Think of this economy as an elderly friend: Old age means coming death

I’m teaching macroeconomics to MBA students this summer and thinking about asking this question on the final:

“We set a record in July. The U.S. economy has now gone longer without experiencing a recession — 121 months — than in any other time in modern history. This means:

a) We’ve learned our lesson and have solved the problem of business cycles. There will never be another recession.


b) We’re overdue for another recession. People should expect one soon.”

It’s a trick question. There are no correct answers in macroeconomics. The real world is far too complex for any simple rule to predict the economic weather to come. But there are lots of wrong answers, and both of these options are just wrong.

Still, anyone who worries about the next recession — which should be all of us — needs to think about what past performance tells us about future performance. Does this unusually long period of good times mean we’re in for more good times, or does it mean we should prepare for the worst? 

For a hint, consider another story about extraordinary longevity: A close friend’s grandfather hopes to celebrate his 100th birthday in a few weeks. He has demonstrated a real talent for staying alive. Does this mean he’s going to keep doing what he’s been doing?

Sadly, no. The data are quite clear: sooner or later, everyone dies.


The data on business cycles are just as clear. Sooner or later, there is another recession. Nothing has happened in the past 10 years to change that. Economists haven’t suddenly discovered the Fountain of Economic Youth. A recession is sure to hit; we just don’t know when. If a student picked (a) on the multiple choice question, he or she would fail.  

I’d have a harder time grading those students who picked (b). Claiming that it’s been a long time since the last recession and so we’re “due” for the next one might mean the student doesn’t understand basic math, but it might also mean the student has a deep and sophisticated understanding of the economy.

Let’s deal with the innumeracy first. If a student blithely claimed that we’re overdue, he or she might be suffering from the fallacy that plagues any football player who has to call heads or tails at the pregame coin flip and thinks to himself, “OK, in the last three games the coin has landed heads. It’s due to land tails.” That’s just wrong. Tosses of fair coins are independent events. What happened on the last flip has no influence on the probability of heads turning up on this flip.

Almost four years ago, when we were in the sixth year of the current expansion, people were already worried about whether we were due for a contraction. To assuage their fears, then-Fed Chair Janet Yellen said, “I think it’s a myth that expansions die of old age. I do not think that they die of old age. So the fact that this has been quite a long expansion doesn’t lead me to believe (that) its days are numbered.”

The Fed chair can’t stand up and tell people to quit acting like football players, but that’s probably what she was thinking. Just as flipping heads doesn’t mean the next flip will land tails, the simple fact that things didn’t fall apart last quarter doesn’t mean they’re more likely to fall apart this quarter.


Yellen is smart enough to avoid the football player fallacy, but does she really believe that recoveries don’t die of old age?

If so, she needs to meet my 99-year-old friend. He certainly will die, and almost definitely of old age. As we age our bodies suffer countless small injuries, some of our own doing and some the fault of nature. These accumulate, making us vulnerable to whatever cause of death is mentioned in our obituary. The grim truth is that living a long life is bad for your health. 

This might be every bit as true for economies as it is for people. Good economic times permit us to get away with bad economic decisions. The most obvious example is debt. In 2009, at the end of the recession, government debt was 83 percent of gross domestic product. It is now an astonishing 105 percent of GDP. Common sense and sound economics tell us that government should pay down debt during good times, not borrow.  

But don’t blame irresponsible politicians; they’re just doing what the voters are doing. Private household non-housing debt — that is, from car loans, credit cards and student loans — is over 50 percent higher than it was before the start of the last recession. Mortgage debt is nearly back to the record levels of 2008.

To be clear, none of this means that the next recession is just around the corner. No one knows when it will happen. But the accumulation of debt, along with lots of bad stuff that’s happened — higher tariffs and all the rest — have left the economy more vulnerable to failure than it was a few years ago.   

We shouldn’t order our economic affairs entirely around the fear of the next recession. But we should understand that it will happen.

You should think about this economy the way we are thinking about our elderly friend. We’re all looking forward to the big party on his 100th birthday. But we’re keeping our dark suits cleaned and pressed.

Michael L. Davis is a clinical professor of economics at the Cox School of Business at Southern Methodist University in Dallas, where he specializes in the intersection of government and business.