found Lenny Bernstein’s music to be annoying, and the drama is too melodramatic in places.  But Brando’s acting is so good it carries the film.  People recall the heavy dramatic scenes, but he does equally well doing sly and subtle facial expressions. The screenplay has some nice touches.  The famous “coulda been a contender” has the ring of truth, whereas “coulda been the champion” would have sounded like empty bombast. (That’s not to say it was even close to deserving its best picture award, as Rear Window and The Seven Samurai came out the same year.)

I can still recall when mob-controlled unions seemed like one of America’s biggest problem.  The film is a good reminder that the problems we worry about during one decade are replaced by others as time goes by. 

Come and See  (Russia, 1985, CC)  3.8  This film alternates between greatness and clumsiness.  It’s both hyperrealistic and surrealistic.  The horrors one sees are almost too much to take in.  Then at the end we are informed that this was just one Belorussian village out of 628 that were destroyed by the Nazis in a similar fashion.  That horror I cannot even comprehend.  And similar events occurred in Ukraine.  And in Poland.  And in China.  And in lots of other countries.  And WWII is just one of thousands of wars.  People just block all this out. It’s all too much to absorb.

Then I think about the modern and rich society that I live in, and how so many people are deeply depressed despite their good fortune.  In the end, I don’t believe we know much of anything about human happiness. It’s just too hard a topic—for me, for economists, for philosophers, for everyone.  As I get older, I become a radical agnostic on the subject of happiness.  What causes it?  Is utility a net positive or a net negative?  Do we even know how happy we are?

Easy Living  (US, 1937, CC)  3.7  Great fun.  But how could you go wrong when you start with the Platonic ideal of screwball comedy plots and have Preston Sturges write the screenplay?

Hanagatami  (Japan, 2017)  3.6  Ignore the numerical rating, as I don’t really know how to evaluate this interesting film.  The most generous interpretation is to view the striking color palate as a visual way of expressing the feeling of being young.  For the most part, I thought those experiments worked, hence the relatively high rating.  But this sort of experimental film should be relatively short, as we are not all that interested in the characters or the narrative.  But it’s quite long—way too long in my view.  And a bit repetitive.

I Knew Her Well  (Italy, 1965, CC)  3.6  Is there any more appealing setting than Italy in the 1960s?  Gorgeous black and white photography and glamorous faces makes Rome seem like the most delightful place in the universe.

The Naked Spur  (US, 1953, CC)  3.6  Technicolor Anthony Mann western with Jimmy Stewart, Robert Ryan and Janet Leigh.  These westerns remind me a bit of Asian art—lots of small variations around a common structure.

Yumeji  (Japan, 1991, CC)  3.5  This film is far from perfect, but it’s a feast for the eyes for lovers of Taisho era art and design.

Record of a Tenement Gentlemen  (Japan, 1947, CC)  3.5  Weird title—I presume something was lost in translation.  A charming movie, but it falls well short of the Ozu films that came a few years later.  It’s quite interesting to see Japan as it was in 1947.

Winchester 73  (US, 1950, CC)  3.5  Classic Anthony Mann/Jimmy Stewart western with a pretty impressive cast.  Some of the smaller roles are played by actors that would soon become well known.  Watch for a very young Tony Curtis, and Rock Hudson playing an Indian chief.  (The film is not exactly PC.)

Demonlover  (French, 2002, CC)  3.5  Like many French films, this seems highly intelligent, stylish, and skillfully directed, but somehow a bit empty inside.  Or does this reaction reflect a lack of sophistication in Anglo-Saxon viewers?  Given the subject matter, it’s rather surprising that this film doesn’t seem dated after 21 years.

A Tale of Springtime  (French, 1989, CC)  3.5  More than almost any other director, Eric Rohmer keeps making the same film.  There’s not much to criticize, but also not much to get excited about.

The Friends of Eddie Coyle  (US, 1973)  3.5  Has a much more authentic feel than the typical crime film. 

Dragnet Girl  (Japan, 1933, CC)  3.4  The camera work is surprisingly dynamic, almost baroque at times.  It’s quite a contrast with the calm, static approach Ozu uses in his postwar films.  Still it does have a few of the poetic visual images that I associate with his best work.  And you’ll rarely see a gangster film with so little action.

Get Carter   (UK, 1971)  3.4  There’s lot to enjoy here including the mod style of the early 1970s, British gangsters in Newcastle, and of course the ubiquitous Michael Caine.  The young Caine was the best version.

The Man With A Shotgun  (Japan, 1961, CC)  3.3  Seijan Suzuki.  Testosterone!  Toxic masculinity!

Epidemic  (Denmark, 1987, CC)  3.3   It’s easy to see why this film was panned by critics—it’s something of a mess.  But I’d much rather watch a bad Lars von Trier film than a good film from a mediocre director.  Much more experimental than the other two films in the Europe trilogy, and most of the experiments don’t work.  But a few do.

The Passionate Friends   (UK, 1949, CC)  3.3  David Lean does a very nice job directing this romance, but the underlying story is too implausible to be believable.

Giants and Toys  (Japan, 1958)  3.3  As a satire of business (and the Americanization of Japanese culture) it’s far too silly to be taken seriously.  But it does have an infectious energy, largely due to the efforts of the lead actress.  The Technicolor images capture a moment in time when Japan was pivoting from the drab post war years (depicted in previous B&W films) to the soaring economic growth of the 1960s.

Infernal Affairs II  (HK, 2003, CC)  3.3  A prequel to the much better original Infernal Affairs.  The production is generally pretty high quality, but it’s marred by an excessively convoluted plot and some overly melodramatic music.

Center Stage  (HK, 1991, CC)  3.3  This quasi-documentary biopic about a Chinese silent movie star is an odd experiment, and it doesn’t really work.  So why the positive rating?  Maggie Cheung’s face.

Breakdown  (US, 1997)  3.2  This formulaic picture is a bit too predictable for my taste.  But Kurt Russell is better than I expected and the director does a nice job of keeping things from getting bogged down.

Detective Bureau 2-3: Go To Hell, Bastards!  (Japan, 1963, CC)  3.2   Strictly for Seijan Suzuki fans.  Great title.

The Great Silence  (Italy, 1968, CC)  3.2  A spaghetti western directed by someone other than Sergio Leone.  Now I realize that what I’d always thought of as Leone’s style is actually the style of spaghetti westerns more broadly.  Apparently, they made dozens of these films.

The Hitch-hiker  (US, 1953, CC)  3.1 This noir has no female characters, and yet was directed by Ida Lupino.  I wonder how this film impacted people’s willingness to pick up hitchhikers?

Election  (Hong Kong, 2005, CC)  3.0  It’s OK to have a complex plot that makes you work, and it’s OK to have an implausible film.  But it’s not OK to have both.  I just didn’t feel like making the effort to figure out who was who in all of the backstabbing.

Honor Among Thieves  (US, 1931, CC)  3.0  A very young Claudette Colbert in a pleasant romcom. 

Dream Lover  (US, 1994, CC)  2.9  It’s interesting comparing ordinary Hollywood films like this one with those made by talented directors.  This film is a typical example of the former—quite uneven, with some very nicely acted scenes and then some really clunky “dream sequences.”  Directing talent in Hollywood seems to be in very short supply.  Why is that?  Why is it so hard to make a good film?  A country with 330 million people must have hundreds of Hitchcocks.  Or is this what consumers want? 

Jade  (US, 1995, CC)  2.9  One of those 1990s “erotic thrillers” that has a silly plot, corny music and cringe-worthy sex scenes.  But at least it was directed by William Friedkin, who had a certain visual flair.  Oddly, the part of the film I found most interesting was the brief glimpses of paintings on the wall of the rich guy’s house.  Some really nice stuff by people like Jacob van Ruisdael and Balthus.  How do those exquisite paintings get into a film like this?

Color of Night  (US, 1994, CC)  2.7  This campy film is so bad that it almost works as a black comedy, but not quite.  To make that work you must go all in.  At times, the director seems to think the film can be taken seriously.

Criminal Passion  (US, 1994, CC)  2.6  Another of the seemingly endless unerotic “erotic thrillers” from 1994.  Hard to believe it was made by the same director as Desert Hearts.  So much for the auteur theory.

Margot at the Wedding  (US, 2007, CC)  2.5   Well, at least we are spared the wedding.  Otherwise, this is strictly for fans of family dysfunction porn.  Not sure why humans are so fascinated by a peep at the exposed id, not censored by politeness. 

Infernal Affairs III  (HK, 2003, CC)  2.0  A sad end to a promising trilogy.  I understand wanting to use Tony Leung, but he’s miscast in a very confused role.  The directors really needed some adult supervision.


Money is still easy

These tweets from a few days ago caught my eye:

I think David is right. We do know why rate increases have failed to slow the economy, if “we” means market monetarists. But Weisenthal is right that the mainstream is puzzled by this fact.

Actually, I’m still not sure that rates have “caught up” to the natural rate. A couple days later we saw these tweets:

So the 2023:Q1 NGDP slowdown mostly reflected bad initial data. That’s why I pay a lot of attention to high frequency labor market data, such as the payroll report. It often provides the best snapshot of the current state of the economy.

Of course this is all backward looking data, and its possible that NGDP growth will slow sharply going forward. But I recall people making that claim last year, and we now know that the doves of 2022 were wrong—policy was clearly too easy last year.

There’s no mystery here—easy money is generating fast NGDP growth, and that’s why core inflation remains stubbornly elevated.