I have long admired how the Irish professor Clive S. Lewis acknowledged the apparent sterility of scientific models and theories when faced with the beauty and seemingly endless complexity of the real world.
He argued that although as useful as the wonderment of a great ocean view might be, a simple map of the ocean is a bit more valuable when crossing it in a boat. As we think about the current economy, I am tempted to describe the many interesting elements that come to play.
But for the purpose of understanding where we are in the world this weekend, I will turn to the sterility of models.
The current U.S. recovery dates to July 2009, so we now begin our 85th month of economic expansion. That is the third longest economic expansion for which we have reasonable data, and we have that data back to the 1850s.
One way to consider the relevance of this fact is through the use of a mathematical model called a “cumulative hazard function.” This hazard function allows us to use statistical analysis to predict how long something will last: a business, a bridge, a human life, or an economic expansion, given the accumulation of events each will experience over time.
Some of these are events are negative, some positive, while most may be irrelevant.
These models work well when we have long time periods to observe, with many different events, and many businesses or bridges to evaluate. Unfortunately, we don’t have lots of recessions to evaluate — only a few dozen worldwide and many of which are linked across countries. So, it is the insight of the model that is most useful, not the double integrals.
After 84 months, many things have happened, both good and bad. We’ve had two devastatingly bad quarters that looked a lot like new recessions.
Labor markets weathered one of them, but have not yet overcome the other. We’ve seen Brazil, Russia, India and China teeter into a mild slowdown and then recover. We’ve seen a mild, mostly southern, European recession come and go without lasting damage to our economy. Labor markets are improving, albeit very slowly, and all seems rosy.
During the past three weeks though, two things have occurred that offer grave risk to our recovery. The most reported event has been the collapse of the Greek economy and financial system. The possible exit of Greece from the EU monetary system, the failure to repay several hundred billion in loans and the deepening of a depression there is sufficient to bump us into a recession.
Far more worrisome, though, is the more quietly bursting stock bubble in China. During the past three weeks, the Chinese stock market, previously thought to be carefully managed by the government, has lost one-third of its value. It is in full collapse, dragging down commodities and other stocks.
I’m not yet predicting a recession, but the cumulative hazards of these events should be very worrisome. There is more than enough bad news here to kill the recovery.
Michael Hicks is the director of the Center for Business and Economic Research and an associate professor of economics in the Miller College of Business at Ball State University. Send comments to email@example.com.