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Speech Acts and Hard Landings

Will the current account deficit lead to a hard landing for the American economy? Nouriel Roubini and David Altig debate in The Wall Street Journal and I won't try to adjudicate. What I will observe, however, is this. When reasonably high-profile individuals debate such things in public fora, they're not really offering predictions, they're committing speech-acts aimed at influencing behavior. There's broad agreement between Roubini and others in his camp like Brad Setser that a hard landing is by no means inevitable. Similarly, Altig and others in his camp don't suggest that it's impossible. Everyone agrees that a hard landing is undersirable. And there's rough agreement about under which circumstances a hard landing would be avoided.

A big part of what's going on here, I think, is that whether or not we see a hard landing has a lot to do with what people think about the likelihood of a hardly landing. If I understand the issues correctly, insofar as policymakers worry about a hard landing, a hard landing is less likely because they'll adopt policies that help avoid one. But insofar as private investors worry about a hard landing, it becomes more likely, because they'll make investment decisions that increase the strain on global financial stability. In large part, then, I don't think this debate is really about economics at all. Instead, the Roubini/Setser camp thinks the most important thing is to put the fear of God into policymakers so they get us off a bad course. The Altig camp thinks the most important thing is to reassure investors to try and avoid a panic that will, itself, cause a hard landing. These financial situations have a curious self-referential character about them. If everybody wakes up on the morning of April 1 and decides that the dollar and the US economy will crash and burn within the next 12 months and they'd better act accordingly, the dollar and the US economy will crash and burn, very quickly.

March 31, 2005 | Permalink

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Comments

a bit (bunch) off-topic...

but what if a thousand raving lunatics wake up April 1, and decide migratory workers are the biggest threat to the American way of life, and patrol the border accordingly?

Posted by: scott | Mar 31, 2005 2:07:42 PM

You might repeat your theoretical point here (about speech acts) daily from here on out.

A lot of people, even in politics, seem to be so infatuated with scientistic attempts to describe reality "as it is" and to predict it, that they don't realize that what they're trying to do is to change reality -- which would change anyway. [Insert Marx quote here.]

In particular, a lot of Dems seem to come from administrative backgrounds where the maintenance of sameness and normality is the goal, and don't seem confortable in the political entrepreneurial realm where shaking things up, changing them, and trying new strategies are what works.

Republican honchos tend to be semi-criminal entrepreneurs, and they tend to whip the wise social scientists the Democrats hire. (Republicans hire lots of social scientists too, but they don't let them run things).

Posted by: John Emerson | Mar 31, 2005 2:25:53 PM

Economics is so dependent upon psychology that many economists turn into counselors who specifically construct actions in such a way as to soothe the very markets that the perceive as troubled. It really is a bizarre effect. It also leads to weird things like how virtually every country that holds dollar-denominated assets is diversifying its holdings denies it fairly regularly out of fear of triggering lower prices before they can diversify.

Posted by: Matt Singer | Mar 31, 2005 2:41:20 PM

Re: the "soft landing". If Kash and DeLong and Altig are right, then it appears to me that they are saying we can borrow trillions and trillions of dollars from overseas, consume like crazy for a couple decades, just slowly devalue the dollar and screw our creditors....and suffer no serious adverse consequences whatsoever. For anyone!

What a deal.

Posted by: bob mcmanus | Mar 31, 2005 4:27:31 PM

An excellent observation.

Posted by: Nick Kaufman | Mar 31, 2005 4:39:52 PM

I don't think this debate is really about economics at all. Instead, the Roubini/Setser camp thinks the most important thing is to put the fear of God into policymakers so they get us off a bad course. The Altig camp thinks the most important thing is to reassure investors

Or perhaps it's not a debate at all, but rather a collaborative attempt to put the fear of God into policymakers without causing a panic among investors...

Posted by: blegh | Mar 31, 2005 5:10:42 PM

If Kash and DeLong and Altig are right
Huh? It appears to me from
this that DeLong is more or less on the Setser/Roubini side of the debate, whereas Kash is more on the Altig side. Certainly, the purpose of DeLong's post is to disagree with Kash....

Posted by: blegh | Mar 31, 2005 5:24:10 PM

"Certainly, the purpose of DeLong's post is to disagree with Kash...."

will revisit...

Many times the "softlanders" say the adjustment will be had in a "decline in imports and decrease in consumption" In other less economistic words, a decrease in standard of living, which may be distributed inequitably. Now the fact that real wage declines chart fairly well with the last two devaluations is likely not coincidence, and perhaps even conspiracy.

Them that have will land softly on those that haven't, and call it a reasonable rearrangement of int'l exchange rates.

Posted by: bob mcmanus | Mar 31, 2005 7:05:30 PM

I love seeing the correct plural form of "forum" used. Stuff like "conundrums" and "memorandums" is appalling.

Posted by: Chloe | Mar 31, 2005 7:48:30 PM

Hard Landing

Here is a link to DeLong's commentary on kash. It would appear that he is more of a "hardlander" than kash, but I would still put him more in the "what if" camp than the "we're fucked" faction. Tho his more general tone the last few years has been of woe, dismay, and despair.

Posted by: bob mcmanus | Mar 31, 2005 7:52:28 PM

If Kash and DeLong and Altig are right, then it appears to me that they are saying we can borrow trillions and trillions of dollars from overseas, consume like crazy for a couple decades, just slowly devalue the dollar and screw our creditors....and suffer no serious adverse consequences whatsoever. For anyone!...What a deal.

Not really such a great deal, because over the long run, the slow devaluing you cite will adversely affect American living standards. All the nice things we like to buy from foreigners, including parts that go into things assembled here, and energy, and foreign vacations, and...

It's a long list. And it's a list that's been getting a lot pricier of late.

Truly there is no free lunch.

Posted by: P.B. Almeida | Mar 31, 2005 9:14:16 PM

I believe that D-squared on DeLong or Crooked Timber provided a mathematical proof that, if you're living in a bubble, nothing you can do can possibly be right. You just have to wait till the shit hits the fan, and there's no rule for what you should do while waiting.

Posted by: John Emerson | Mar 31, 2005 9:21:15 PM

"committing speech-acts aimed at influencing behavior"

Isn't that technically "bullshit"?

Posted by: Snow | Apr 1, 2005 11:39:45 AM

Snow asked- Isn't that technically "bullshit"?

No, bullshit consists of non-truth regarding speech acts aimed at influencing behavior. For instance, if I yell, "Duck! Someone is trying to shoot you," that is a speech-act aimed at influencing behavior. But if someone is actually shooting at you, it isn't bullshit.

On another problem of speech acts, Democrats need to stop so blatantly strategizing in public, I don't see how it can benefit us. In fact, it's self-defeating.

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