Economists Get Closer to Spotting Recessions

One thing you hear repeated over and over in the economics press is that economists can’t predict recessions. This is true. The best forecasting models that economists have in their toolkit can only predict the economy about one quarter in advance. That’s not very useful -- by the time a recession is only three months away, it’s too late to prevent it.

But another thing you see a lot in the econ media is the idea that excessive debt leads to economic crashes. When debt is high relative to gross domestic product, we are told, the risk of a financial crisis and a recession increases. For example, many people tout China’s rising debt -- now at almost 300 percent of GDP -- as cause for alarm. Many hearken back to the theories of economist Hyman Minsky, who said that debt markets naturally cause booms and busts.