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Current Affairs

A Magazine of Politics and Culture

Atlas Staggers

The ups and downs of recessions…

We sure do see a lot of headlines lately about recession. Everyone knows recessions are bad, but what are they? Are we about to have one? And with all the problems we have already, while the economy is growing and the job market is tight, what the hell will become of us when the system slides downhill?

Greedy P

When economists discuss how “the economy” is doing, they’re typically referring to whether there is growth in something called GDP—the gross domestic product. GDP is a measurement of the total value of an economy’s production of goods and services, adding up the sticker cost of all the cars, cell phone components, movie tickets, massages, and internet service that are bought in a year. It represents the total value of the production in an economy, and the broad desire among many people is that GDP should grow over time, so that more goods and services are produced for us all to consume, raising our standard of living. 

And one of capitalism’s distinct features is its strong tendency toward long-term growth—for example, the inflation-adjusted GDP per person in the United States is eight times what it was in 1900 (although these numbers assume an equal level of income, which ha ha of course there is not). That economic growth is a big deal, since it means that large numbers of people are significantly better off today than their ancestors were in terms of their standard of living, including their access to food, health care, information, and energy. It’s not a small thing, and don’t take my word for it—just have a look at some historical photography of the living conditions of typical people in 1900, and you’ll soon be wincing and tightly clutching your smartphone and home thermostat.

But as socialists are aware, the story of capitalism’s growth doesn’t stop there. While the market system clearly produces a fountain of goods and creates incentives for exponential expansion, it has gigantic mirror-image downsides that don’t find their way into pro-business TV editorials or market-oriented bipartisan economic policy. As previously explained in the pages of Current Affairs, capitalism’s accelerating growth over time means havoc and annihilation for the environmental systems that we and millions of other species rely on to survive. 

Further, capitalism creates a whole series of other major problems, like monopoly in giant industries, and the rise of an elite ownership class that hoards most wealth, including financial equity—the stock ownership of those towering corporate monopolies. The incredible power of these companies and the preposterously rich class that owns them is a major threat to individual freedom, despite the way economists depict their rule as liberty itself. Economists in general don’t have an especially impeccable record when it comes to addressing these major issues. In fact, as Nathan Robinson and I have recently argued, they tend to be denial-mongering jackasses on these subjects, as well as on a further one—recessions.

It’s Arrested Development

From their earliest days markets have been prone to boom-and-bust cycles—a recurring pattern where markets will indeed grow dramatically for years at a stretch, but then shift over to periods where the level of economic production decreases rather than increases. These periods are called recessions. The formal definition of “recession” in most countries is an economic contraction that lasts for two consecutive quarters or more, and recessions that are especially severe and prolonged are called depressions, as in the Great Depression from 1929 to 1939 in the United States.

There is a huge body of macroeconomic theory to explain the pattern of growth and recession, or the “business cycle.” Among the most prominent is Keynesianism, which suggests that the macroeconomy isn’t self-stabilizing, and is often driven by investors’ “animal spirits”—a.k.a. their broad sentiments about market conditions. When these sentiments turn negative, investment tends to fall rapidly, layoffs begin, and the recession is on. So the economy sometimes needs government stimulus to push it out of deep recessions or depression—often meaning raised government spending or tax cuts. That’s why public programs, from Trump’s tax bill to large wars to jobs programs, are often said to have stimulating abilities, although they vary enormously in how effective they are, and in whether their main goals are to help poor people provide for their families or to create third-world orphans.

Other major tendencies include Marx’s elaborate theory of production crisis and Hyman Minsky’s models, which center on people’s eventual forgetting of past economic panics and recessions. Joseph Schumpeter, an influential conservative economist, was known for his idea of creative destruction. This model suggests that recessions are necessary parts of market evolution, in which less productive, obsolete capital is retired and more productive, higher-tech capital is deployed in the tough recession environment. 

These macroeconomic schools accordingly vary in how much government intervention is seen to be appropriate, and what type. But none dispute the basic nature of recessions in throwing economic development into reverse, and the difficulty of reliably anticipating them.

Slaying Payroll

Of course, for most of us, the advent of a recession is mainly significant because shrinking production levels are usually accompanied by shrinking employment levels, as fewer goods produced require fewer workers. So recessions create dizzying spikes in unemployment, which of course only worsens the situation as laid-off workers immediately cut back on spending, leading to a lower level of overall market demand for goods, which leads firms to lay off more workers, which further lowers demand. The self-reinforcing character of economic downturns is a reason why many liberal capitalists favor Keynesian policy programs which stimulate the economy and shorten recessions by having the government increase its own large-scale spending to create new demand, or by cutting its tax levels to encourage others to spend.

Notably, this fairly consistent pattern of rocketing joblessness during recession suggests why the typical conservative view of the unemployed—as lazy or entitled people who don’t want to work—is so stupid. During a market recession, literally millions of people get pink slips; they’re not suddenly getting infected with a laziness virus. There’s a certain level of overall employment in an economy at any one time, and it may or may not approach the total number of people looking for work. 

Beyond the obvious pain of job losses, recessions put major strain on the social fabric as masses of families slash grocery budgets, lose homes, and give up on school or put off medical needs. It even means higher rates of domestic abuse and controlling behavior within families. And for young people, graduating into weak recession-era job markets means reduced earnings for a decade or longer, simply for having the bad luck to graduate during a downturn.

Importantly, recessions all have their own individual characteristics, much like other historical episodes such as wars and elections. Some recessions are pretty mild in terms of how much macroeconomic shrinkage occurs, such as the nine-month recession in 2001, but others are enormous and kicked off by major finance crises, as in 2007. Others are yawning hellish descents, like the Great Depression. But notably, the Depression of the 1930s wasn’t the first major economic contraction to be called the Great Depression. The term was used during the 1890s, a decade that was itself part of the Long Depression of the late 19th century: This is how prone capitalism is to disastrous downturns. But since World War II we’ve used various forms of Keynesian policy to stabilize the business cycle, so there haven’t—so far—been any spells that bad, and the name “Great Depression” has remained stuck on that last instance. The all-time second-worst episode was the 2007-2009 contraction, now called the Great Recession. 

Making Depressions Great Again

Soooo are we going to have one now? Well as always it’s unclear—bear in mind we economists have a very, very, very shitty record of prediction, from failing to predict the 2000 tech stock crash to (mostly) not anticipating the enormous 2008 finance crisis. In economists’ defense, at any time there’s an enormous number of jumbled, constantly fluctuating economic signals, including changing investment levels, shifting consumer tastes, evolving production technology, and merging corporate empires. The overall GDP numbers themselves take months to calculate in the National Accounts, and so they only confirm recessions once they’ve been underway for months. But certain indicators have at least decent records when it comes to preceding downturns.

One indicator that receives enduring attention is the bond market yield curve. (Content warning: finance economics.) Bonds are essentially how institutions borrow money—when Apple or Amazon or the U.S. government wants to raise cash, they often sell bonds, which are basically loans you can buy and sell. If the U.S. Treasury issues a $1000 10-year bond, it costs the original buyer a thousand bucks, but the holder of that bond 10 years later will receive the $1000 back, along with the equivalent of an interest rate, called a coupon rate. Bonds are often lower-returning but safer investments, so when stock markets drop (like when companies report profit shortfalls), investors pack into the bond market.

A related historically reliable indicator of imminent recession is called the inverted yield curve, which refers to the yields of different issues of U.S. government bonds. Bond yields are an expression of the bond’s fixed interest rate payments relative to its price, which means yields decrease as the price of a bond increases. U.S. Treasury bonds serve as a keystone for the overall debt markets and are widely considered among the safest assets, having never defaulted in the history of the republic. 

In conventional market conditions, the posted interest rates for long-term bonds, like ones with a 10-year maturity, are higher than the interest rates for shorter-term bonds, like two-year. That’s because the 10-year allows more time for things like inflation to eat away the stream of value from the bond’s interest rate, and with a higher interest rate, the bond yields a higher percentage of its face value. 

However when recessions seem close, the yield on the two-year can become higher than the 10-year. That’s because investors think a poor outlook, including potential recession, makes the fixed long-term interest rates of bonds more attractive than the shrinking dividends from corporate stocks over the coming years. Those bonds are also a safer choice too, and so investors buy up and the price rises, driving down the long-term yields. This makes charts showing the difference between yields on two- and 10-year bonds flatten out and then flip, hence the term “inverted yield curve.” It suggests investors see lowered economic confidence in the long-term relative to the near-term. (Apologies for wonking it up here.)

In the United States, the yield difference between a number of short- and long-term bonds has shrunk, especially this month, when yields on the 10-year note briefly fell below the two-year. The three-month and 10-year have been inverted since May. And since a flat curve means less difference between long and short-term rates, it means banking is less profitable, which itself can eat into lending and slow down the borrowing that keeps companies and consumers paying with plastic. But a curve inversion doesn’t guarantee a recession—the yield curve entered this territory in 2016, followed by a slowdown in growth, but no recession.

Meanwhile, a global recession outside the United States looks pretty likely, based on the more solid but laggy numbers for straight national GDPs, along with other indicators like falling manufacturing output and corporate investment levels. Germany, the European Union’s economic engine, shrank last quarter and looks set to continue, mostly due to its export-oriented economy’s vulnerability to falling trade levels in the face of the Trump administration’s clumsy trade war. Chinese investment levels are sinking due to the escalating tariff conflict, which is a nationalist response to the destruction of working class jobs but far from a progressive, green, or pro-labor trade policy

A slowing global economy can spread to individual countries, as their foreign customers cut back during their recessions, thus weakening export markets. But the United States, as always insulated from the heinous dominos it knocks over on other lands across the sea, is less global trade-reliant than other major economies like Germany, Japan, or China. And because the job market is relatively strong, and Americans tend not to be intensely aware of overseas affairs or trade conflicts, consumer spending levels have remained buoyant. And the universal promotion of credit, combined with the relentless expectation as presented on American TV that everyone has a white-collar standard of living, ends up meaning that our spending has some limited resistance to negative economic news that would startle the people of other countries into cutting back on spending. 

Food Fight

But the trade war stands to change that. So far its impact on consumer goods prices has been limited, but this impact will grow with Trump’s new waves of tariffs which come into effect in September and December. And in the meantime, Trump’s utter unpredictability and dumb blundering improvisation at the heights of global power is scaring the piss out of corporate planners who need stability to justify the risks of making giant investments in factories and data centers. Those forgone investments will, in time, mean slower growth and less consumer spending. On the other hand, the unemployment rate remains at a historic low (although the official number understates the real scale of joblessness), and the expansion is now the longest in U.S. history and, at last update, was humming along at a respectable rate of over 2 percent.

So recent indicators could mean growth might continue for another year or more, and thus exactly when a U.S. recession may happen, and what other developments will shape the economy in the meantime, are all up in the air. And since I’m capable of feeling bad about my field’s constant incompetent bungling, I’m slow to make predictions myself.

It does mean that if a recession is belatedly declared, then yes, Trump is likely to go down in thundering flames. With the solid opposition of liberal voters and the clear disenchantment of independents—many of whom didn’t vote in 2016—the relatively good job market is Trump’s main bragging point. Loss of it will leave him with pure racism to run on, which, yes, can take you a long distance in the United States, but probably no longer to 270 electoral votes. Still, don’t count on a recession rescuing the scene if the opposing nominee is a stumbling, self-injuring, conservative wretch like Biden—Sanders remains the candidate best posed to run or govern in a recession, followed by the more detailed but guarded Warren.

But the idea that a recession would be “worth it” to get rid of Trump, like shallow TV jerk-off Bill Maher recently suggested, is a hell of a terrible bargain. Recession means a serious decline in the standard of living for millions of people, which means earlier deaths and more crime. And in the years since the intense recession of 2007-2009, the federal government has run up gigantic budget deficits (where the state spends more on the military and social spending than it takes in on tax receipts), an ability it’s supposed to save for recessions. This includes 2017’s deficit-exploding Tax Cuts and Jobs Act, which saw a flood of red ink despite sunny Republican promises it wouldn’t. The deficit is now projected to reach an all-time high of a trillion dollars this year. Similarly, the Federal Reserve has only recently raised interest rates from zero and indeed recently cut them in the face of the possible oncoming downturn. 

All this means that the usual fiscal and monetary policy tools we have to fight recessions may have less effectiveness this time around, an alarming prospect. And worse, the contraction of economic activity in a capitalist society means more desperation and alienation across the board, tearing at the social fabric. Social scientists universally hold the all-time champion of global human calamity, World War II and its accompanying atrocities, to be caused in large part by the tremendous social strains of the Great Depression. We live at a time of already high social antagonism, with escalating government authoritarianism and phony right-wing journalists going on national TV with telegenic injuries to create the illusion of rampaging leftist violence. Recession’s social dislocations and uneven impoverishments will throw fuel right on all these fires.

So a recession is not something to root for, with its widespread increases in pain and suffering for millions, especially the poor. And with limited fiscal and monetary policy ammo to fire, the dangers of the next recession spiraling into a big beast like the Great Recession, or even into a full-on depression, are significant. We should be bracing for further blows to our often-struggling American standards of living, and for arguments against Sanders and AOC along the lines of “In this moment of economic crisis it is not the time for your risky socialist medicares.” 

Like an emergency health episode for an at-risk person, the specifics of a recession’s timing and depth can’t be predicted accurately. And with many of us barely getting by as it is in the face of late-to-rise wages and spiking ambulance fees, drug costs, and consumer debt, saving a small extra bit of your likely modest income is reasonable, but provides limited protection. The best hope for enduring a coming recession is a major national commitment to the New Deal-era model of high-wage job-led growth, rather than profit-led. And we have on our hands a world crisis to match, arising from the giant externalities that have grown with our enormous market economy. So a real growth-promoting plan would include a variety of desperately-needed steps to alleviate our environmental crisis, as in the various forms of the proposed Green New Deal. And a fully democratic socialist economy would mean that everyone has their needs met to the extent that society is able, rather than denying families the means to live because pouty investors are afraid of less profitable conditions for a year or two.

As always, the best social safety net is a socialist safety net.

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