I spent a decent amount of time doing some economic forecasting during the 2012-2015 period. I was consistently more pessimistic than median forecasts on GDP growth, and such pessimism ended up being correct. I am feeling similar right now.
The obvious unknown is the length of the COVID-19 health crisis. Longer health crisis, worse outcomes for economy. But for every potential crisis depth/length, I am more pessimistic than most forecasts I am seeing. Here are reasons:
1. I fear that employment separations/firings/layoffs will be worse than people think in the longer run. Somehow people think everyone will just be hired back if the health crisis dissipates. I am skeptical based on earlier research.
2. I fear that we are headed toward a long-term liquidity trap characterized by high debt levels and interest rates pinned at the effective lower bound. Such liquidity traps generate low growth in most macro models.
3. I fear that this recession will hit the non-rich much harder than the rich (by non-rich I mean 90th percentile and below of income distribution). This will only exacerbate liquidity trap problems, leading to persistent short-falls in aggregate demand.
4. I fear that the political system in the United States is unable to respond to this crisis the way the economy needs. Just look at how massive job losses have already been. Preventing such job losses should have been top priority for policy.
Sorry for the pessimism. But I guess it's Friday?
And just for the record. I very much hope I am wrong. ☹️
