Justin Wolfers called a recession here not long ago.
Ben Bernanke seems about ready to call it himself. Now a reader named Alexis Tatarsky has put the question to all of you on our Freakonomics Prediction Center:
On a scale of 1 to 10, with the recession of 2001 being a 4 and the Great Depression an 8, what will be the change in G.D.P. for 2008?
So get yourself over to the Predictify Center and cast your vote.
and 
. You can also watch it on 
I’m more of a betting man than an informed authority, so I’ll go “all in” and say 8-10. But that’s just a sort of Richter scale magnitude of economic changes: I don’t think what we’re about to see will look anything like the Great Depression.
The key is international economics. Foreign investment in the U.S., and in U.S. dollars, is increasingly looking like a house of cards. A bunch of things are happening all at once:
* China’s domestic consumer market is growing fast enough that soon they won’t need to rely on US consumers, at which point keeping their currency cheap compared to the dollar will be unnecessary and counterproductive.
* The Euro is becoming a viable alternative to the dollar as a global currency.
* Unprecedented US deficit spending, and rock-bottom Fed interest rates, are tending to devalue the dollar. The only thing holding it up is massive investment in dollars by foreign investors.
* The war in Iraq has caused foreign trust and confidence in the U.S. to reach an all-time low.
So here’s my prediction. The “housing bust recession” is small — call it 3-4 on your scale — but it causes foreign investors to decide divest their dollars and dollar-valued assets. A classic “bank run” panic begins, everyone sells their dollars, and the dollar drops into the toilet.
The rest of the world begins to rely on the Euro as a stable currency. Foreign manufacturers can no longer sell their goods in the U.S., but they switch over to selling to the burgeoning Asian consumer market, and life outside the U.S. goes on.
The U.S. experiences massive inflation, as foreign goods become priced out of reach. But exports become extremely profitable. The value of goods relative to services increases, and the U.S. makes a gradual transition back to an industrial / agricultural economy. Farms, mines, and manufacturing plants reopen after decades of stagnation, while shopping malls shrivel and die.
Is this a bad thing? In the short term, definitely. But the fundamental problem with the U.S. economy is its massive amounts of government and consumer debt, and an economy focused on selling things rather than making them. A period of heavy inflation and currency revaluation will render those debts negligible, and reamp our balance of trade.
I think it would be interesting to know what state people are from when posting their predictions. For example, I’m from Michigan, and from my point of view it seems like we’ve been in a recession since 2001, but I keeping hearing that there were a few good years between then and now for other parts of the country.
(And for those wondering about the scale: the values are defined on the predicitfy page.)
Wow, there seems to be a certain lack of literacy WRT the “narrative” here.
Given
– the total disregard for global warming,
– the disdain for the Kyoto protocols,
– the subprime lending monsters,
– the rabid cable television pundits and
– religious radicals of all stripes running amok,
I feel duty-bound to say that this one goes to 11.
5.0 – My great concern is that in all the focus on real estate equity, mortgages, and wall street misapplication of risk, that there is another shoe to drop.
That shoe is consumer credit. The mortgage fiasco is driven by loan to values that were too high, and when real estate sank those properties become upside down. Some of the initial high LTV’s were the result of purchasing with no money down. Many more were the result of cashing out equity to pay off credit cards. Many times this occurred as part of a cycle.
With the mortgage meltdown the cycle has ended. Yet, consumers won’t discover this until the day that they try to convert credit card debt into mortgage debt. Having found the cycle is over, where do they go?
If the economy needs consumer spending I fear that it will have a hard time getting going as consumers experience their own lack of liquidity.
10! Oh dear lord the end is nigh! Chaos reigns in 2009!
I’m interested in what game theory says about the groupthink inherent in recession planning. We hear a lot about the ability to scare the markets into recession. Is that something that’s been observed, or is it just a theoritcal problem that being used to manipulate reporters?
Oh… I think our recession is going to be a zero (both figuratively and as a rating using our scaqling)
I know almost nothing about macro-economics. But I run a rapidly growing software development firm with 45 consultants that serves middle market and fortune 500 companies. So far, our business has been unaffected — we’ve grown faster in late 2007 and early 2008 than we have in our history. We were around in 2000-2003, and that was much worse. Granted, tech was at the center of the earlier recession, so perhaps my company felt it worse than some other sectors.
2, if one occurs at all. However, the media will make it seem like a 10.