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I keep reading about all these warning signs of a coming recession, and I have a very silly question: If we can see it coming, why can't we do something about it now, instead of after we are deep in it and fighting about stimulus packages like last time?

Now, I said it was a silly question, so I know the reason we don't is because of a lack of political will as well as a lack of political and economic consensus as to what that action should be. But I never hear anyone talking about what can be done to prevent a recession before it hits when all the signs tell you it is coming. Why not? Thanks.

(p.s.- Wow, you don't even have a tag for recession? What a bunch of optimists! LOL)

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So here is the unpleasant truth about recessions.

"The economy" as a whole consists is a broad term that in all forms, will always be comprised of so many moving parts, so many transactions, that it is hard to not only describe what is happening to it, but why those things are happening. In order to answer your question on why we "can't/don't" do anything about recessions, you have to understand that recessions are harder to predict that whatever the news makes it out to be. We can maybe see the signs that they are just about to come, when the whole snowball is already rolling down the hill, but trying to predict recessions from the long term is basically impossible.

That said, there are two points I'd like put into focus.

  • We do have some tools for trying to blunt the force of recessions, and we do try to use them!

  • The warning signs you are reading about, what I imagine most notably being the yield curve inverting, is only a warning sign for certain reasons that don't necessarily have to hold in our current economy.


To the first point, I say "blunt" because trying to completely avoid recessions would probably mean making some big systematic changes, but also probably getting rid of a lot of uncertainty in the world. And our world is unfortunately full of it. We can argue over what causes boom and bust cycles and whether we would prefer to live in a world where growth is slow, but we can consumption smooth and prevent all dips in economic activity. Those are separate issues.

What tools do we have to blunt recessions? There is fiscal policy and monetary policy. With fiscal policy, you can change taxes to try to encourage economic activity (for consumers, business, depends on where you cut the taxes), and with monetary policy you can lower the federal funds interest rate to encourage more lending and thus more investment. But of course these tools may not work as directly as we'd like. Cutting taxes may have to come with cutting spending on government programs that also encourage economic activity. During the 2008 recession, the federal funds late got floored down to 0%, leading the Federal Reserve to have to think of more creative measures of using monetary policy to help boost the economy.


The second point I think is more interesting to talk about. The financial news these days probably talks a lot about the yield curve inverting. What is this exactly?

Imagine you are the government borrowing money through bonds. People value having money as accessible as they can, so a short term bond usually doesn't have a high interest rate. Investors don't get a high rate of return because they are getting compensated with more liquidity. If the government wants to borrow money for a longer time though, then the government will put a higher interest rate on it. This compensates investors who have to sit there and wait for their money longer, money that could have been used to invest in a more lucrative project that could have popped up in the meantime. There is uncertainty in the path of future interest rates, so you take on risk by holding onto a debt contract longer.

So if you were to graph "length of time of a bond or other debt contract" (time to maturity) and "interest rate" (yield), you would normally get an upward sloping curve that tapers off. Why this particular shape? Again, holding shorter term debt is pretty preferred among investors, so there is a steep upwards slope initially. The relative difference between a 3 month contract and a 6 month contract is a lot bigger than the relative difference between a 40 year and 40.25 year contract.

So now we can ask why the yield curve would invert. This usually happens if investors expect a cut in future short term rates. The Federal Reserve is known as the "lender of last resort" and will more or less set the price of liquidity using the federal funds rate. If people expect the Fed to cut it, then the yield curve will invert. And the Fed often only makes big cuts to the federal funds rate to try and prevent or blunt a recession. So that's why the yield curve inverting is usually associated with a nearby recession.

But suppose the yield curve inverts, the Fed cuts the rate and...there is no recession. And maybe the Federal Reserve never anticipated one. This could feasibly be the case too. The idea is that when setting the federal funds interest rate, usually unemployment and inflation tend to be tradeoffs, but they aren't always. Lowering the rate in recent years doesn't seem to have increased inflation expectations very much (a lot of that probably due to the aforementioned 0% bound that was around from the 2008 recession). Since the 1970s reforms to the Federal Reserve, the institution has gotten a reputation for being more committed to fighting inflation in the long run, which also helps with their ability to cut rates and not immediately see inflation boost up. So ultimately it's possible that the Fed may want to cut the rate for other reasons, like simply maintaining a healthy economy.


All that said, you might still be concerned about the yield curve inverting or other indicators that you read in the news. I think it is not unreasonable. But I think the important thing to realize is that people in the news industry frankly do not really understand or even care to explain the nuance behind these signals. They may not understand or explain what is being done about these signals at the policy level. A lot of mainstream news competition is just trying to get people's attention, and honestly who is going to watch a segment on monetary policy. Snore. So the reason you do not see anyone talking about how to respond to a recession is probably just because you don't listen to anyone who really knows much about them.

Really, at the core of your question, you are basically asking why don't economists just predict all the bad stuff that can cause a recession and then stop it. The answer is because we just can't observe all of that, and it's goofy for anyone to think we can. We can only see some things, respond using some limited tools, and give our best policy suggestions. It is wishful thinking to believe we can stop all or even most of hardship in this uncertain world.


If you would like to read more about some recent research on recessions and macroeconomic policy, here are just a small number of papers you could try reading. Even if you don't read beyond the abstract, perhaps it will give you an idea of what sort of research economists are trying to do related to recessions and business cycles.

  • Aikman, David, Jonathan Bridges, Anil Kashyap, and Caspar Siegert. "Would macroprudential regulation have prevented the last crisis?." Journal of Economic Perspectives 33, no. 1 (2019): 107-30.

  • Vassolo, Roberto, Javier Garcia-Sanchez, and Luiz Mesquita. "Competitive dynamics and early mover advantages under economic recessions." Revista de Administração de Empresas 57, no. 1 (2017): 22-36.

  • Martin, Philippe, and Thomas Philippon. "Inspecting the mechanism: Leverage and the great recession in the eurozone." American Economic Review 107, no. 7 (2017): 1904-37.

  • Koijen, Ralph SJ, Francois Koulischer, Benoit Nguyen, and Motohiro Yogo. Quantitative easing in the euro area: The dynamics of risk exposures and the impact on asset prices. No. 601. 2016.

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Most of the arguments I see saying that the recession is coming simply says that it's been long enough that we haven't had a recession, the last recession was more than ten years ago, the average business cycle boom is no more than 8 years, etc.

With this kind of argument, the only thing you can do to "stop" the recession from happening is stopping the time.

If there's more to this argument, like, there's a housing bubble in the housing market, then something can be done about it.

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If we can see it coming, why can't we do something about it now, instead of after we are deep in it and fighting about stimulus packages like last time?

The short answer is we can. However, in order for the coming recession to be avoided, the Fed would need to reverse the effects of its recent 'quantitive tightening' and resume a stimulus policy.

The problem is that the Fed is an autonomous entity and how it implements its goals are decided internally and in secrecy. If it should decide that the long term goal of improving US employment is to stop a Trump administration from engaging in a trade war with China by influencing domestic politics through a synthetic economic downturn, that is within its remit.

EDIT> The above answer is not US-specific. The Fed central bank activity will primarily determine the global economic situation. On the other hand, if China were to decide that the world was too hostile to it, it would simply stop propping up global industry as it currently does (domestic automotive demand and low price manufacturing for export demand), which would also cause global chaos.

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  • $\begingroup$ This answer limits its perspective and isn't showing any objective analysis. It does not provide any reference. $\endgroup$ – bilbo_pingouin Aug 26 at 7:15
  • $\begingroup$ @bilbo_pingouin lame. The answer is based on the objective analysis of Richard Duncan, to which I here need provide no reference $\endgroup$ – Sentinel Aug 26 at 21:10

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