Laurence Kotlikoff, an economics professor, has said that a recession can be a state of mind, rather than an actual economic situation.
Recession? There is no evidence that we are in a recession, or even close, says Laurence Kotlikoff.
Kotlikoff is a professor of economics at Boston University. He recently said that during adverse economic events, people feel poorer, based on what they read and hear in the media, even though nothing has changed in their lives.
“I don’t think we’re in a recession now, or have been for the last six months, because unemployment is still very low. If you look at the facts, there is no evidence of a recession. Yet everyone in the newspaper is writing about a recession. Bad news sells.”
Kotlikoff says that if news organizations talk about a recession, every other news organization feels compelled to talk about it, too.
According to Kotlikoff, academic research shows that, in the past, a drop in house prices has led to a decline in overall consumer spending. This is because people felt poor on paper. But was this really true?
“Psychology matters a lot because people are not economists. They are not trained to think the way I have been trained to think. So, they are wrong. They listen to what other people are saying, and those other people are also focused on the wrong things!”
Recession? We are Talking to Ourselves
Kotlikoff says that people discuss how high mortgage rates are and how high inflation is, but they don’t discuss how real mortgage rates have come down. Subsequently, in his view, people are misreading the economic reality, as talking about a recession can be a self-fulfilling prophecy:
“If we both believe in something that is not true, we make it happen through our actions.”
What Causes Recessions?
Kotlikoff often talks about what caused the last recession and how we can prevent it from happening again. “Nothing they said caused the great recession is backed up by the data. In fact, almost everything they said was true, it was not.”
In Kotlikoff’s article, called The Big Con, he says that the cause of the last recession was that people fooled themselves into thinking we were having a recession:
“We convinced ourselves that we had all these problems that didn’t really exist. That’s where psychology comes in: we psych ourselves up as a country. We put ourselves in recession. And we have been trying to do that again for many months in this country. And other countries around the world are doing it too. We may be able to convince ourselves of the next great recession.”
Kotlikoff says that the Great Recession was actually not even that big. “We only had a three percent drop in production. So this is a self-fulfilling prophecy.”
Macroeconomic Factors
The economist also said that the Fed has become convinced that it needs to raise rates sharply. “But what’s really going on with inflation is on the supply side.”
Dr. Kotlikoff cites COVID-19, the war in Ukraine, and Chinese production disruptions as things that have pushed up prices. However, he says that these price increases are temporary.
Kotlikoff suggests that companies should try to help workers by getting lower profits for a while:
“So let’s collectively change the psychology and coordinate on a lower level of inflation. Let’s not coordinate the recession. If we all believe in a recession, we are all going to make it happen.”
By Audy Castaneda
