Contrarian Economics

CONTRARIAN ECONOMICS….Here’s an odd thought: is it possible that the economy is about to get better? The Law of Economic Conventional Wisdom says it might be.

Let me explain. Usually, you can tell that a trend has hit its peak when it becomes the conventional wisdom that the trend is permanent. For example, in the late 90s, after a few years of high growth, it became conventional wisdom that this wasn’t merely cyclic, but was the result of structural changes in the economy (better inventory control, IT investment finally paying off, the internet) that meant high growth would continue forever and the stock market would continue to rise. Sure enough, shortly thereafter the economy tanked and the stock market bubble burst.

The same thing happens to real estate markets after several good years in a row, commodity markets, fine art markets, and pretty much every other market. People have short memories, and after things have gone well for a few years they find ways to convince themselves that what’s happening isn’t cyclical, but rather a reflection of some new and permanent underlying change in the laws of economics. What’s more, they usually manage to produce remarkably sophisticated and genuinely persuasive rationales for their new theories.

The same thing happens in reverse, too. After a few years of bad times, people start to get overly pessimistic and the conventional wisdom turns. This downturn isn’t merely cyclical, it’s a reflection of a permanent underlying change in the laws of economics.

By happenstance, in the past couple of days I’ve run across three separate articles that make this case for our current sluggish job market:

  • Mark Zandi, chief economist at “I’m growing increasingly suspicious that something more fundamental may be happening to the job market and the economy.”

  • Martin Hutchinson (admittedly, a professional pessimist): “Expect the economic figures that appear over the next few months to produce primarily negative surprises, as Wall Street analysts fail to realize the depressing reality of today’s economy.”

  • Robert Barro, based on his computer model: “The forecast for February 2004 to February 2005 is an employment growth rate of -1.1%, with a range of -1.6% to -0.7%. This growth forecast translates into a 12-month change in employment of -1.5 million, with a range of -2.1 to -0.9 million.”

I don’t take this seriously enough that I’d be willing to put money on it or anything, but when lots of people start to become convinced that an economic cycle has become permanent, that often means the cycle has reached its limit and is about to turn. Is it possible that’s what’s happening right now?