- A recession is defined as a series of business and investment failures that occur at the same time.
- Why they happen, and why so many enterprises might fail at the same time, has been a major focus of economic theory and research, with various opposing answers.
- The origins and effects of recessions are influenced by financial, psychological, and real economic factors.
- The influence of COVID-19, as well as the preceding decade of extraordinary monetary stimulation, contributed to the economy’s vulnerability to economic shocks in 2020.
- The pandemic-related recession, according to the National Bureau of Economic Research (NBER), lasted only two months.
What triggered the 2020 recession?
The COVID-19 pandemic has triggered a global economic recession known as the COVID-19 recession. In most nations, the recession began in February 2020.
The COVID-19 lockdowns and other safeguards implemented in early 2020 threw the world economy into crisis after a year of global economic downturn that saw stagnation in economic growth and consumer activity. Every advanced economy has slid into recession within seven months.
The 2020 stock market crash, which saw major indices plunge 20 to 30 percent in late February and March, was the first big harbinger of recession. Recovery began in early April 2020, and by late 2020, many market indexes had recovered or even established new highs.
Many countries had particularly high and rapid rises in unemployment during the recession. More than 10 million jobless cases have been submitted in the United States by October 2020, causing state-funded unemployment insurance computer systems and processes to become overwhelmed. In April 2020, the United Nations anticipated that worldwide unemployment would eliminate 6.7 percent of working hours in the second quarter of 2020, equating to 195 million full-time employees. Unemployment was predicted to reach around 10% in some countries, with higher unemployment rates in countries that were more badly affected by the pandemic. Remittances were also affected, worsening COVID-19 pandemic-related famines in developing countries.
In compared to the previous decade, the recession and the associated 2020 RussiaSaudi Arabia oil price war resulted in a decline in oil prices, the collapse of tourism, the hospitality business, and the energy industry, and a decrease in consumer activity. The worldwide energy crisis of 20212022 was fueled by a global rise in demand as the world emerged from the early stages of the pandemic’s early recession, mainly due to strong energy demand in Asia. Reactions to the buildup of the Russo-Ukrainian War, culminating in the Russian invasion of Ukraine in 2022, aggravated the situation.
What is the primary cause of the recession?
Most recessions, on the other hand, are brought on by a complex combination of circumstances, such as high interest rates, poor consumer confidence, and stagnant or lower real wages in the job market. Bank runs and asset bubbles are two further instances of recession causes (see below for an explanation of these terms).
Is there going to be a recession in 2021?
Unfortunately, a worldwide economic recession in 2021 appears to be a foregone conclusion. The coronavirus has already wreaked havoc on businesses and economies around the world, and experts predict that the devastation will only get worse. Fortunately, there are methods to prepare for a downturn in the economy: live within your means.
Is another Great Depression on the horizon?
ITR Economics has predicted that a second Great Depression will emerge in the 2030s for many years. The path to the Great Depression will be significant in and of itself, with numerous opportunities and changes presented. As we all want to optimize earnings and enterprise value, business leaders must begin planning for such changes today.
What trends are influencing this prediction? What should businesses do to prepare for the 2020s? Is there anything that could cause this forecast to change? Check out our resources to discover more about the global impact of this economic catastrophe.
What occurs before to a recession?
Two consecutive quarters of negative GDP growth is the usual macroeconomic definition of a recession. When this happens, private companies often reduce production in order to reduce their exposure to systematic risk. As aggregate demand falls, measurable levels of spending and investment are likely to fall, putting natural downward pressure on prices. Companies lay off workers to cut expenses, causing GDP to fall and unemployment rates to climb.
How can we avoid economic downturns?
I’m not sure when it’ll happen or if the yield curve indicates a downturn is on the way, but unemployment will start to rise, and growth will stall and finally turn negative unless the Fed and Congress are far more capable than I believe they are.
When the financial crisis of 2008 hit, the US government deployed two instruments to combat it: monetary policy administered by the Federal Reserve and fiscal policy determined by Congress.
Both contributed tremendously, yet both fell short of what the country required. Millions of people were unemployed when they didn’t have to, jeopardizing their long-term economic prospects and increasing mortality rates, not least owing to suicide.
In September 2008, just as Lehman Brothers was crumbling, Fed Chair Ben Bernanke made the perplexing decision not to decrease interest rates to boost recovery. The American Recovery and Reinvestment Act of 2009, also known as the fiscal stimulus, looks to have succeeded, although it was insufficient.
There are a number of policies that the Fed and Congress may implement right now to make a future recession less severe, if not altogether avoidable. Since the crash, economists and policy analysts have proposed a slew of ideas.
The proposals are all based on the same premise: the system failed the last time. There’s no reason why unemployment in the United States should ever approach 10%, and why a recession and recovery should take as long as they did. Better fiscal, monetary, and legal policies would have put more stimulus into the economy and gotten us back to low unemployment and consistent growth sooner.
To avoid politicians making the same mistakes again, many of these measures include automatic procedures that allow stimulus to begin as soon as economic turmoil arises, rather than waiting for Congress to act.
This is by no means a comprehensive list, but these are some of the most spectacular and potential recession-proofing ideas now available.
Pay out more food stamps when unemployment is high
The basic rationale for fiscal stimulus during recessions such as the Pelosi-Bush stimulus package of 2008 or the 2009 stimulus that became synonymous with Obama’s recovery policy is that increased government spending can boost growth, both because it represents growth and because it can spur private-sector spending. The fiscal multiplier, which quantifies the increase in economic activity for every $1 of government expenditure or tax cuts, measures this effect.
The multiplier varies greatly across different types of expenditure or tax cuts, with the Supplemental Nutrition Assistance Program likely being the most beneficial (SNAP, or food stamps). SNAP expenditure increased growth by $1.74 in 2009, at the depths of the recession, and by $1.22 in 2015, far into the recovery, according to Mark Zandi of Moody’s Analytics.
Not only did $1 in new government expenditure boost growth in 2009, but it also prompted 74 cents in private sector spending. (It should be noted that these are only estimations.) During the Obama administration, I overheard top economist Jason Furman joke that everyone referenced the Zandi numbers because he was the only one who had two decimal places in his forecasts.)
SNAP is already an automatic stabilizer: because eligibility is based on income, the number of persons receiving benefits, as well as the size of the average benefit, increases during recessions, immediately helping to combat recessions. Congress, on the other hand, could do more. In a research by the Center on Budget and Policy Priorities, Jared Bernstein and Ben Spielberg recommended that as state unemployment rates rise, Congress might pay larger SNAP benefits.
Alan Blinder of Princeton has reiterated the concept of temporarily raising SNAP benefits, as well as suggesting that unemployment insurance payments be automatically increased during recessions (which Zandi’s analysis finds is nearly as stimulative as food stamps).
Automatically cut payroll tax rates
Blinder also proposes that when unemployment rises, payroll tax rates be automatically reduced. This is a pretty common suggestion; for example, Obama’s budget chief, Peter Orszag, presented it in 2011. This could be accomplished in a variety of ways. You might create a separate Making Work Pay tax credit to refund payroll taxes paycheck to paycheck, like Congress did in 2009, or you could just lower the payroll tax rate directly, as Congress did in 2010.
According to Zandi’s calculations, payroll tax cuts have a multiplier of 1.27, which isn’t as good as unemployment assistance or food stamps, but not awful. And the payroll tax rate is a straightforward, straightforward lever that should be easy to link to unemployment. If the situation becomes extremely desperate, you could even imagine the payroll tax rate being negative and adding to paychecks.
Government-created jobs when unemployment rises
The TANF emergency fund, which granted money to states to offer subsidized jobs to low-income persons under the Temporary Assistance to Needy Families program, was arguably one of the most effective aspects of the 2009 stimulus.
Although the fund was not carefully assessed, retroactive evaluations revealed that it was effective at producing jobs at a cheap cost: $1.3 billion in federal investment resulted in almost 260,000 new jobs, a ratio of about $5,000 per job generated. The fact that the sponsored work initiatives were set up and implemented promptly was particularly encouraging, implying that large-scale direct job creation in the modern period is administratively feasible.
Sen. Ron Wyden (D-OR) and Rep. Danny Davis (D-IL) have introduced the ELEVATE Act, which would create a comparable subsidized work program and connect federal funding to state unemployment rates. States would have a lot of leeway in terms of how those subsidized jobs are structured, but they’d have to stick to models that have a lot of evidence behind them.
Force down electric, water, heat, and cable bills
Yale economist and law professor Yair Listokin proposes that utility companies purposely hold down prices for gas, electricity, and other fundamental expenditures during recessions in his new book Law and Macroeconomics: Legal Remedies to Recessions.
Normally, he observes, utilities work in the opposite direction. During recessions, people spend less, thus utilities typically want the flexibility to raise rates to compensate for the lost revenue. This pulls money out of families’ pockets at a time when the economy needs them to spend more. It’s especially difficult for low-income families, whose power bills account for a large portion of their monthly expenses.
Having regulators deny utilities the ability to raise rates or force them to drop rates, on the other hand, acts as a tax reduction that directly enhances impoverished households’ spending power. This isn’t only something Congress or the Fed could do; it’s something city governments could do as well.
Promise to forgive mortgages
Greater pro-consumer mortgage/foreclosure legislation, according to economists Amir Sufi and Atif Mian, might lead to more debt forgiveness, more spending, and a faster recovery. He contends that, in order to avoid stifling demand, judges deciding on construction projects should default to building rather than not building during recessions.
This is also an area where Congress has the power to intervene. The Obama administration’s major mortgage relief program mostly benefited mortgage servicers; in fact, it refused to assist mortgage holders by failing to implement cramdown legislation that would allow bankruptcy judges to reduce mortgage payments. Passing cramdown would be a fantastic method to allow judges to reduce debt and make the next recovery easier.
Change what the Fed is targeting
The Federal Reserve currently claims to be targeting inflation: it wants overall prices to rise by 2% year over year. That means that if the economy tanks and prices stop rising or even begin to decline, the government has pledged to taking measures, such as decreasing interest rates, to help prices grow even faster.
If, on the other hand, prices begin to rise too quickly (maybe because the economy has recovered, employees are demanding higher pay, and those higher earnings drive firms to raise their prices, etc. ), the Fed will raise interest rates to keep inflation under control.
There have been several issues with this strategy. For one thing, during the recovery from the Great Recession, the Fed was unable to achieve 2% inflation and consistently undershot that target. That failure could have resulted from the Fed’s inability to employ its customary instrument for inducing inflation (reducing interest rates): It had kept interest rates around zero since 2008, so it was confined to quantitative easing (purchasing huge amounts of long-term bonds to lower long-term interest rates) and declaring if it wanted to do more to boost inflation.
During the recession, several economists, notably Bentley professor and influential blogger Scott Sumner, former Obama senior economist Christina Romer, and monetary policy expert Michael Woodford, urged for the Fed to embrace NGDP targeting.
Rather than aiming for a certain level of inflation, the Fed would endeavor to ensure that nominal gross domestic product (NGDP) the total amount of money spent in the economy rises by the same amount each year. If it falls behind, a recession is likely, and the Fed will need to intervene to boost growth. If it goes too far, it’s a sign that inflation is out of control and the Fed needs to tighten up.
In comparison to an inflation objective, an NGDP target would signal to markets that the Fed is committed to boosting growth and combating unemployment during recessions, not merely fighting out-of-control inflation. According to proponents, just sending that notification would lessen the severity of recessions.
“The Fed could increase confidence and expectations of future growth by promising to do whatever it takes to return nominal GDP to its pre-crisis trajectory,” Romer wrote in 2011. “Consumers who are more certain that they will have a job next year will be less hesitant to spend, and corporations who feel sales will rise will be more eager to invest.”
Right now, the Fed may decide to adopt an NGDP goal on its own. However, Congress may compel it to do so, just as it did when it was obliged to emphasize full employment and price stability. The Bank of England is expected to enforce the inflation target set by Parliament in the United Kingdom. That would be against American central bank independence principles, but it’s a perfectly valid model we could borrow, and it would be fully within Congress’s authority to approve a bill setting an NGDP target of, say, 5% year-over-year growth.
Try for higher inflation
Perhaps NGDP targeting is a step too far for the Fed; it differs too much from the inflation targeting it has practiced for years. Perhaps an easier solution would be to just increase the inflation objective from 2% to 4%.
The Federal Reserve can’t lower its interest rate too low. People would begin withdrawing their money from banks and hoarding it in cash form if interest rates reached, say, -10 percent. In monetary policy, this is referred to as the “zero lower bound.” However, the bound is nominal rather than inflation-adjusted. A Fed interest rate of zero is effectively a -2 percent rate in real, inflation-adjusted terms when inflation is 2%.
As a result, Laurence Ball, a Johns Hopkins academic, has recommended changing to a 4% inflation objective, which would allow for a negative 4% real rate at the bottom. During downturns, this provides the Fed a lot more leeway to act.
Have the Fed distribute cash directly to people
If everything goes as planned, an NGDP target or higher inflation aim would be self-enforcing: the Fed would publish their intentions, and markets would adapt accordingly. That is what optimists like Sumner believe will occur.
But let’s imagine the markets don’t adjust on their own and demand that the Fed take more concrete steps to reach its goals. Let’s imagine interest rates are already at or near zero percent when the Fed starts to worry about undershooting its NGDP or inflation target.
It’s capable of a number of things. It might acquire Treasury bonds and mortgage-backed securities, as it did during previous rounds of quantitative easing. It might abandon the QE strategy of buying a predetermined quantity of assets and instead declare that it will buy as much as it can until it meets its goals. It may, like the Bank of Japan, take economist Roger Farmer’s suggestion and buy conventional equities.
However, it might make sense for Congress to provide it with a new tool: helicopter drops. Congress may give the Fed the authority to print money and deliver it directly to Americans, for example, through a universal basic income-style cash transfer to all adults or households, or by lowering payroll tax rates and covering the difference in printed money.
This would have a more visible distributional impact than quantitative easing since it would direct more resources to poor households, and it might be more successful because poor households are more likely to spend extra money rather than store it.
Abolish cash money
The zero lower limit hypothesis assumes that central banks are unable to set negative interest rates. But, properly speaking, this isn’t the case. Since 2014, the European Central Bank and the Danish National Bank, for example, have had somewhat negative rates. If you keep money with them, you must pay them a fraction of a percent interest.
However, there’s a reason why both the ECB and Denmark have kept their rates at a low level of negative 0.4 percent (the current ECB rate). If they went substantially negative, the expenses of keeping currency in the banking system versus pulling it out and storing it in a large locker Breaking Bad-style would become overwhelming, and people would simply withdraw all of their cash.
What does a recession look like?
There have been five such periods of negative economic growth since 1980, all of which were classified as recessions. The worldwide recession that followed the 2008 financial crisis and the Great Depression of the 1930s are two well-known examples of recession and depression. A depression is a severe and long-term economic downturn.
Do wars induce economic downturns?
The majority of wars in history have occurred in response to economic crises; there have been very few instances in which the world has experienced a slowdown or recession as a result of hostilities. After the First World War, the economy went into a three-year slump from 1918 to 1921.
What is the state of our economy right now?
Indeed, the year is starting with little signs of progress, as the late-year spread of omicron, along with the fading tailwind of fiscal stimulus, has experts across Wall Street lowering their GDP projections.
When you add in a Federal Reserve that has shifted from its most accommodative policy in history to hawkish inflation-fighters, the picture changes dramatically. The Atlanta Fed’s GDPNow indicator currently shows a 0.1 percent increase in first-quarter GDP.
“The economy is slowing and downshifting,” said Joseph LaVorgna, Natixis’ head economist for the Americas and former chief economist for President Donald Trump’s National Economic Council. “It isn’t a recession now, but it will be if the Fed becomes overly aggressive.”
GDP climbed by 6.9% in the fourth quarter of 2021, capping a year in which the total value of all goods and services produced in the United States increased by 5.7 percent on an annualized basis. That followed a 3.4 percent drop in 2020, the steepest but shortest recession in US history, caused by a pandemic.
How long do economic downturns last?
A recession is a long-term economic downturn that affects a large number of people. A depression is a longer-term, more severe slump. Since 1854, there have been 33 recessions. 1 Recessions have lasted an average of 11 months since 1945.