Is history cyclical?
By Scott Sumner
I just finished reading Tyler Cowen’s new book, “The Complacent Class.” Tyler is really good at bringing together lots of seemingly disparate trends and finding a common underlying theme. Many (but not all) of the anecdotes in the book will seem familiar to readers that are well read on current events, but if you are like me then you may not have noticed how they all relate to a single underlying theme. That’s Tyler’s special talent
In the final chapter Tyler looks to the future, and this is the part of the book that I found the least convincing. In this chapter, Tyler presents a sort of cyclical view of history. Before getting into the details, let’s stipulate that history is cyclical in the sense that good times are followed by bad times, where “bad times” are defined as less good times than the previous good times. Thus when bad things happen, such as 9/11, Iraq and the Great Recession, we might be justified in retrospectively labeling the 1990s as “good times.” I have no problem with that sort of claim, but it’s almost tautological.
Of course Tyler has bigger fish to fry, and extends this idea in a number of interesting directions. This is where I have some reservations.
On page 198, Tyler refers to a return of the cyclical perspective to macroeconomics. He seems particularly sympathetic to Minsky’s claim that long periods of stability lead to excessive risk taking, which sows the seeds of the next economic/financial crisis. While Tyler doesn’t make this specific argument, some people worry that a Fed policy that produces short-term stabilization might do so at the cost of bigger crises down the road.
I’m skeptical of the view that stability leads to behavior that makes the economy more unstable in the long run. If that were true, and if bankers were rational, then they would tighten up on loan standards after a long period of stability. I think we all agree that they do not do so. In my view that’s because long periods of stability do not increase the risk of future depressions, whereas my opponents would probably cite some behavioral economics research and then argue that bankers don’t become more cautious after long periods of stability because they are irrational.
The idea that history is cyclical is closely related to some similar ideas in economics and finance, such as the claim that recessions occur at regular frequencies, and the idea that the asset markets are prone to repeated cycles of bubbles and busts.
Because America has never gone more than 10 years without a recession, it seems logical to assume that the longer we go without a recession, the more likely we’ll experience one in the near future. But business cycle research doesn’t seem to back up that intuition; instead the business cycle is more like a random walk. And when we look around the world, we see other countries with economies that are similar to the US, which have gone two or more decades without a recession. (26 years for Australia.) I suppose Australia will eventually have another recession, but I don’t see any reason why it’s more likely to occur next in Australia than in America or the UK.
Because the human eye likes to impose order on random processes, a graph of the S&P500 looks sort of cyclical. But again, studies show that stock price movements are fairly random, albeit perhaps not a complete random walk. In fact, when a market has recently been less volatile, the odds are that it will continue to be less volatile than usual, at least in the near future.
[Today Tyler linked to a study that questions previous “market anomaly” studies. Some say the problem is data mining, but in a sense it’s even deeper, a lack of understanding of what “statistical significance” actually means.]
Instead of stability and complacency leading to the Great Recession, I see the real problem as being government created moral hazard and poorly thought out monetary policy. That’s not to deny that complacency plays some role; I imagine that policymakers are less likely to shift policy when it seems to have been successful. But I believe that moral hazard is much more likely to lead to excessive risk taking than stability. Why do I believe that? Because moral hazard should lead to socially excessive risk taking, whereas stability should not. To overcome that strong theoretical presumption I need hard evidence.
Tyler also considers other types of dangers, such as war. He is skeptical of sunny forecasts of “the end of history” or Steven Pinker’s claim that the planet is becoming steadily less violent. I’m a bit more sympathetic to those optimistic views, but on the other hand the exceptions are so large (for instance WWI and WWII) that it’s probably best we take Tyler’s perspective and spend more time worrying about “black swans”. I certainly won’t live long enough to see whether Pinker’s conjecture is accurate, but I might live long enough to see it refuted in the eyes of most people
Here’s an analogy. I think it’s quite possible that in 50 years, 1985 will still be seen as the beginning of a “Great Moderation” in the business cycle. I don’t see that hypothesis as having been refuted by 2007-09. But on the other hand, back in 2006 we would all have been much better off if we didn’t believe those economists who thought that the Fed had gotten a handle on the business cycle.
Here’s a graph of RGDP growth rates (year-over-year). Notice that since the Great Recession, RGDP growth has been even less volatile than during the 1960s expansion.
The final chapter also discusses Eric Cline’s book “1177 B.C.: The Year Civilization Collapsed“. The title sounded intriguing, so I read this book last year. Unfortunately, while it was an interesting read, the book did not really present any evidence that life in 1167 BCE was much different from life in 1187 BCE. (If you like this sort of historical speculation, I’d recommend one of Charles Pellegrino’s books instead. It may not be more accurate, but it’s more entertaining)
I’m generally skeptical of most forecasting, including the specific forecasts at the end of The Complacent Class. However Tyler probably didn’t intend that we put too much weight on any single forecast, rather that we become less complacent about whether progress was inevitable. If so, then the book will have provided a useful public service.