Alan Reynolds

These must be trying times for those who have spent the past few months or years predicting economic disaster. Oil prices and interest rates have come way down, and stock prices have gone way up. And the election is only a month away.

As I explained in a May 2005 column, "Doomsday Is Doomed," however: "Whenever the wrong political party controls the White House and Congress, the mainstream media feel compelled to predict some looming economic disaster, and to keep doing so shamelessly and erroneously year after year. The 'business news' thus careens between warning of a hard landing, deflation or stagflation -- any imaginable conjecture that depends on strong words, weak logic and no facts."

It is not just journalists who suffer from this partisan affliction. Some professional economists seem to develop an irresistible taste for doomsday scenarios as elections approach. The famed blogger Nouriel Roubini of New York University attracted attention lately by conjuring up a 70 percent chance of "severe recession" by the first quarter of next year.

This is the same fellow mentioned in my 2005 column, when he was predicting interest rates would rise by 2 percentage points. Since then, the yield on 10-year bonds has fallen from 5.1 percent to 4.6 percent.

Roubini now seeks solace in the fact that another blogger and former Clinton official, Brad DeLong, "warned of a recession and even a possible meltdown," as did "Paul Krugman in The New York Times." Those sources have almost as much credibility as Chicken Little's warnings the sky is falling. DeLong and Krugman have always described the economy in the worst possible terms whenever (1) elections were looming and (2) the wrong political party was in power.

Roubini's August forecast of recession relied on "Three Ugly Bears" -- "the housing slump is becoming a real bust; oil is heading higher and higher and could be soon well above $80; and inflation -- both core and headline -- is rising further, forcing policymakers across the world to increase interest rates."

The odd notion that oil prices would rise "well above $80" without global demand contracting now looks increasingly absurd, as does his endlessly incorrect forecast of higher inflation and interest rates. Yet the reality of falling oil prices and interest rates had no effect on Roubini's dismal forecast.

He views such errors as proof he was right all along, but the oil, bond and stock markets are insanely wrong. "Expect a nasty bear market in equities," he wrote recently, "once the delusional dream of perma-bulls leads them to wake up to the reality of the nasty and deep recession ahead." The record high on the Dow is, he says, a "sucker's rally." If he really believed that, he would have been shorting stocks. And going broke. He just wants you to believe it. And go broke.

Two months later, we are left with just one of Roubini's three ugly bears -- modestly softening prices for some homes in some cities. Thank goodness. It's about time.

If something has gotten too expensive, shouldn't we be glad when it becomes cheaper? When it comes to homes, however, many people have spent the last four years fretting that the "housing bubble" might end. That is, they worried that overpriced homes might become more affordable. This is not quite as nonsensical as worrying the price of oil might fall too much, but it's close.

When my wife and I bought our first house in 1966, "affordable housing" meant a house we could afford. Today, affordable housing often means a house you can't afford, but would nonetheless like to have. Still, it has been undeniably tough for first-time homebuyers in many cities where prices went through the roof.

If young homebuyers finally get a little better deal than they've been getting lately, why is that a national problem? Roubini worries that sellers may feel less wealthy if they collect just an enormous capital gain from the sale, rather than the gargantuan gain they expected last year. Yet a disappointing price for sellers is, of course, a matching wealth gain for buyers.

Roubini hints of massive bank failures from unpaid mortgages. Hysterical nonsense. A significant nationwide housing bust would follow (rather than lead) a rise in interest rates and unemployment. But interest rates and unemployment are extremely low.

He worries about a "consumer burnout." Yet real after-tax personal income has risen at a 3.6 percent annual rate over the past three months. He correctly notes that most forecasters were late to recognize the last recession (himself included), but I was three months early. Industrial production began falling in July 2000, which is quite different from the 4.7 percent increase for the year ending this August. Even in election years, up is not the same as down.

I, too, have warned that the combination of rising oil prices and a tighter Fed policy has usually ended in recession. If logic and evidence matter at all, however, I am now obliged to say that this hypothetical risk of recession is hugely diminished because oil prices and interest rates have been falling. Those who continue to predict bad news in the face of good news are inexcusably stubborn or deceitful.

All of these clumsy efforts to spin good news into bad could be more entertaining if econo-partisans such as Krugman, DeLong and Roubini would simply tell us what they really mean -- namely, that a tax-slashing, spendthrift warmonger like President Bush does not deserve an economy this good. That could be a far more enjoyable argument, and one that would not require stretching truth to the breaking point.


Alan Reynolds

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