In this MoCo Economy Watch, we have some fun thinking generally about looks ahead, and we lay out some “risk scenarios” that are worth considering. And how better to start than with some lyrics from one of the great bards of our time, John Prine.
We are living in the future and I’ll tell you how I know
I read it in the paper 15 years ago
We’re all driving rocket ships and talking with our minds
Wearing turquoise jewelry and standing in soup lines
Here we are…less than two years into a once-in-a-lifetime public health emergency, one year after an organized insurrection or attempted coup, and amidst and endless series of climate catastrophes of biblical proportions. Anyone want to put it all on the line making predictions about the local economy in 2022? Anyone? I sure don’t.
In this edition of MoCo Economy Watch, we take a step back and think a bit about looks ahead generally. Here are some general principles I like to keep in mind:
- Don’t overreact to the most recent new information or most shocking new trend.
- Don’t simply draw a straight line from where we are today.
- “Black swan events” and systemic shocks are likely to accelerate pre-existing trends.
Furthermore, in looking ahead it is worth remembering that some significant forces limit our ability to see clearly.
- It is difficult to understand the present let alone the future.
- The world economy is a complex system, meaning that the number of variables affecting the future economy is infinite.
- The cumulative impact of misunderstanding today and mis-forecasting tomorrow is that any sense of where we’ll be next year is probably going to be exponentially wrong.
Finally, I lay out some risk scenarios that we should be thinking about as we plan for whatever lies ahead.
General principles that should inform looks ahead…
Hold your horses!
In looking ahead, I usually first remind myself not to over-react to recent or shocking developments. I was going to write my own caution on this, but I don’t think I can come up with one that is better than this one written by Donald L. Elliott, FAICP, in his wonderful piece titled Zoning in a Post-COVID World.
{P}lanners should remember that communities evolve over long periods of time. What seem like dramatic changes in the short run often appear more modest when viewed over the decades in which we live our lives. The “back to the city” headlines since 2000 actually involved only a (privileged) minority of U.S. households whose changing preferences bent the real estate markets toward traditional downtowns. The vast majority of Americans did not move downtown and had no intention of moving downtown; they continued to live in surrounding areas of the cities and suburbs where the vast majority of U.S. housing is located. The same is probably true of responses to the COVID pandemic. Headlines will be made by a minority of U.S. consumers who decide to move outward to avoid the perceived risks of more crowded urban areas, but it is unlikely that a significant share of Americans will make that decision… Housing, employment, and transportation choices are influenced by several constantly changing forces, including the availability of work, stage of life, quality of schools, commuting time, personal preferences, affordability, and discrimination. America’s cities and counties are what they are as a result of decades of individual households balancing these tensions. The fallout of the COVID-19 pandemic will change some of these factors for some households, but not all, and not all in the same way.
Change occurs on the margins. It happens one tenant, household, or firm at a time. For example, we will see less demand for office space, but that will be reflected gradually as tenants reach the ends of their leases. So, as big a deal as the pandemic is, don’t fall into the trap of thinking that change on a massive scale will happen all at once. It won’t, and who knows what other forces will be affecting the trajectory of change a year or ten from now.
Millions now living will never die
The easiest way to forecast is to assume a continuation of the current trend. On the other hand, even trend-based forecasts require some degree of skill in identifying the trends, picking the most relevant trends, and using those to guide your look ahead. I call this the “millions now living will never die” problem. It is often true that forecasters pick the wrong present trend when choosing among many that could extend into the future; other times, they simply fail to question the assumptions regarding which parts of the status quo will continue in the future.
As an example, the U.S. population has increased throughout this nation’s history, but that was never a given; rather, it was simply treated as a given. How much does our understanding of our current situation and near-term risks change if we change that one assumption? How would we even go about forecasting the population a decade from now? What weight would we give to the last two years relative to the last two hundred years? Will the death rate regress to the mean? Will the birth rate regress to the mean? What about immigration?
Systemic shock as accelerant
Like many folks, I tend to view the pandemic as most likely to change economic and social conditions by accelerating some changes that were already underway. But, also like most people, I find myself inexorably drawn to the changes that are running counter to the pre-pandemic trends.
It is new and exciting that people moved to the suburbs, but that is something that is more likely to be a short-term response to the emergence of the virus. On the other hand, decreasing demand for commercial real estate is something that is more likely to be a lasting impact – that’s where we were headed before the pandemic, and that’s where we’re probably still headed…but now just a whole lot faster.
Forces that prevent us from seeing clearly…
It is hard to understand the present until it is the past
First, the easiest way to understand the future is as an extension of the present and recent past. In economics and planning generally, understanding the present is the first challenge and is particularly problematic at inflection points in history – those times when change is not simply incremental.
In thinking about this phenomenon, I sometimes remember this great line from comic writer Jack Handey:
When the age of the Vikings came to a close, they must have sensed it. Probably, they gathered together one evening, slapped each other on the back and said, ‘Hey, good job.’
It isn’t always easy to tell the beginning of the end from the end of the beginning when you are actually living it. Most people can’t and being right might simply be a matter of dumb luck.
A great example of this challenge is the Great Horse Manure Crisis of 1894. At that time, there were 100,000 horses in New York City producing an estimated 2.5 million pounds of manure each day. What to do with that manure was considered to be the biggest urban planning challenge of the age – just imagine how much worse it would get if the population kept growing at current rates! This crisis was examined at what may have been the first international planning conference, held in 1898, at which experts debated how to address a problem that would certainly come to define the next century of urban life. However, within the next 10-15 years the horses on New York streets were replaced by automobiles and a whole new set of problems emerged. The future isn’t just “today, but a little while later”; rather, the future is a time at which everything will be somewhat different from today.
Sam Peckinpah’s great film The Ballad of Cable Hogue, tells the opposite story. The title character, played by Jason Robards, owns a watering hole in the southwest desert. Upon seeing an automobile for the first time, he understands that the future of his watering hole business is in peril, and he endeavors to find a taker for his soon-to-be-obsolete business. There’s a sucker born every minute, at least insofar as a sucker is someone who assumes the status quo of horse-powered transportation will continue into the next century.
And of course, most humans get their news second hand from other humans, many of whom are informed by speaking with still other humans…On October 30, 1929 – one day after the stock market crash – the New York Times ran an article with the following headline:
General View Is That It Has Run Its Course and That Basic Condition Is Sound. No Catastrophe Is Seen: Transitory Forces Held to Be Behind Decline With Prosperity Not Affected.
Well, okay then. I didn’t read the article, but the journalist probably asked all the right people a number of reasonable questions and this is what they got back.
For those who are “economically inclined,” I highly recommend reading Ray Dalio’s Principles for Navigating Big Debt Crises. I found the detailed case study of the Great Depression to be particularly fascinating. It was humbling to read the week by week, blow by blow account of how the crisis unfolded and how poorly it was understood in “real time.”
A butterfly flaps its wings…
Beyond the errors that have their origins in misunderstandings of the present or recent past, forecasts and projections tend to fall apart because of the complexity of the real world. If a butterfly flapping its wings in South America can lead to a tornado in Kansas, then what forecast, or projection, can any subject matter expert really be expected to get right?
French mathematician and astronomer Pierre-Simon Laplace, in 1814, postulated a very optimistic view of the future of social sciences:
We may regard the present state of the universe as the effect of its past and the cause of its future. An intellect which at a certain moment would know all forces that set nature in motion, and all positions of all items of which nature is composed, if this intellect were also vast enough to submit these data to analysis, it would embrace in a single formula the movements of the greatest bodies of the universe and those of the tiniest atom; for such an intellect nothing would be uncertain and the future, just like the past would be present before its eyes.
If you say so, Pierre-Simon!!!
Macroeconomic models are going to have difficulty projecting forward in a world facing global climate change, a global public health crisis, increasing levels of international conflict, and increasing political instability in the U.S. And of course, macroeconomic models weren’t particularly good at predicting the future in the recent past – in fact, the evolution of economics from a branch of philosophy to a mathematical exercise has been rife with failures resulting from both the hubris and overreach of economists and also the innumeracy and illiteracy of the general population when it comes to making sense of the social sciences. With respect to the former, Paul Krugman’s assessment of the failures of his profession to see the Great Recession is on point.
…{T}he economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. – New York Times, 6 September 2009.
Just doing the math doesn’t make it useful or advisable.
It is also the case that there is a growing body of research around the question of who makes good predictions and whether subject matter experts are indeed able to make better predictions about the areas of their expertise. Philip E. Tetlock’s research, as described in the wonderfully readable book he co-wrote with Dan Gardner, Super Forecasting: The Art and Science of Prediction, addresses this issue. Subject matter experts know a lot about their fields of study, but they are “hedgehogs” who focus on one area and often don’t have the broad perspective necessary for forecasting. On the other hand, “foxes” may be better at actually forecasting future events because of their broad perspectives and because they are constantly consuming the news and the writings of “hedgehogs” in various fields of study. Often, we are listening to the wrong people, or we’re not listening in the right way.
Furthermore, subject matter experts are most likely to be able to apply intuition to the future when the world they are observing is stable. Daniel Kahneman, in his book Thinking Fast and Slow, notes that the conditions that best support acquiring skill and intuition are that the environment is sufficiently regular to be predictable, and that the expert has an opportunity to learn these regularities through prolonged practice. I watch a lot of baseball, and that’s how I know that a 3-1 count from an opposite-handed pitcher is one that could get deposited into the seats by a power hitter. I’ve seen it thousands of times. Sadly, real life is not baseball and I have no idea whether the next pitch is going to be a fastball down the middle or a knuckle curve in the dirt.
Given that the present that we are living is unlike any present in the recent past, it is difficult for any individual to claim any special skill or intuition about the future because no one has observed this before. The word we are all sick of is “unprecedented,” but there is a reason that those who need to look into the future keep reminding us that they have nothing to go on.
One current example of this is that macro models tend to have a view of economic seasonality that is based on statistical studies of the economy over many years. One factor that has historically affected employment levels is the season – e.g., employment in certain industries increases in the summer (think farming, hospitality) and others in the winter (think retail). But what the pandemic has done is completely change seasonality – now the weather may be a factor in either increasing or decreasing the spread of the virus, which is something that will, in later months, alter the economic trajectory.
All of this was neatly crystallized for me last month when two articles appeared at the top of my news feed on the same day. One was an article about the (backward looking!) data showing the strength of the economy (in the summer!) and projecting that it would continue into the new year, and a second article about the rapidly increasing COVID-19 case counts in the northeast U.S. and the risk that posed to the broader national economy heading into 2022.
On some level both may be correct: our future may involve simply shifting back and forth between good weather for outdoor activity being reflected in greater economic activity and relatively low infection rates; then, as people continue working and travelling in the fall, and take their activities indoors (e.g., from summer camp to indoor school, from family vacations to business travel, from eating outdoors to eating indoors) the case counts increase posing a risk to the economy. This accordion-like push and pull may be the new normal – we don’t know yet because we only have 21 months to go on, and of course even there…well, the data is still coming in…
The farther out you look, the more often you’ll be wrong, and you’ll also be wrong by a lot more…
Finally, the discrete challenges of understanding today and predicting tomorrow are further complicated when the time frame for prediction is long-range. Nassim Nicholas Taleb put this well in his great work The Black Swan :
…{W}e act as though we are able to predict historical events, or, even worse, as if we are able to change the course of history. We produce 30-year projections of social security deficits and oil prices without realizing that we cannot even predict these for next summer – our cumulative prediction errors for political and economic events are so monstruous that every time I look at the empirical record, I have to pinch myself to verify that I am not dreaming.
Taleb’s point was largely about epistemic arrogance (overestimating how much we know or the degree of certainty around that estimate). But Taleb is also saying that being wrong about short-term projections really compounds the errors in long-term projections. Again, you can’t understand tomorrow if you don’t understand today, but you also are less likely to understand next week if you can’t accurately project tomorrow.
Perhaps the most dog-eared literary work in my library is Italo Calvino’s compilation of essays, Invisible Cities. This particular passage is my favorite in the book and may be the most apt metaphor for planning ever conceived in literature.
In the center of Fedora, that gray stone metropolis, stands a metal building with a crystal globe in every room. Looking into each globe, you see a blue city, the model of a different Fedora. These are the forms the city could have taken if, for one reason or another, it had not become what we see today. In every age someone, looking at Fedora as it was, imagined a way of making it the ideal city, but while he constructed his miniature model, Fedora was already no longer the same as before, and what had been until yesterday a possible future became only a toy in a glass globe.
The building with the globes is now Fedora’s museum: every inhabitant visits it, chooses the city that corresponds to his desires, contemplates it, imagining his reflection in the medusa pond that would have collected the waters of the canal (if it had not dried up), the view from the high canopied box along the avenue reserved for elephants (now banished from the city), the fun of sliding down the spiral, twisting minaret (which never found a pedestal from which to rise).
On the map of your empire, O Great Khan, there must be room for both the big, stone Fedora and the little Fedoras in glass globes. Not because they are all equally real, but because all are only assumptions. The one contains what is accepted as necessary when it is not yet so; the others, what is imagined as possible and, a moment later, is possible no longer.
By the time we understand today, our view of the future is already based on something that is no longer. This passage so perfectly illustrates one of the fundamental challenges of forecasting or predicting future social or economic conditions: each world is not simply the sum of a number of separate trend-line projections, but rather a world unto itself. The future isn’t just the sum of predictions; the future is a scenario.
Illustrating the point, it is possible that U.S. GDP in 2022 continues to increase at the rate that it increased in 2021 and that new infections continue on the current delta/omicron trajectory. On the other hand, one might also reasonably imagine either of two scenarios – one in which GDP increases and new cases level off or decline, and another in which new infections increase on their current trajectory and U.S. GDP levels off or declines. I tend to think this “scenario” approach is the more useful one when planning strategic responses to potential future policy problems.
Some scenarios to consider…
While we can all agree on the folly of making predictions per se, decisionmakers and influencers should consider some broad scenarios that present big risks. What follows are some of the scenarios (not location specific and not mutually exclusive) that are worth thinking about as we move ahead.
- The “500,000 U.S. citizens die of COVID every year” scenario: How much is our collective understanding of the future based on an assumption that populations (locally, regionally, nationally, etc.) will continue to grow? How might a significant prolonged change to the death rate (and birth rate) change our assumptions about household formation, economic activity related to construction, construction and growth-related revenues, public debt affordability, labor force productivity, intergenerational wealth transfer, social and economic inequality, retirement rates, and labor force participation? What would a contraction in the population mean locally, in terms of planning efforts, the capital budget, school capacity, and transportation planning? And which populations or communities would be most affected?
- The “hot economy and current inflation leads to Fed tightening” scenario: Are we properly assessing the risk of significant asset devaluation, such as might occur in response to federal reserve tightening, given the various other economic and social risks facing the country? Put differently, could this time be different, given how different these times generally are? And what would a significant economic correction or recession really mean in this national and global political environment? With so many risk factors, is the risk of decline bigger both in terms of its likeliness and in terms of its potential negative impacts?
- The “we’re too divided to solve problems” scenario: Are we giving enough weight to scenarios in which we become less able to address emerging or continuing public policy problems? Are we underestimating the possible effect of continued and/or increased political instability in the United States on the future of the economy? How does a collective inability to solve public policy problems affect future economic productivity? And even locally and regionally, where the divisions are more between wings of the Democratic Party, is there enough consensus around the idea of considering all perspectives and developing solutions that work for all, or are we moving more and more towards all-out, non-stop war between the parties, and also within each party?
- The “blurring lines separating public and private sectors” scenario: Have we given adequate thought to the changing nature of the relationship between the public and private sectors? Are we entering a world in which there is much more government control of the housing market, and if so, how will that affect the decisions of property owners and developers about how to develop? Are we entering a world in which there is much more government support for ongoing business operations, and if so, how long will that last? Will restaurant relief programs become the new norm? What about government financing to support private industry and incentives to affect private industry location, investment, and employment decisions? Does the pandemic and the accelerating inequality lead us to consider more government programs like basic income support and social safety net programs that are not tied to employment status?
- The “GOP’s America” scenario: What actions might a GOP Congress take to limit the policy choices available to blue state legislatures? What actions might GOP state legislatures take to limit the policy choices available to counties and cities? Will social safety net access be limited to those who work? To what degree will businesses be free to make decisions about who to serve or whether to discriminate? To what degree will businesses be free to require vaccination or masks in the workplace? How can the economy get back up to full speed in the absence of new immigrants, given the increasing death rates and declining birth rates that we’ve experienced over the last two years? What is the future of Obamacare in a GOP control scenario and what does that mean in terms of public health and in terms of the viability of non-traditional employment? Which federal programs currently in place will be repealed or de-funded, and what might that mean for the economic stability of the nation?
- The “inflation forever” scenario: Have we given enough consideration to the possibility that the same set of policy choices (e.g., debt-financed social assistance, massive government response to crisis, etc.) might be made in 2022…and 2023…and 2024? Does the idea that future inflation will come back under control rest on an assumption that this country will not, by choice or by necessity, continue to pass frequent large-scale and debt-funded social assistance or economic stimulus programs? Is that assumption realistic? What happens if inflation continues apace while economic growth slows?
- The “global instability” scenario: Does Russia invade the Ukraine, and what does that do to fossil fuel prices here and in Europe? Does China escalate tensions with Taiwan and other neighbors, and how does that affect global supply chains? Does the virus erode what little stability there is in some developing nations, creating significant humanitarian crises in Africa, South America, Central America, and Southeast Asia? And what burdens does that place on larger countries to step in? And in such a scenario, is it politically feasible for the U.S. to step up? Or will China take the place of the U.S. as an ascendant superpower that sees the benefit in establishing and maintaining a world order?
I don’t have the answers to those questions, but those are among the scenarios that I think about as I look ahead at 2022 and beyond. If you have thoughts about these scenarios, or any that I missed, don’t hesitate to reach out; like you, I simply can’t stop thinking about the future. Furthermore, our collective understanding of the future can only be improved by considering other viewpoints. As such, I am always on the lookout for information about the kind of changes that only those who are “up close” can see.
Wrapping up
This piece is a bit of a departure from the usual MoCo focus. But it was fun to write, and I promise not to attempt anything similar again for at least 12 months. We’ll be back next week with a deep dive on site selection criteria in a multi-jurisdiction region, and again later this month with our Flotsam and Jetsam (assorted observations about the regional economy). Be well, stay safe, and shop MoCo!
