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."