Should We Believe Greg Ip About Recessions?

On Wednesday, Greg Ip opined that we should start worrying about a recession. He is the chief economics commentator for the WSJ. He held a similar position for the Economist, and he has written several books. As a journalist with an economics background, his mission is to understand the key economic concepts and help his readers to understand.

It is something like what I do, except that he has a much larger audience! I also must manage portfolios and my business, so writing is a sideline – albeit one which I love.

I read Mr. Ip’s work regularly and normally find it to be informed and helpful. That is why his column today was so disturbing. It was almost as if someone else had taken over his word processor.

A Closer Look

The Ip thesis is that there are certain “preconditions” for a recession. By that he seems to mean that he has looked at some past recessions and always found certain things happening in advance. Here is what he sees:

If you drew up a list of preconditions for recession, it would include the following: a labor market at full strength, frothy asset prices, tightening central banks, and a pervasive sense of calm.

This research methodology is backwards. To determine causality, you should look at hypothesized preconditions, and then determine a batting average. Sex offenders nearly always read Playboy (or the modern equivalent) as kids. That is a “precondition” that has nothing to do with causality. Serious addicts once smoked pot — -but I’m sure you have the idea.

Since a recession, by definition, begins with a business cycle peak, things will always look good before the recession begins. The Ip methodology would have inaccurately signaled a recession for years, and done the same in past expansions. It is yet another manifestation of interpreting good news as bad.

Let us follow him as he takes up each individual argument. The narrative does not take up the points in order, so I will rearrange for clarity.