Todd Hirsch
The Great Recession may be behind us, but Canadians aren't ready to laugh about it. (Indeed, given the economic drama in Europe lately, holding the laughter might be wise.) Yet Statistics Canada points out that in terms of recessions, what we lived through in 2008 and 2009 was actually not all that bad after all. Maybe calling it the "Great Recession" overstates it. Perhaps the "Medium-Sized but Full of Drama Recession" captures it better.
Have economists come through it stronger and wiser? Have we learned anything about ourselves and our profession? If we could leave behind a volume of advice, inspiration and encouragement to a generation of future economists, what would we say?
Maybe we need some chicken soup for the economist's soul.
The first bit of advice: Don't get too caught up predicting the shape of what's to come. Back in early 2009, economists became obsessed with the alphabet soup of shapes the recovery could take. We knew it wouldn't be a V-shaped recession, so there were predictions of U-shapes, W-shapes and even the dreaded L-shape. When we ran out of letters, we turned to more creative shapes, such as the backward-facing square-root symbol.
As it turns out, it just might be a V-shaped recovery after all. The Canadian economy seems to be roaring back to life with more gusto than we had imagined. All of the updated forecasts for 2010 GDP growth show an almost perfect V-shaped recovery - the Bank of Canada was laughed at a year ago for its wild optimism for this kind of growth. (Of course, the Greek debt crisis could still set off a chain reaction that tips us back into a slump, which would mean the W-shape folks were right - though for the wrong reasons.)
Of course, it's only natural to make suppositions about how events will unfold. That's the fun of being an economist: trying to guess what will happen next. It's like a never-ending game of Twenty Questions. The point is not to become obsessed with predicting the future - stay grounded with making sense of the present.
That leads to a second piece of advice: Don't fall into the trap of focusing solely on information that reinforces your own prediction. This is a common human pitfall that causes us to become overly confident in our forecast. It feels great at the time, because it rewards our egos and gives gentle (but false) assurance that we're on the right track. It's better to focus on information that runs counter to our prediction, and to ask "Now why would that be?" There's more economic insight to be gained that way, and it forces us to constantly re-evaluate our predictions.
And finally, economists of the future, don't be afraid of those three words we seem to dread the most: "We don't know." After all, how can we know precisely what is going to happen? Perhaps it's a syndrome built out of our own insecurities. We've come to believe that our econometric models will tell us what comes next. Even worse, we've convinced everyone else that we actually do know what will happen next. Much of the happenings in the economy are random and unpredictable by nature. People laugh at fortune tellers, but they believe economists. As a profession, we've done it to ourselves.
Being a good economist means accurate forecasting, say, 60 per cent of the time. Being a great economist means offering insight, interpretation and clarity about what's going on around us now.
So take this chicken soup to heart, young economists. Recessions come and recessions go. And when the Next Great Recession hits us, you will feel like it's the worst thing ever to descend upon humanity. It won't be. Don't obsess with trying to pinpoint its shape or the timing of the recovery. You'll probably get it wrong. Rather, offer words of calm and assurance, and focus on helping people prepare for any possible number of economic outcomes. That will be your greatest contribution of all.