JIM LEHRER: And, finally, tonight, the second in our series on making sense of financial news to explain what lies behind the breaking developments on the NewsHour and on our Web site.
Last week, the NewsHour’s economics correspondent, Paul Solman, looked back at the past year to get some understanding of what happened.
Well, tonight, he looks ahead.
GEORGE ADAMS, President, Adams Steel: Every week, we have a conference call with our managers, all right? And we joke on our conference call that my dog could do a better job picking the market than me.
PAUL SOLMAN: George Adams, described to us as unequivocally the most important man in the U.S. scrap metal industry. Throughout 2008, he predicted that the price of his key product had peaked, and now was the time to sell.
GEORGE ADAMS: And every month, I was wrong. OK? And I did that nine for, what, nine months in a row — or eight months in a row, until the market completely fell out of bed, and I looked like a genius, OK? And I tell people, if you say the same thing month after month and you do it, you know, eventually, you’re going to be right, OK?
PAUL SOLMAN: Economic forecasting.
While in California recently shooting several stories at various locations, the Tummy Tuck jeans factory, the largest scrap metal operation on the West Coast, we asked everyone we met to predict the year ahead, from businessmen at work, to economists at their annual convention.
MARTIN FELDSTEIN, Harvard University: In 2009, the economy is going to continue to slide down. We have not seen the bottom.
PAUL SOLMAN: Martin Feldstein of Harvard.
MARTIN FELDSTEIN: I think we will be lucky if we see a bottom and a beginning of an upturn by the end of 2009. But that doesn’t mean that, in the spring of 2010, they will be as good as they were in 2007. We have got a — a long climb ahead of us.
PAUL SOLMAN: Feldstein, glum, Ken Rogoff, glummer.
KENNETH ROGOFF, Harvard University: I would guess that, if we’re lucky, we will be at zero growth at the end of next year. And unemployment is likely to rise for a long time after that, certainly into double digits, something that was unimaginable.
PAUL SOLMAN: Not all the forecasts were so bleak.
ED LEAMER, UCLA: Keep in mind that, as rapidly as the fear gripped us, it can also lose its grip just as rapidly.
PAUL SOLMAN: UCLA’s Ed Leamer.
ED LEAMER: The first quarter is a big negative, and then the economy improves.
Many economists were blindsided
PAUL SOLMAN: Now, at this point, some of you might be a tad skeptical, given the track record of economic forecasting. Less than a year ago, Leamer himself was predicting no recession.
ED LEAMER: We expected the economy to stumble forward.
PAUL SOLMAN: And though a few economists had warned of a bust, some for years, the vast majority thought we would muddle through, which may be why one of the savviest businesspeople we know, L.A. jeans manufacturer George Rudes, says:
GEORGE RUDES, CEO, Not Your Daughter's Jeans: I don't want to listen to some guy that went to Harvard and looks at statistics and says, well, this one should last 18 months. That's B.S.
PAUL SOLMAN: Rudes thinks confidence is the key to the economy's future course. Ed Leamer agrees.
ED LEAMER: We can create a Great Depression if we start to believe in it, because we get these self-fulfilling fear cycles, that we need to get -- we need to let loose of that.
PAUL SOLMAN: So, would you be honest and tell us you thought there was going to be a Great Depression? I mean, are you being honest with us here?
ED LEAMER: That only -- that question only slightly overstates the power of my words.
PAUL SOLMAN: Rest assured, NewsHour viewers, it wasn't just the relatively bullish Leamer who dismissed the possibility of another Great Depression. So did former Fed Vice Chairman Alan Blinder, a Democrat.
ALAN BLINDER, Former Federal Reserve Vice Chairman: No way there is a Great Depression.
PAUL SOLMAN: So did Republican economists glum and glummer.
MARTIN FELDSTEIN: This is very different from the Depression of the 1930s. It's different because we have a number of programs in place to protect people, the unemployment insurance, the bank deposit insurance, and things like that.
KENNETH ROGOFF: We are very, very vulnerable, but I wouldn't say that is a high likelihood. There are an awful lot of checks and balances in our system. A lot of sensible things are being done.
Social sciences poor predictors
PAUL SOLMAN: But the unknowable question: Will sensible things work?
The problem with predicting the future is that it depends on the choices we will all make in the future, whether or not to buy more scrap or Tummy Tucks, choices that, if there's anything like free will in the world, we haven't made yet.
Rudes says the experts he looks to aren't up in the ivory tower, but down in the mall.
GEORGE RUDES: Consumers, I -- when I see people, you walk into a shopping center, and you see people walking with shopping bags with something in it, then I will tell you business is getting better.
PAUL SOLMAN: But, seeing as how we do seem to have shopped until we dropped in recent years, and kept businesses like Tummy Tuck booming, the big question is when might we decide to arise and go on a spree again.
Unfortunately, says Rudes:
GEORGE RUDES: Nobody knows what's going to happen in the future. We -- we use our experience, and we plan for it.
PAUL SOLMAN: Or, as political scientist Steven Teles puts it:
STEVEN TELES, Political Scientist, Johns Hopkins University: Predicting risk is almost always a backward-looking process. That is, we look to previous situations, and we try to determine what the probability of a similar situation occurring in the future will be. But the problem is, what if the structural situation is change?
PAUL SOLMAN: Small wonder everyone from the folks at the Fed to George Adams in his scrap yard were shocked by the crisis.
GEORGE ADAMS: It wasn't a -- a downturn. It was a cliff. OK? We fell off a cliff in the world.
STEVEN TELES: Social sciences have almost no ability to regularly predict when those systemic breakdown points are going to be. And that, I think, really is the tragedy of social science.
The downturn's lighter side
PAUL SOLMAN: OK, so maybe all-too-serious economists aren't our best bet for a peek into the dim future.
YORAM BAUMAN, Stand-up Economist: My name is Yoram Bauman. I'm the world's first and only stand-up economist.
PAUL SOLMAN: An economist comedian, who better to analyze our plight, at the micro level, individual consumers, and at the macro, the economy as a whole? Yoram Bauman asked us to feed him the following straight line.
If the U.S. economy were an animal, what animal would it be?
YORAM BAUMAN: I would have -- I would have to go with a hamster right now. And it's a hamster that's been running around its cage, you know, for maybe seven years. And it's tired. So, as a microeconomist, I look at it, and I think that the hamster needs some rest. Macroeconomists look at the hamster and think that the hamster needs some methamphetamines.
And I'm sure that they're right. But, after two years, it's going to be one ugly hamster. I mean, it's going to have rotten teeth. It's going to have like bloodshot eyes. It's going to be scratching itself all the time. You know, there's going to be a price to pay.
PAUL SOLMAN: There's a lot of truth behind that joke, right, because the idea is that, if we re-rev up the economy, or keep it going through spending, that may be what will keep the economic wheel turning, but, in the long run, it could lead to even greater collapse?
YORAM BAUMAN: At some point, we're going to have to tighten our belts. And the government can do -- take action now to sort of smooth that transition, but it can't postpone it indefinitely. We can't continue to -- to spend more than we're -- than -- than we're earning.
PAUL SOLMAN: We have to slow down. We have to speed up -- a paradox, you might say, a situation we may never have seen before. No wonder it's so difficult to know how long it will take to resolve.