The Economics of the Boomers
America is getting older, indebtedness is rising, and economic recoveries keep taking longer. This is not a coincidence.
We’re now in the longest economic expansion in U.S. history, so it’s as good a time as any to think about how the next recession will play out.
In theory, recessions should be getting some combination of rarer and milder over time. We have better data (thanks to the work of an army of technocrats starting in the 30s), and we have better theories (every recession refutes at least one theory of recession prevention). It’s possible to imagine shifting to a regime where economic growth oscillates in a tighter range and never goes below zero.
This, of course, doesn’t happen. There are partisan theories as to why — the evil Republican theory of unrestrained speculative excess, the evil Democratic theory of excessive regulatory meddling — but the more interesting ones are politically agnostic. I’m partial to Hyman Minsky’s argument that the process goes as follows. In good times, few loans default and credit spreads narrow; investors’ return expectations are sticky, so they respond to lower spreads by levering up; at some point, what would be a minor speedbump at low leverage turns into a crisis with higher leverage, leading to a funding crisis and a deflationary unwinding.
What’s convenient about this theory is that it embodies enough human wisdom to explain that we’ll never fully solve the recession problem. As another expert on the human condition might have put it, the poorly-calibrated risk models you will always have with you.
But Minsky runs into the same problem as every other economic theory: If it’s universal, it’s also smug. Minsky doesn’t tell you what will go wrong. He doesn’t say, “That’s why you’ll have a maturity mismatch between commercial paper funding and illiquid structured credit in 2008.” Just that something, someday, will go wrong. That’s frustrating because it’s not action-guiding, and the whole point of understanding recessions is knowing when to short equities in size.