tag:theconversation.com,2011:/id/topics/economic-recession-9318/articlesEconomic recession – The Conversation2022-07-28T19:36:29Ztag:theconversation.com,2011:article/1878942022-07-28T19:36:29Z2022-07-28T19:36:29ZIs the US in a recession? Well, that depends on whom you ask – and what measure they use<figure><img src="https://images.theconversation.com/files/476556/original/file-20220728-26301-9hv5qb.jpg?ixlib=rb-1.1.0&rect=38%2C122%2C3666%2C2344&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Fears that the U.S. is in recession are growing.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/homeless-person-sleeps-along-wall-street-on-april-28-2022-news-photo/1394228485">Spencer Platt/Getty Images</a></span></figcaption></figure><p><em>The U.S. economy <a href="https://www.bea.gov/news/2022/gross-domestic-product-second-quarter-2022-advance-estimate">shrank at an annual rate 0.9%</a> from April through June, the Bureau of Economic Analysis estimated on July 28, 2022. It follows a contraction in gross domestic product of 1.6% recorded in the first quarter of the year.</em></p>
<p><em><a href="https://www.foxbusiness.com/economy/us-economy-shrank-second-quarter-entering-technical-recession">Some observers suggest the two quarters of contraction constitute</a> a “technical recession” or the “<a href="https://www.theguardian.com/business/2022/jul/28/us-economy-gdp-second-quarter">unofficial start” of one</a>, while others suggest <a href="https://www.cnn.com/2022/07/28/economy/us-economy-second-quarter-gdp/index.html">it at least raises fears</a> or <a href="https://www.cnbc.com/2022/07/28/gdp-q2-.html">signals it’s on the way</a>. Federal Reserve Chair Jerome Powell apparently thinks otherwise. <a href="https://www.wsj.com/articles/transcript-fed-chief-powells-postmeeting-press-conference-11651696613">On July 27</a>, after <a href="https://theconversation.com/a-hawkish-fed-signals-further-rate-hikes-and-sees-a-slowing-economy-but-not-recession-187758">raising interest rates</a> 0.75 percentage point, Powell told reporters, “it’s a strong economy and nothing about it suggests that it’s close to or vulnerable to a recession.”</em> </p>
<p><em>Confused about whether the U.S. is in a recession or how to know when one hits? If you are, <a href="https://www.theatlantic.com/ideas/archive/2022/07/recession-definition-wrong-question-inflation-unemployment/670983/">join the club</a>.</em></p>
<p><em>So The Conversation U.S. asked <a href="https://scholar.google.com/citations?user=VxWst50AAAAJ&hl=en&oi=ao">Brian Blank</a>, a financial economist at Mississippi State University, to explain what’s going on in the economy and what factors determine if it is in recession.</em></p>
<h2>What did the latest GDP report tell us?</h2>
<p>The economy is really hard to pin down right now. </p>
<p>First, the question everyone is talking about now is the release of the less-than-impressive gross domestic product report, which showed a <a href="https://www.theguardian.com/business/live/2022/apr/28/cost-of-living-pressures-inflation-unilever-sainsbury-whitbread-stock-markets-twitter-musk-business-live">contraction</a> after adjusting for inflation. </p>
<p>Some aspects of the report were positive, such as that consumption – how much people are buying – still rose a little and business fixed investment – how much companies spend on machines and factories – was flat, avoiding the drop previously forecast. </p>
<p>As for some of the more negative news, investment in residential housing and property declined 14%, which makes sense given how much it had been rising since the pandemic upended the <a href="https://fred.stlouisfed.org/graph/?g=6NQG">housing market</a>. In addition, a <a href="https://fred.stlouisfed.org/series/CBI">drop in private inventory investment</a> – a measure of how much stuff companies have produced but haven’t yet sold – had perhaps the biggest impact on negative second-quarter figures. While inventory reductions can be a sign of strength from selling products, the decline reduced overall GDP by over 2 percentage points.</p>
<p>And overall it means the U.S. economy technically has shrunk for two consecutive quarters, which is why you’re seeing a lot more economists, journalists and others use the dreaded “R” word: recession. </p>
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<h2>What is a recession, anyway?</h2>
<p>Two quarters in a row of contraction is the <a href="https://www.cnbc.com/2022/07/26/heres-how-to-know-if-were-in-a-recession-and-its-not-what-you-think.html">shorthand journalists</a> and many others use to describe a recession.</p>
<p>In the U.S., however, the economy is deemed to be officially in recession only after the <a href="https://www.nber.org">National Bureau of Economic Research</a>, a nonprofit and nonpartisan organization, says it is.</p>
<p>The bureau <a href="https://www.nber.org/research/business-cycle-dating">defines a recession</a> as a “significant decline in economic activity that is spread across the economy and lasts more than a few months.” Its <a href="https://www.nber.org/research/business-cycle-dating/business-cycle-dating-committee-members">business cycle dating committee</a>, which is composed of eight economics professors, meets to determine when recessions begin and end. It uses three key criteria:</p>
<p>1) How quickly the economy is contracting.
2) How many aspects of the economy are declining.
3) How long the economy contracts.</p>
<p>The NBER defines recessions as the time between the point at which the economy stops growing – the peak – and the point at which it starts growing again – the trough. </p>
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<img alt="a man looks at two boxes of breakfast food in front of an aisle of cereals and other foods" src="https://images.theconversation.com/files/476573/original/file-20220728-34200-4gv6bc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/476573/original/file-20220728-34200-4gv6bc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/476573/original/file-20220728-34200-4gv6bc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/476573/original/file-20220728-34200-4gv6bc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/476573/original/file-20220728-34200-4gv6bc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/476573/original/file-20220728-34200-4gv6bc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/476573/original/file-20220728-34200-4gv6bc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Companies are investing less in inventory as high inflation slows consumer spending.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/Economy-GDP/69fe8e57892e411191f0bbbbab2d50fb/photo?Query=recession&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=7839&currentItemNo=1">AP Photo/Andres Kudacki</a></span>
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<h2>So, are we in a recession or not?</h2>
<p>Recessions are complicated to identify, given that the economy is big and has many parts. Currently, some parts of the U.S. economy, like the labor market, are growing quickly, while others, such as housing, are slowing. </p>
<p>While <a href="https://fred.stlouisfed.org/series/GDP">two quarters of economic contraction typically do coincide with a recession</a>, they also do not typically involve the <a href="https://apnews.com/article/us-jobs-report-signs-of-economic-resilience-e83d996c4a6320b5785dde94d6c2f125">hot job growth the U.S. economy</a> has seen this year. And recessions rarely happen when unemployment – which is currently at a <a href="https://fred.stlouisfed.org/series/UNRATE">roughly half-century-low of 3.6%</a> – is falling. The economy is typically not in recession if almost everyone who wants a job has one.</p>
<p>In addition, recessions usually involve <a href="https://www.bea.gov/data/income-saving/gross-domestic-income">declines in real gross domestic income</a>, which is similar to GDP but instead specifically measures income and costs related to production. In theory, <a href="https://www.nytimes.com/2022/07/27/opinion/gross-domestic-product-income.html">they should move more or less in tandem</a>, but <a href="https://fred.stlouisfed.org/series/GDI">gross domestic income continues to grow</a>. </p>
<p>Another measure of growth is personal income, which <a href="https://www.bea.gov/news/2022/personal-income-and-outlays-may-2022">has been climbing for most of the year</a> and rose faster than <a href="https://www.bea.gov/data/personal-consumption-expenditures-price-index">spending</a> in May. The Fed watches this metric closely because of its <a href="https://www.dallasfed.org/research/economics/2021/0701">predictive ability</a>, as <a href="https://www.nber.org/research/business-cycle-dating">does the National Bureau of Economic Research</a>, in addition to unemployment. </p>
<p>For my 2 cents, I believe Powell is right. The economy does not appear to be in a recession at the moment, given how strong the labor market is. Since <a href="https://fred.stlouisfed.org/series/PAYEMS">2.7 million more people have jobs now</a> than they did at the end of last year, a key measure of the economy is still growing. </p>
<p>“There are too many areas of the economy that are performing too well,” <a href="https://www.cnbc.com/2022/07/27/fed-chair-jerome-powell-said-he-does-not-think-the-us-is-currently-in-a-recession.html">Powell told reporters</a>. “It doesn’t make sense that the economy would be in a recession with this kind of thing happening.”</p>
<p>That said, Powell and the Fed are trying their level best to curb soaring inflation by slowing the economy – and there are worries that doing so will induce a recession. If you want a strong signal to tell if that might be happening, <a href="https://fred.stlouisfed.org/series/A011RE1Q156NBEA">look at residential investment as a percentage of GDP</a>. Residential investment is how much individuals spend on new homes and home improvement. Right now it’s flat, but when it starts to decline, a recession is usually on its heels.</p>
<p>Keep in mind, 2021 boasted <a href="https://theconversation.com/yes-us-economy-may-be-slowing-but-dont-forget-its-coming-off-the-hottest-year-since-1984-heres-who-benefited-in-4-charts-176643">one of its best U.S. economies in decades</a>, so maybe Americans can accept a so-so 2022. In some ways, an economy that is not growing too fast might also mean an economy that is getting inflation under control, which suggests that sometimes not so great news is actually good news.</p><img src="https://counter.theconversation.com/content/187894/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>D. Brian Blank does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The US economy shrank for a second straight quarter. While some call that a recession or a strong sign of one, a financial economist explains why the term probably doesn’t yet apply.D. Brian Blank, Assistant Professor of Finance, Mississippi State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1822702022-05-02T12:36:50Z2022-05-02T12:36:50ZFed hopes for ‘soft landing’ for the US economy, but history suggests it won’t be able to prevent a recession<figure><img src="https://images.theconversation.com/files/460664/original/file-20220501-92000-a1p5av.jpeg?ixlib=rb-1.1.0&rect=0%2C36%2C1461%2C1619&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A soft landing may be out of the Fed’s reach.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/skydiver-landed-with-the-parachute-on-the-target-royalty-free-image/568702681">Oliver Furrer/Stone Getty Images</a></span></figcaption></figure><p>The Federal Reserve will likely soon learn what gymnasts already know: sticking a landing is hard.</p>
<p>With <a href="https://theconversation.com/why-the-fed-cant-stop-prices-from-going-up-anytime-soon-but-may-have-more-luck-over-the-long-term-179339">inflation surging to a new 40-year high</a> and <a href="https://www.bls.gov/news.release/cpi.nr0.htm">continuing to accelerate</a>, the Fed is expected to lift interest rates by a half-percentage point at the end of its next meeting on May 4, 2022. It will be the <a href="https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20220316.pdf">second of seven planned rate hikes</a> in 2022 – <a href="https://time.com/6157945/fed-interest-rates-inflation/">following a quarter-point increase</a> in March – as the Fed tries to cool consumer demand and slow rising prices. </p>
<p>By raising interest rates, the central bank is hoping to achieve a proverbial “<a href="https://www.investopedia.com/terms/s/softlanding.asp">soft landing</a>” for the U.S. economy, in which it’s able to tame rapid inflation without causing unemployment to rise or triggering a recession. The <a href="https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20220316.pdf">Fed</a> and <a href="https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/spf-q1-2022">professional forecasters</a> project that inflation will recede to below 3% and unemployment will remain under 4% in 2023.</p>
<p>Our recent research, however, <a href="https://www.hks.harvard.edu/centers/mrcbg/programs/growthpolicy/history-suggests-high-chance-recession-over-next-24-months-alex">suggests that engineering a soft landing</a> is highly improbable and that there is a significant likelihood of a recession in the not too distant future. </p>
<p>That’s because high inflation and low unemployment are both strong predictors of future recessions. In fact, since the 1950s, every time inflation has exceeded 4% and unemployment has been below 5%, the U.S. economy has gone into a recession within two years. </p>
<p>Today, <a href="https://www.bls.gov/news.release/cpi.nr0.htm">inflation is at 8.5%</a> and <a href="https://www.bls.gov/news.release/pdf/empsit.pdf">unemployment is at 3.6%</a> – suggesting a recession will be very hard to avert.</p>
<h2>Behind the curve</h2>
<p><a href="https://www.investopedia.com/ask/answers/111314/what-causes-inflation-and-does-anyone-gain-it.asp">Inflation is fundamentally caused</a> by too much money chasing too few goods.</p>
<p>In the short run, the supply of goods in the economy is more or less fixed – there is nothing that fiscal or monetary policy can do to change it – so the job of the Fed is to manage total demand in the economy so that it balances with the available supply. </p>
<p>When demand runs too far ahead of supply, the economy begins to overheat, and prices rise sharply. In our assessment, measures of overheating – such as <a href="https://www.bea.gov/news/2022/gross-domestic-product-fourth-quarter-and-year-2021-second-estimate#:%7E:text=Current%2Ddollar%20GDP%20increased%2010.1,(tables%201%20and%203).">strong demand growth</a>, <a href="https://fred.stlouisfed.org/series/RETAILIRSA">diminishing inventories</a> and <a href="https://www.atlantafed.org/chcs/wage-growth-tracker">rising wages</a> – began to show in the economy throughout 2021. But <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20200827a.htm">a new operating framework</a> that the Fed adopted in August 2020 prevented the Fed from taking action until sustained inflation was already apparent. </p>
<p>As a result, the Fed is way behind the curve today in responding to an overheating economy. </p>
<h2>Sticking a soft landing is hard</h2>
<p>To bring down surging inflation, the Fed will now try to raise interest rates to curb consumer demand. </p>
<p>The resulting increase in borrowing costs <a href="https://theconversation.com/how-raising-interest-rates-curbs-inflation-and-what-could-possibly-go-wrong-176426">can help slow economic activity</a> by discouraging consumers and businesses from making new investments. But it would come at the risk of causing major economic disruptions and pushing the economy into a recession. This is the soft landing: Interest rates rise and demand falls enough to lower inflation, but the economy keeps growing.</p>
<p>The history of engineering soft landings is not encouraging, however. <a href="https://www.nber.org/system/files/working_papers/w29910/w29910.pdf">We found that</a> every time the Fed has hit the brakes hard enough to bring down inflation in a meaningful way, the economy has gone into recession. </p>
<p>While some have argued that <a href="https://www.federalreserve.gov/newsevents/speech/powell20220321a.htm">there have been several examples</a> of soft landings over the last 60 years, including in 1965, 1984 and 1994, we show in our analysis that these periods had little resemblance to the current moment.</p>
<p>In all three episodes, the Fed was operating in an economy with significantly higher unemployment, lower inflation and lower wage growth. In these historical examples, the Fed also raised interest rates well above the inflation rate – unlike today, where inflation is at 8.5% and interest rates are <a href="https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20220316.pdf">projected to remain below 3%</a> through 2023 – and explicitly acted early to preempt inflation from spiraling, rather than waiting for inflation to already be excessive. </p>
<h2>Why is the labor market relevant for inflation?</h2>
<p>One reason the Fed’s challenge is particularly difficult today is that the labor market is <a href="https://www.nber.org/system/files/working_papers/w29739/w29739.pdf">unprecedentedly tight</a>, meaning the demand for workers is far outpacing the available supply of them. A tight labor market implies that companies need to raise wages to attract new workers. </p>
<p>Usually, the unemployment rate is used as an indicator for labor market tightness. Unemployment is <a href="https://fred.stlouisfed.org/series/UNRATE">very low today</a>, and the Fed expects it to go even lower. But our research shows that the pressure to raise wages is even higher than indicated by the unemployment rate. The number of job openings are <a href="https://fred.stlouisfed.org/series/JTSJOL">at all an all-time high</a>, and <a href="https://fred.stlouisfed.org/series/JTSQUL">workers are quitting at record rates</a> – both of which are significant for driving up wages. </p>
<p>In a sense, wages are the ultimate measure of core inflation – <a href="https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=3&isuri=1&nipa_table_list=56&categories=survey">more than two-thirds of business costs go back to labor</a> – so rising wages put significant upward pressure on inflation. Wage growth today is <a href="https://www.atlantafed.org/chcs/wage-growth-tracker">running at a historic rate of 6.6% and accelerating</a>. </p>
<p>With wages rising so fast, there is little basis for optimism that inflation can slow to the 2% range targeted by the Fed. Our analysis shows that current wage growth implies sustained inflation above 5%, and that historically wage growth does not slow without significant increases in unemployment and a recession.</p>
<h2>The odds of recession</h2>
<p>The U.S. economy today is facing additional inflationary pressures from <a href="https://www.npr.org/2022/04/08/1091705608/global-food-prices-record-high-ukraine-war">higher grain and energy prices due to the Ukraine war</a> and more supply-chain disruptions as COVID-19 forces <a href="https://www.cnbc.com/2022/04/16/shanghai-reports-more-covid-cases-as-china-imposes-new-lockdowns-.html">new lockdowns in China</a>. These factors threaten to exacerbate inflation even more over the coming year.</p>
<p>In our assessment, the inflation problem facing the Fed today is substantial and unlikely to be resolved without a significant economic slowdown. Overall, the combination of an overheating economy, surging wages, policy delay by the Fed and recent supply shocks means that a recession in the next couple of years is certainly more likely than not.</p><img src="https://counter.theconversation.com/content/182270/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lawrence H. Summers consults for various financial institutions and is a Distinguished Senior Fellow of the Center for American Progress. </span></em></p><p class="fine-print"><em><span>Alex Domash does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Federal Reserve is expected to lift interest rates a half point at its next meeting and more in the coming months, but it may be too late to forestall an economic downturn.Alex Domash, Research Fellow, Harvard Kennedy SchoolLawrence H. Summers, Charles W. Eliot University Professor, Harvard Kennedy SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1477272020-10-13T13:25:52Z2020-10-13T13:25:52ZWill it be a ‘V’ or a ‘K’? The many shapes of recessions and recoveries<figure><img src="https://images.theconversation.com/files/363035/original/file-20201012-21-2kyvcs.jpg?ixlib=rb-1.1.0&rect=98%2C81%2C2122%2C1419&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A 'V' recovery is seen as the best way to bounce back from a recession.
</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/canada-geese-flying-in-formation-royalty-free-image/88198774">Steve Stone/Moment via Getty Images</a></span></figcaption></figure><p>Recessions – <a href="https://www.investopedia.com/terms/r/recession.asp">typically defined</a> as two consecutive quarters of declining economic output – are always painful in terms of how they affect our economic well-being. Like all bad things, fortunately, they eventually end and a recovery begins. </p>
<p>But not all recoveries or recessions look the same. And economists have a tendency to compare their varying paths with letters of the alphabet.</p>
<p>For example, during the current situation, you may have the heard the direction the recovery might take compared with a “<a href="https://www.marketwatch.com/story/that-v-shaped-economic-recovery-forecasters-have-been-calling-for-dont-hold-your-breath-11602174696">V</a>,” a “<a href="https://www.freepressjournal.in/business/rbi-governor-says-it-is-not-k-v-u-l-or-w-but-three-speed-recovery-what-does-all-these-letters-mean">W</a>” or <a href="https://www.salon.com/2020/09/09/the-us-is-experiencing-a-k-shaped-economic-recovery-heres-what-that-means/">even a “K.”</a></p>
<p>As <a href="https://scholar.google.com/citations?user=B744wv0AAAAJ&hl=en&oi=ao">a macroeconomist</a>, I know this alphabet soup can be confusing for a lay reader. So here’s a guide to some of the most commonly used letters.</p>
<h2>‘V’ for victory</h2>
<p>While recessions are never a good thing, the “V-shaped” recovery is deemed the best-case scenario. In a recession with a V shape, the decline is rapid, but so is the recovery. </p>
<p>A good example of this type of <a href="https://www.nber.org/cycles.html">recession took place in 1981 and 1982</a>. That recession occurred after then-Federal Reserve Chair Paul Volcker <a href="https://www.washingtonpost.com/politics/2019/12/12/paul-volcker-won-his-fight-inflation-battle-regulate-big-finance-is-ongoing/">rapidly raised interest rates beginning in 1979</a> in an effort to curb high inflation. This caused a sharp recession – leading to what was then the <a href="https://www.bls.gov/opub/mlr/1983/02/art1full.pdf">highest unemployment rate in the U.S. since the Great Depression</a>.</p>
<p>But outside of economic circles, this recession is little remembered. Why? Primarily because the recovery was so rapid. After Volcker began cutting interest rates in the second half of 1982, the economy entered a recovery as sharp as the recession. </p>
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<h2>‘U’ and a long bottom</h2>
<p>Conversely, a “U-shaped” recession generally has a longer duration, both for the downturn and the recovery period. The 2001 recession that followed the dot-com bubble and the 9/11 attacks fits into this category.</p>
<p>In some ways, the post-dot-com recession was a mild one. The fall in employment from the job market’s peak in February 2001 until the trough in August 2003 was only slightly less than 2%. Yet it took over two years of decline for the economy to bottom out, and it took another year and a half for the number of jobs to exceed the pre-recession peak. Furthermore, the amount of time spent near the bottom of the recession was relatively long.</p>
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<h2>The reclining ‘L’</h2>
<p>The last U.S. recession, which coincided with the financial crisis of 2008, was especially brutal.</p>
<p>Economists call it an “L-shaped” recession because there was an initial sharp downturn, but a very plodding recovery. To see the L, you need to imagine the letter sort of reclining backward on its end.</p>
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<p>The economy declined rapidly after the September 2008 failure of Lehman Brothers, and employment plunged about 6.3% from its pre-recession peak before reaching its low point. The pace of job creation in the recovery was very slow. <a href="https://fred.stlouisfed.org/series/PAYEMS">It took almost 4½ years</a> to recover all the jobs lost. </p>
<h2>‘K’ and a two-track recovery</h2>
<p>It may be hard to see how a K could be applied to data on a graph, but it’s the letter <a href="https://www.msn.com/en-us/money/news/why-some-economists-warn-of-a-k-shaped-coronavirus-economic-recovery/ar-BB16Otro">increasingly being used</a> to describe the path of the current recession and eventual recovery.</p>
<p>Fed Chair Jerome Powell didn’t call it a “K” <a href="https://www.npr.org/2020/10/06/920770414/feds-jerome-powell-calls-for-more-economic-aid-warning-weakness-feeds-on-weaknes">but that’s basically what he meant</a> when he discussed the current economic trajectory in a recent address. He expressed concerns that the U.S. will experience a “two-track recovery” in which things get better quickly for some people, while staying bad for others. </p>
<p>Is that the kind of recession we’re in? </p>
<p>It’s unclear. So far, looking at the whole economy, the U.S. has what has been called a <a href="https://www.lpl.com/news-media/research-insights/weekly-market-commentary/prospects-for-swoosh-shaped-recovery.html">“checkmark” or “swoosh” recession</a>. It began to look something like a V, with a sharp drop in employment and then the beginnings of a rapid increase. But that recovery has begun to stall – though not for everyone. </p>
<p>[<em>Deep knowledge, daily.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=deepknowledge">Sign up for The Conversation’s newsletter</a>.]</p>
<p>As <a href="https://www.rev.com/transcript-editor/shared/EyhjNkF3lL5sTIMB3u24p5CawMHAZmLvUjYV89JPo8JY5mtx6LMDFBpimV3Hz5nmoGEfsx-mF9vwoVqAbS3oiJxOL88?loadFrom=PastedDeeplink&ts=608.09">Powell suggested</a>, the recovery could look different to various groups. White-collar workers may see a “V,” as their jobs are more capable of being done remotely. Blue-collar workers are seeing something closer to a U or L. <a href="https://www.businessinsider.com/k-shaped-economic-recovery-chart-low-wage-workers-pandemic-economy-2020-10">One analysis shows</a> that medium- to high-wage workers have gained back virtually all the jobs lost during the shutdown earlier this near. Conversely, employment of lower-wage workers is still more than 20% below its pre-COVID-19 peak.</p>
<p><iframe id="ReXKj" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/ReXKj/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>Recessions are tough for anyone to live through. However, the shape of the recovery can make it more or less bearable.</p><img src="https://counter.theconversation.com/content/147727/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>William Hauk does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Some economists have begun to compare the current recession and recovery with a ‘K,’ while others see a ‘V.’ Which is it, and what does it mean?William Hauk, Associate Professor of Economics, University of South CarolinaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1441782020-08-24T12:21:28Z2020-08-24T12:21:28ZEconomic hardship from COVID-19 will hit minority seniors the most<figure><img src="https://images.theconversation.com/files/352374/original/file-20200811-16-vxxa1n.jpg?ixlib=rb-1.1.0&rect=10%2C20%2C6669%2C4416&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The financial ravages caused by COVID-19 will particularly impact Black seniors. </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/close-up-portrait-of-senior-black-woman-looking-royalty-free-image/1190822973?adppopup=true">Willie B. Thomas via Getty Images</a></span></figcaption></figure><p>For Americans 60 and older, COVID-19 is widespread and deadly. Its economic impact could also be devastating. </p>
<p>With a recession fast developing, much of the attention on the downturn focuses on working-age adults, but many older Americans – with less time to make up for financial losses – will suffer the most. </p>
<p><a href="https://www.umb.edu/faculty_staff/bio/marc_cohen">I am a clinical professor</a> of gerontology. <a href="https://www.umb.edu/gerontologyinstitute/about/fellows">My co-author is</a> a research fellow in gerontology. We believe that recent history, specifically the Great Recession of 2008-09, will demonstrate what’s at stake. </p>
<p>In a series of <a href="https://www.ncoa.org/covid-19/potential-financial-impacts-of-covid-19-on-older-adults/">research briefs</a> using data from the <a href="https://hrs.isr.umich.edu/welcome-health-and-retirement-study">Health and Retirement Study</a>, we analyzed the financial status of Americans 60 and older before and after that recession. We reviewed the data from a wide variety of demographic groups: non-Hispanic whites, non-Hispanic Blacks, and Hispanics; single-person and two-person, married households; retired and non-retired.</p>
<p>The findings paint a grim picture of what may come from the pandemic: a recession likely to have a far greater impact than the 2008-09 downturn, especially on minority older adults. Given that the unemployment rate among older minority Americans is already disproportionately high and that many have health conditions that make it difficult to work, their ability to change their financial situation is small compared to other groups. </p>
<iframe title="Post-recession: Poverty rises for 60+ Hispanics" aria-label="Bar Chart" id="datawrapper-chart-Esn2n" src="https://datawrapper.dwcdn.net/Esn2n/1/" scrolling="no" frameborder="0" style="border: none;" width="100%" height="158"></iframe>
<h2>Increasing poverty rates</h2>
<p>Beginning in 2008, older adults <a href="https://www.ncoa.org/covid-19/potential-financial-impacts-of-covid-19-on-older-adults/">experienced significant losses</a> across the board regardless of demographic groupings. Housing values, liquid assets and total net wealth all declined. Given the housing market collapse associated with the recession, sharp drops in home value were expected. More remarkable is that drops in assets and total net wealth were almost as steep. </p>
<p>Yet as one moves up the wealth stream, the recession’s financial impacts diminished for older adults. For the wealthiest 20%, losses ranged from 4% to 18%. But for those in the lowest 20%, financial assets and total wealth losses ranged from <a href="https://d2mkcg26uvg1cz.cloudfront.net/wp-content/uploads/2020-C19-DG06_COVID-19-Issue-Brief_4-14.pdf">200% to 500%</a>. </p>
<p>For those 60 and older at or near the bottom, these losses were staggering. Poverty rates increased from <a href="https://www.ncoa.org/covid-19/potential-financial-impacts-of-covid-19-on-older-adults/">1 percentage point to 6 percentage points</a>, depending on the demographic group. These increases may seem small but in numbers of people it is enormous.</p>
<iframe title="Post-recession: Poverty rises for 60+ Non-Hispanic Blacks" aria-label="Bar Chart" id="datawrapper-chart-5I0ie" src="https://datawrapper.dwcdn.net/5I0ie/1/" scrolling="no" frameborder="0" style="border: none;" width="100%" height="158"></iframe>
<p>In 2008, more than 50 million people in the U.S. were 60 and older. Roughly 1.2 million of them fell into poverty during the great recession and this represents a 46 percent increase in the poverty rate – <a href="https://d2mkcg26uvg1cz.cloudfront.net/wp-content/uploads/2020-C19-DG06_COVID-19-Issue-Brief_4-14.pdf">a 5% poverty rate pre-recession compared to a 7.3% rate post-recession.</a></p>
<p>Today there are 75 million in the U.S. 60 and older. This time, a pandemic-instigated downturn could translate to 1.8 million seniors pushed into poverty, if impacts are similar to 2008-09. </p>
<p>To further break down <a href="https://www.ncoa.org/covid-19/potential-financial-impacts-of-covid-19-on-older-adults/">our analysis</a>: In the 2008-09 recession, single-person households and retired individuals had smaller increases in poverty compared to two-person households and non-retired individuals respectively. Both groups had notably higher percentages of their household income coming from Social Security retirement income and government benefit programs. </p>
<p>This suggests that government-based financial resources help mitigate the impact of a recession and slow increases in poverty, likely buffering those who qualify for Social Security and have adequate retirement savings from complete financial ruin.</p>
<figure class="align-center ">
<img alt="More than 75 million Americans are 60 and older." src="https://images.theconversation.com/files/352384/original/file-20200811-17-165xjyp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/352384/original/file-20200811-17-165xjyp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/352384/original/file-20200811-17-165xjyp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/352384/original/file-20200811-17-165xjyp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/352384/original/file-20200811-17-165xjyp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/352384/original/file-20200811-17-165xjyp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/352384/original/file-20200811-17-165xjyp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">More than 75 million in the U.S. are age 60 and older.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/older-retired-couple-on-couch-royalty-free-image/182105928?adppopup=true">Lola Takes Pictures via Getty Images</a></span>
</figcaption>
</figure>
<h2>Most vulnerable: Older minorities</h2>
<p>Given the pervasiveness of systemic racism in the U.S., it’s not surprising that older Blacks and older Hispanics suffered the deepest financial declines during the 2008 recession. </p>
<p>Older Hispanics had almost <a href="https://d2mkcg26uvg1cz.cloudfront.net/wp-content/uploads/2020-C19-DG12_COVID-19-Issue-Brief_FINAL.pdf">twice the amount of losses</a> in net total wealth than non-Hispanic whites. They also had the highest increase in poverty, a 5.5 percentage point jump, more than any other demographic group. </p>
<p>Older Blacks had twice the decline in liquid financial assets when compared to white counterparts, and a 3.2 percentage point increase in poverty, the second highest. What’s worse: Prior to the 2008 recession, these groups already had drastically fewer financial resources than older whites, and quadruple the poverty rate.</p>
<p>Older adults living in single-person households also experienced significant financial losses despite not being hit quite as hard as older two-person households. Many are women, and a significant percentage are widows. Even in good economic times, they are typically at a much lower financial status. During a recession, things become precipitously worse; they are unable to absorb the financial losses that older two-person households, who often have double the financial resources, can. And, again, they are unlikely to be able to find a job and in many cases, unable to work even if they could.</p>
<p>[<em>Deep knowledge, daily.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=deepknowledge">Sign up for The Conversation’s newsletter</a>.]</p>
<p>In 2008-09, older single-person households <a href="https://d2mkcg26uvg1cz.cloudfront.net/wp-content/uploads/2020-C19-DG19_COVID-19-Issue-Brief_Older-Single-Householders_7-24.pdf">experienced significant declines</a> across all financial measures, despite their reliance on Social Security and government benefits. By comparison, two-person households, often with two sources of income, are in a better financial position before, during and after a recession. They had half the rate of poverty than the older single-person households. </p>
<h2>Learning from the Great Recession</h2>
<p>The impact of COVID-19 will likely be worse than what we present here. The 2008-09 estimates probably offer only a best-case scenario. But they will help us understand the economic hardships that millions of older Americans now face because of the pandemic. Indeed, as health and economic threats overlap, they may bear the brunt of this catastrophe. </p>
<p>There is, however, a possible way out. Our evidence indicates that stable sources of government income and benefits may keep minority seniors from financial collapse. Anything less than that, and the risks facing these most vulnerable Americans become catastrophic certainties.</p><img src="https://counter.theconversation.com/content/144178/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Marc Cohen received funding from the National Council on Aging for this analysis. He is a Research Director at the Center for Consumer Engagement in Health Innovation at Community Catalyst.</span></em></p><p class="fine-print"><em><span>Jane Tavares received funding from the National Council on Aging for this analysis.</span></em></p>New data shows the Great Recession hurt older, poorer Blacks and Hispanics the most. The pandemic downturn is likely to be even worse for them.Marc Cohen, Clinical Professor of Gerontology and Co-Director of the LeadingAge LTSS Center @UMass Boston, UMass BostonJane Tavares, Research Fellow, LeadingAge LTSS Center, UMass BostonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1410792020-06-24T16:48:52Z2020-06-24T16:48:52ZBuhari’s COVID-19 economic plan: old wine in new wineskins<figure><img src="https://images.theconversation.com/files/343543/original/file-20200623-188916-t22ztm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">President Muhammadu Buhari raises his fist during an inspection of honour guards on parade to mark Democracy Day in Abuja, on June 12, 2019. </span> <span class="attribution"><span class="source">Pius Utomi Ekpei/AFP via Getty Images</span></span></figcaption></figure><p>COVID-19 is increasingly <a href="https://www.statista.com/statistics/1110879/coronavirus-cumulative-cases-in-nigeria/">wreaking havoc</a> on the health of Nigerians, but its economic impact may well be more devastating. Before the pandemic, the Nigerian economy was growing at an <a href="https://www.worldbank.org/en/country/nigeria/overview">anaemic rate </a>of 2%. The country has also been suffering from <a href="https://qz.com/africa/1313380/nigerias-has-the-highest-rate-of-extreme-poverty-globally/">high poverty</a> and <a href="https://www.aljazeera.com/programmes/countingthecost/2019/02/young-unemployed-nigeria-190216073358024.html">unemployment rates</a>. This is paradoxical for a country endowed with humongous <a href="https://www.legit.ng/1161400-list-natural-resources-nigeria-locations.html">natural resources</a>.</p>
<p>Determined to blunt the economic trauma of COVID-19 and minimise its impact on poverty, unemployment, insecurity and violence, Nigeria’s President Muhammadu Buhari announced the establishment of an inter-ministerial Economic Sustainability Committee. He gave it the remit to recommend measures that would prevent further economic collapse. Headed by Vice President Yemi Osinbajo, the committee submitted its <a href="https://media.premiumtimesng.com/wp-content/files/2020/06/ESC-Plan-compressed-1.pdf">report</a> to the President in mid-June.</p>
<p>There are two main pillars to the <a href="https://media.premiumtimesng.com/wp-content/files/2020/06/ESC-Plan-compressed-1.pdf">economic sustainability plan</a>. The first is job creation and the second an infusion of cash. These will be achieved through targeted investments in agriculture and agro-processing, manufacturing, renewable energy, housing, information technology. The proposal also included cash transfers as well as “survival funds” for medium and small scale enterprises. The plan is remarkable by its emphasis on the use of local contents to support its initiatives.</p>
<p>But most of what’s in the plan is neither novel nor ground-breaking. It includes projects that had been bandied around by previous administrations, with little success. </p>
<p>The difference appears to be the scale and intensity with which the projects are to be undertaken.</p>
<p>In fact the plan sounds very much like the doomed <a href="https://www.premiumtimesng.com/news/top-news/373321-analysis-why-nigerias-vision-202020-was-bound-to-fail.html">Vision 2020</a>, which was a long-term strategic intent launched by the Nigerian government in 2009 to promote economic growth, socio-economic development and structural transformation. The overarching goal was to enable Nigeria to become one of the <a href="https://nairametrics.com/wp-content/uploads/2013/06/nigeria-vision-20_2020_draftetb.pdf">top 20 economies</a> in the world, as well as achieve an annual GDP of at least $900 billion and a GDP per capital of $4000. These goals are far from being achieved. </p>
<p>Post COVID-19, what Nigeria urgently needs are initiatives and projects that instantaneously infuse massive cash into the coffers of severely cash-strapped individuals, households, traders, small enterprises and corporations.</p>
<h2>The gaps</h2>
<p>Perhaps the greatest shortcoming of <a href="https://media.premiumtimesng.com/wp-content/files/2020/06/ESC-Plan-compressed-1.pdf">the report</a> is that it delegates implementation to government ministers, each of whom is expected to set up an implementation committee. This is very reminiscent of previous government efforts.</p>
<p>It is no secret that the wheels of the Nigerian bureaucracy grind excruciatingly slowly. The economic recovery plan should have set up a special implementation taskforce outside of the bureaucracy. </p>
<p>History may offer a useful lesson here. During the post-World War II when European economies were devastated, the US led its allies to launch the <a href="https://history.state.gov/milestones/1945-1952/marshall-plan">Marshall Plan </a> for Europe’s economic reconstruction. Rather than delegate implementation to government bureaucracies, the <a href="https://www.worldbank.org/">World Bank</a> and the <a href="https://www.imf.org/external/index.htm">International Monetary Fund</a> were specifically created to undertake the task.</p>
<p>In times of unprecedented crisis, your worst enemy is the bureaucracy. </p>
<p>Unfortunately, Buhari’s <a href="https://media.premiumtimesng.com/wp-content/files/2020/06/ESC-Plan-compressed-1.pdf">Economic Sustainability Plan</a> has fallen into the same trap as its antecedents: it is likely to gather dust in government ministries and agencies.</p>
<h2>Murky roadmap</h2>
<p>Apart from the lack of novelty, the report is vague and speculative about how initiatives would be accomplished.</p>
<p>For instance, the <a href="https://media.premiumtimesng.com/wp-content/files/2020/06/ESC-Plan-compressed-1.pdf">plan</a> proposes the creation of 5 million jobs within 12 months by bringing 20,000 – 100,000 hectares of land per state into cultivation. The private sector is expected to drive the process. But it’s unclear what mechanisms would incentivise profit-maximising enterprises to employ this number of farm workers. </p>
<p>And how might state governments be encouraged to provide land for farming, when many of them vehemently <a href="https://guardian.ng/news/more-states-groups-reject-ruga-settlements-for-herders/">refused</a> to provide land for the Federal Government’s botched Rural Grazing Areas scheme? </p>
<p>Some of the key provisions in the plan are not implementable without the cooperation of state governments. The <a href="https://www.premiumtimesng.com/news/top-news/283104-pdp-governors-condemn-buharis-refusal-to-sign-amended-electoral-act.html">frosty relationship</a> between the Buhari administration and states controlled by the opposition People’s Democratic Party, which now stands at 16 out of 36 states of the Nigerian federation, suggests this could be a bottleneck.</p>
<p>More intriguing, however, is the fact that most of the projects proposed in the report may not be completed before the end of the Buhari administration. One such example is the solar energy project. The plan proposes supplying <a href="https://media.premiumtimesng.com/wp-content/files/2020/06/ESC-Plan-compressed-1.pdf">5 million Nigerian households</a> (or about 25 million individuals) with solar energy. The report requires that solar power equipment be produced in Nigeria. </p>
<p>This isn’t particularly realistic in a country that <a href="https://www.dailytrust.com.ng/nigeria-spent-n26m-importing-toothpick-from-china-germany.html">imports toothpicks</a>, <a href="https://www.worldoil.com/news/2019/10/21/africa-s-biggest-crude-producer-remains-stuck-on-imported-fuels">petrol</a> and <a href="https://nairametrics.com/2020/03/17/nigerians-spend-14-billion-on-generators-fuel-as-senators-seek-ban-on-generator-use/">generators</a>. The US, with its technological prowess, has been able to supply only about <a href="https://www.energy.gov/eere/solarpoweringamerica/solar-energy-united-states">12 million households</a> with solar energy since 2008.</p>
<p>Another proposal that has a very murky implementation plan is the goal of creating <a href="https://media.premiumtimesng.com/wp-content/files/2020/06/ESC-Plan-compressed-1.pdf">1.8 million jobs</a> through the construction of 300,000 homes (400 in each local government area). The Ministry of Works and Housing is tasked with its implementation. But the report concedes that the ministry is yet to figure out the “design and template” for the houses. This is a manifestation of the lack of preparation for this project. </p>
<p>The report recommends an increase in the number of <a href="https://www.thecable.ng/understanding-nigerias-conditional-cash-transfer-programme">cash transfer</a> recipients. But it doesn’t say how big the cash transfers should be and what mechanisms will be used to transfer cash to the new recipients, many of whom are expected to be rural dwellers.</p>
<p>Furthermore, the funding of the plan is nebulous. Recognising that the Nigerian economy would <a href="https://nairametrics.com/2020/05/22/nigerian-economy-going-into-recession-might-contract-by-8-9-finance-minister/">contract by 4.40%</a> if no measures were taken, the recovery plan opted for a <a href="https://media.premiumtimesng.com/wp-content/files/2020/06/ESC-Plan-compressed-1.pdf">Naira 2.3 trillion</a> stimulus package. This, it’s been estimated, will ensure that the economy doesn’t decline by more than 0.59%. </p>
<p>But the report is evasive about how the proposed projects will be financed. While about 70% of the estimated cost of the plan is expected to come from “Special Accounts” and the <a href="https://www.proshareng.com/news/MONETARY%20POLICY/CBN-Issues-Guidelines-for-the-Implementation-of-the-N50bn-Targeted-Credit-Facility/50079">Central Bank of Nigeria’s</a> “structured lending,” the source of the rest is not clearly defined. </p>
<p>The plan calls for local sourcing of most of the inputs to be used in the various projects. But it does not discuss in detail the foreign exchange implications, especially in light of <a href="https://oilprice.com/Latest-Energy-News/World-News/IEA-Oil-Market-Recovery-Faces-Two-Major-Uncertainties.html">uncertainties </a> in the global oil market. </p>
<p>To hedge against foreign exchange risks and avoid inflation from high cost of imported goods, the plan should have specified a forward exchange rate at which participants in the plan can purchase foreign exchange. </p>
<h2>Solution</h2>
<p>The plan should have been divided into phases, starting with one devoted to initiatives that would immediately pump cash into the economy. </p>
<p>Without an instantaneous infusion of massive cash, the Nigerian economy risks an inexorable slide into stagflation, which is a lethal combination of a recession and hyperinflation.</p><img src="https://counter.theconversation.com/content/141079/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephen Onyeiwu does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>President Buhari’s Post COVID-19 economic recovery plan is neither novel nor ground-breaking.Stephen Onyeiwu, Professor and Chair of the Economics Department, Allegheny CollegeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1410372020-06-18T20:05:02Z2020-06-18T20:05:02ZVital Signs: COVID-19 recession is different – and we need more stimulus to deal with it.<figure><img src="https://images.theconversation.com/files/342610/original/file-20200618-41234-1iljj4u.jpg?ixlib=rb-1.1.0&rect=0%2C41%2C5524%2C3630&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Australia has done well on the public health front during the COVID-19 pandemic, thanks to decisive action by the National Cabinet in March. Australia has done better than most countries on the economic front, too, thanks to the federal government’s large fiscal measures. </p>
<p>But we are at a crossroads. </p>
<p>By September, we may well have largely dealt with the public health aspects of the pandemic. But the economic recovery will only just be starting. The danger is that misunderstanding the nature of this economic crisis will lead the government to bungle that recovery.</p>
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Read more:
<a href="https://theconversation.com/eradicating-the-covid-19-coronavirus-is-also-the-best-economic-strategy-136488">Eradicating the COVID-19 coronavirus is also the best economic strategy</a>
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<p>This recession is not like any recession in living memory. </p>
<p>Those of the 1980s and 1990s were “business cycle” recessions. The economy outpaced its inbuilt speed limit and inflation rose. To curb inflation, central banks pushed up interest rates. Those higher rates ended up choking off investment and spending too much.</p>
<p>The global financial crisis of 2008 was different again. That basically involved a massive dislocation in credit markets due to defaults (or the prospect of defaults) on mortgage debts packaged up and sold as investment products – known as mortgage-backed securities and collateralised debt obligations. When it finally became clear how bad these investments were, global credit markets effectively froze, bringing a range of otherwise healthy companies close to bankruptcy.</p>
<h2>COVID-19 Recession</h2>
<p>The economic crisis now was caused by a massive supply shock which, in turn, was caused by the virus. </p>
<p>For instance, Sweden’s “self-lockdown” saw economic activity <a href="https://arxiv.org/pdf/2005.04630.pdf">drop 25%</a>. Denmark’s coordinated lockdown resulted in economic activity falling 29%. According to Asger Lau Andersen and colleagues at the University of Copenhagen’s Center for Economic Behaviour and Inequality:</p>
<blockquote>
<p>This implies that most of the economic contraction is caused by the virus itself and occurs regardless of whether governments mandate social distancing or not.</p>
</blockquote>
<p>This is COVID-19 Recession phase one – a big supply shock while the virus ravages both the community and the economy. </p>
<p>Once the public health crisis has been brought under control, countries will emerge from the supply shock with fractured economies. </p>
<p>Australia will likely be in this position in the next couple of months. Household and company balance sheets will be badly damaged. Consumer and business confidence will be low. Unemployment high. Underemployment higher still. Renters or mortgage holders at greater risk of defaulting on payments.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-economy-in-7-graphs-how-a-tightening-of-wallets-pushed-australia-into-recession-139960">The economy in 7 graphs. How a tightening of wallets pushed Australia into recession</a>
</strong>
</em>
</p>
<hr>
<p>This will mark the beginning of COVID-19 Recession phase two.</p>
<h2>Supply shocks create demand shocks</h2>
<p>In a <a href="https://www.nber.org/papers/w26918.pdf">remarkable paper</a> published in April, economists Veronica Guerrieri, Guido Lorenzoni, Ludwig Straub and Iván Werning develop a theory of what they call “Keynesian supply shocks”.</p>
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<p>Their theory demonstrates how supply shocks can create demand shortages when markets are “incomplete” – which is pretty much all markets, all the time.</p>
<p>The COVID-19 supply shock is the shutting down, directly or indirectly, of industries such as hospitality and tourism. Workers in affected businesses lose their jobs and income. If they were on low incomes – as many workers in food and accommodation services are – their “marginal propensity to consume” (rather than than save their income) would have been high. If you don’t earn much, you don’t save much – you just spend. So their drop in consumption will be large unless they borrow to spend. </p>
<p>This is going to lead to an overall demand shortfall unless the workers who still have jobs and steady incomes start spending a lot more. But people typically won’t want to do that for multiple reasons – including the fact the goods consumers ordinarily spend big on – such as exotic holidays – are still not available.</p>
<h2>The policy response</h2>
<p>This all suggests policy responses to this economic crisis must be different to past responses.</p>
<p>Phase one has required ameliorating the supply shocks as much as possible. </p>
<p>Arguably the Australian government’s JobSeeker and JobKeeper programs have done that reasonably well – although JobKeeper in particular should have been better designed. </p>
<p>Phase two needs to deal with the demand shortfall that will become more apparent as the supply shocks fade.</p>
<p>That will require more stimulus, not less. Any focus on getting back to a balanced budget – encapsulated by Prime Minister Scott Morrison warning the government <a href="https://www.theguardian.com/australia-news/2020/jun/15/morrison-warns-every-job-cannot-be-saved-signalling-preparations-to-withdraw-covid-19-stimulus-spending">can’t save every job </a> and needs to be “extremely cautious about expenditure” – is precisely not what is needed.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-costs-of-the-shutdown-are-overestimated-theyre-outweighed-by-its-1-trillion-benefit-138303">The costs of the shutdown are overestimated -- they're outweighed by its $1 trillion benefit</a>
</strong>
</em>
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<p>In times of widespread falls in demand, with monetary policy that can no longer respond, fiscal contraction simply makes the crisis worse.</p>
<p>It’s a lesson learnt long ago by economists of all stripes, and immortalised by former US Federal Reserve chairman Ben Bernanke on the occasion of Keynesian critic Milton Friedman’s 90th birthday <a href="https://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/">in 2002</a>: </p>
<blockquote>
<p>Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.</p>
</blockquote>
<p>Mr Morrison needs to remember that lesson.</p><img src="https://counter.theconversation.com/content/141037/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>This recession is not like any other in living memory. Phase one involved a massive supply shock. Phase two will involve dealing with a collapse in demand.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1403052020-06-10T15:59:21Z2020-06-10T15:59:21ZHow the Federal Reserve literally makes money<figure><img src="https://images.theconversation.com/files/340969/original/file-20200610-34682-bitfp1.jpg?ixlib=rb-1.1.0&rect=26%2C58%2C2968%2C1863&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Fed is 'making' a lot of money. </span> <span class="attribution"><span class="source">Alex Wong/Getty Images</span></span></figcaption></figure><p>The Federal Reserve has vowed to provide up to <a href="https://www.brookings.edu/research/fed-response-to-covid19/">US$2.3 trillion</a> in lending to support households, employers, financial markets and state and local governments struggling as a result of the coronavirus and corresponding stay-at-home orders. </p>
<p>Let that number sink in: $2,300,000,000,000. </p>
<p>I have a <a href="https://scholar.google.com/citations?user=DeAMImUAAAAJ&hl=en&oi=ao">Ph.D. in economics</a>, direct the <a href="https://www.aier.org/pertinent_category/sound-money-project/">Sound Money Project</a> at the American Institute for Economic Research and write regularly on Federal Reserve policy. And, yet, it is difficult for me to wrap my head around a number that large. If you were to stack 2.3 trillion $1 bills, it <a href="https://www.ehd.org/science_technology_largenumbers.php">would reach over halfway to the Moon</a>.</p>
<p>Put simply, it is a lot of money. Where does it all come from? </p>
<p>Unlike the trillions of dollars the <a href="https://www.congress.gov/bill/116th-congress/senate-bill/3548/text?q=product+actualizaci%C3%B3n">Treasury is spending to save the economy</a> by bailing out companies or beefing up unemployment checks, <a href="https://www.mercatus.org/bridge/podcasts/04272020/george-selgin-fed-treasury-relationship-new-lending-facilities-covid-19">very little of the Fed’s money</a> actually comes from taxpayers or sales of government bonds. Most of it, in fact, emerges right out of thin air. And that has costs.</p>
<h2>Printing green</h2>
<p>It is common to hear people say the Fed prints money. </p>
<p>That’s not technically correct. The Bureau of Engraving and Printing, an agency of the U.S. Treasury, <a href="https://www.newyorkfed.org/aboutthefed/fedpoint/fed01.html">does the printing</a>. The Fed, for its part, purchases cash from the bureau at cost and then puts it in circulation.</p>
<p>Although you may have heard some economists talk about the Fed figuratively <a href="https://www.investopedia.com/terms/h/helicopter-drop.asp">dropping cash from helicopters</a>, its method of distribution isn’t quite as colorful. Instead, it gives banks cash in exchange for old, worn-out notes or digital balances held by the banks at the Fed. In this way, the Fed can help banks accommodate changes in demand for banknotes, like those in advance of <a href="http://jpkoning.blogspot.com/2018/12/christmas-and-cash.html">major holidays</a> or after <a href="https://www.aier.org/article/cash-is-king-covid19/">natural disasters</a>.</p>
<p>These exchanges are dollar-for-dollar swaps. The Fed does not typically increase the <a href="https://fred.stlouisfed.org/series/BOGMBASEW">monetary base</a> – the total amount of currency in circulation and reserves held by banks at the central bank – when it distributes new banknotes. </p>
<h2>Magicking green</h2>
<p>To put more money into circulation, the Fed typically purchases financial assets – in much the same way that it plans to spend that $2.3 trillion.</p>
<p>To understand how, one must first recognize that the Fed is a bankers’ bank. That is, banks hold deposits at the Fed much like you or I might hold deposits in a checking account at Chase or Bank of America. That means when the Fed purchases a government bond from a bank or makes a loan to a bank, it does not have to – and usually doesn’t – pay with cash. Instead, the Fed just credits the selling or borrowing bank’s account. </p>
<p>The Fed does not print money to buy assets because it does not have to. It can create money with a mere keystroke. </p>
<p>So as the Fed buys Treasuries, mortgage-backed securities, corporate debt and other assets <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20200409a.htm">over the coming weeks and months</a>, money will rarely change hands. It will just move from one account to another.</p>
<h2>Costs of magical money</h2>
<p>While the Fed can create money <a href="http://andolfatto.blogspot.com/2011/03/out-of-thin-air.html">out of thin air</a>, that does not mean it does so without cost. Indeed, there are two potential costs of creating money that one should keep in mind. </p>
<p>The first results from inflation, which denotes a general increase in prices and, correspondingly, a fall in the purchasing power of money. Money is a highly liquid – easily exchangeable – asset we use to make purchases. When the Fed creates more money than we want to hold on to, we exchange the excess money for less liquid assets, including goods and services. Prices are driven up in the process. When the Fed does this routinely, expected inflation gets built into long-term contracts, like mortgages and employment agreements. Businesses incur costs from having to <a href="https://www.investopedia.com/terms/m/menu-costs.asp">change prices more frequently</a>, while consumers have to <a href="https://fraser.stlouisfed.org/title/inside-vault-6107/spring-1999-586615">make more frequent trips to the bank or ATM</a>. </p>
<p>The other cost is a consequence of reallocating credit. </p>
<p>Suppose the Fed makes a loan to the “Bank of Fast and Loose Lending.” If the bank wasn’t able to secure alternative funding, this suggests that other private financial institutions deemed its lending practices too risky. In making the loan, the Fed has only created more money. It has not created more real resources that can be bought with money. And so, by giving the Bank of Fast and Loose Lending a lifeline, the Fed enables it to take scarce real resources away from other productive ventures in the economy. </p>
<p>The <a href="https://www.annualreviews.org/pb-assets/journal-assets/annual-review-financial-economics/volume-10/ARFE_Bailouts-1541624486297.pdf">cost to society</a> is the difference between the value of those real resources as employed by the Bank of Fast and Loose Lending and the value of those real resources as employed in the productive ventures forgone.</p>
<h2>Uncharted waters</h2>
<p>In recent years, the Fed has shown itself to be quite adept at keeping inflation low, even when making large-scale asset purchases.</p>
<p>The central bank purchased nearly <a href="https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm">$3.6 trillion</a> worth of assets from September 2008 to January 2015, yet annual inflation averaged roughly <a href="https://fred.stlouisfed.org/series/PCEPI">1.5% over the period</a> – well below its <a href="https://www.federalreserve.gov/faqs/money_12848.htm">2% target</a>. </p>
<p>I’m less sanguine about the Fed’s ability to keep the costs of reallocating credit low. Congress has <a href="https://www.aier.org/article/powell-admits-that-the-feds-actions-vastly-exceed-its-mandate/">traditionally limited</a> the Fed to making loans to banks and other financial market institutions. But now it is <a href="https://www.aier.org/article/fed-lending-programs-might-be-legal-but-theyre-still-bad-policies/">tasking the Fed</a> with providing direct assistance to <a href="https://www.aier.org/article/fed-lending-programs-might-be-legal-but-theyre-still-bad-policies/">nonbank businesses and municipalities</a> – areas where the Fed lacks experience. </p>
<p>It is difficult to predict how well the Fed will manage its new lending facilities. But its limited experience making loans to small businesses – <a href="https://www.alt-m.org/2020/03/30/when-the-fed-tried-to-save-main-street/">in the 1930s, for example</a> – does little to alleviate the concerns of myself and others.</p>
<p>Congress gave the Fed the ability to create money from thin air. The Fed should wield this enormous power wisely. </p>
<p>[<em>Insight, in your inbox each day.</em> <a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=insight">You can get it with The Conversation’s email newsletter</a>.]</p><img src="https://counter.theconversation.com/content/140305/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>William J. Luther is an assistant professor of economics at Florida Atlantic University, director of the American Institute for Economic Research’s Sound Money Project, and an adjunct scholar with the Cato Institute’s Center for Monetary and Financial Alternatives.</span></em></p>The Fed is spending up to US$2.3 trillion to help save the U.S. economy from the coronavirus recession. But where does all that money come from?William J. Luther, Assistant Professor of Economics, Florida Atlantic UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1388022020-05-19T06:32:14Z2020-05-19T06:32:14ZFurther to fall, harder to rise: Australia must outperform to come out even from COVID-19<p>“Pestilence is so common,” writes Albert Camus in The Plague: </p>
<blockquote>
<p>There have been as many plagues in the world as there have been wars, yet plagues and wars always find people equally unprepared. When war breaks out, people say: ‘It won’t last. It’s too stupid.’ And war is certainly too stupid, but that doesn’t prevent it from lasting.</p>
</blockquote>
<p>So, too, with recessions. Too stupid, and so common. Yet they always take people by surprise; and they last.</p>
<p>The damage from the global financial crisis of 2008 <a href="https://www.mup.com.au/books/the-great-crash-of-2008-paperback-softback">lingers</a> in the form of lower economic growth and stagnating wages. </p>
<p>That’s true even in Australia, one of just two developed countries (Korea being the other) that avoided a GFC-driven recession (two successive quarters of declining output).</p>
<p>As I argued in my book title <a href="https://www.blackincbooks.com.au/books/dog-days">Dog Days: Australia after the boom</a>, Australia has long been primed for a recession. Now it is going to get one. Having gained perhaps more than any other developed nation from open borders and trade, it now has more to lose. </p>
<h2>Why recessions happen</h2>
<p>Big recessions happen when a shock reveals a weakness in the structure of the economy. There have been manifold points of weakness in the global economy in recent years:</p>
<ul>
<li><p>in the US, the Trump administration’s <a href="https://cpb-ap-se2.wpmucdn.com/blogs.unimelb.edu.au/dist/a/142/files/2018/01/Corden-and-Garnaut.-EconomicConsequencesofMrTrump-20.-06.18-12d5aia.pdf">expansion of fiscal deficits</a> by cutting taxes at a time of full employment with debt and deficits already at record peacetime highs </p></li>
<li><p>the retreats from China’s new <a href="https://www.researchgate.net/publication/326492510_40_years_of_China's_reform_and_development_How_reform_captured_China's_demographic_dividend">model of economic growth from 2017</a> </p></li>
<li><p>the breakdown in global governance on trade, climate change and security, sharpened by the US-China trade conflict </p></li>
<li><p>the unusually high levels of debt in most economies </p></li>
<li><p>the sustained low investment, productivity and wages growth throughout the developed world. </p></li>
</ul>
<p>Australia has shared many of the developed countries’ points of vulnerability.</p>
<h2>Recession triggers</h2>
<p>The immediate cause of recession can be any of many things. </p>
<p>It could be the piercing of unwarranted confidence in the sustainability of an exchange rate fixed in Thailand. This is what led to the Asian Financial Crisis of 1997. </p>
<p>Or it could be an excess of financial deregulation promoting lending for houses far in excess of their value. This what led to the US subprime loans crisis a decade late, with the Global Financial Crisis the result. </p>
<p>For any single country, the trigger can be other countries’ recession and the associated reduced demand for imports, or the associated financial stress.</p>
<p>This time it’s a new virus, emerging from the Chinese city of Wuhan in December 2019. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-big-stimulus-spending-has-just-begun-heres-how-to-get-it-right-quickly-138414">The big stimulus spending has just begun. Here's how to get it right, quickly</a>
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</em>
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<hr>
<p>Had the virus outbreak been contained in China, or its immediate neighbours, the effect would still have been enough impose great damage on the Australian economy. The Australian government was determined to do all it could to avoid a recession. </p>
<p>Avoiding recession is an important objective, because the costs are large and hard to unwind. But developments mean there’s no chance of that now.</p>
<p>We can work, however, to ensure the recession is as shallow and short as possible, and that Australians have confidence there is a path to better days ahead.</p>
<h2>The importance of knowledge</h2>
<p>We don’t know yet how deep the Great Crash of 2020 will dive. That depends a great deal on how governments in many countries respond. Those responses, in turn, depend on the knowledge of leaders, and of citizens, about how the economy works. </p>
<p>Knowledge turns out to be an important part of this story. </p>
<p>First, medical scientific knowledge. </p>
<p>Some governments, including Australia’s, have had access to good medical science and have taken it seriously. This has helped to contain the damage. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/activist-farmers-in-brazil-feed-the-hungry-and-aid-the-sick-as-president-downplays-coronavirus-crisis-136914">Activist farmers in Brazil feed the hungry and aid the sick as president downplays coronavirus crisis</a>
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</em>
</p>
<hr>
<p>Some governments have paid little and inconsistent attention to scientific knowledge. The people of the Brazil, Britain and the United States endured pain and expense for their government’s ignorance or stupidity. </p>
<p>The virus keeps on doing what a coronavirus does, whatever humans think about it. Just as carbon dioxide keeps on doing what it does, whether or not governments accept scientific knowledge about its effect on climate.</p>
<p>Second, economic policy knowledge. </p>
<p>Since the Great Depression of the 1930s, we’ve learnt a great deal about how to reduce the depth and length of recessions. We’ve also learned much about the sources of broadly based modern economic growth. </p>
<h2>More to gain, more to lose</h2>
<p>Australia will have to perform better than most other countries to avoid economic outcomes being worse. </p>
<p>Our economy’s relatively small size and dependence on exporting primary resources means we have more to gain than most other countries from open borders and international trade. We also have more to lose from disruptions.</p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/335976/original/file-20200519-83375-1cj243q.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/335976/original/file-20200519-83375-1cj243q.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/335976/original/file-20200519-83375-1cj243q.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/335976/original/file-20200519-83375-1cj243q.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/335976/original/file-20200519-83375-1cj243q.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/335976/original/file-20200519-83375-1cj243q.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/335976/original/file-20200519-83375-1cj243q.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/335976/original/file-20200519-83375-1cj243q.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><span class="source">World Trade Organisation</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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<p>No other developed economy of comparable size has benefited as much as Australia from the easy international movement of people – for business, pleasure, education, and to build new lives as migrants. </p>
<p>Unlike most other developed countries, Australia is also located in a region of developing countries. This means it will be damaged more by the pain the pandemic is likely to disproportionately inflict on the developing world.</p>
<p>The challenge facing Australia is unprecedented. It will require solutions to match.</p>
<hr>
<p><em>Ross Garnaut is presenting a six-part online lecture series about rebuilding Australia’s economy after the pandemic, beginning Wednesday May 20 2020 and continuing for six Wednesdays. For more information <a href="https://fbe.unimelb.edu.au/alumni/events/public-lectures/ross-garnaut-reset-lecture-series">go here</a>.</em></p><img src="https://counter.theconversation.com/content/138802/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ross Garnaut does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Australia’s economy has prospered due to open borders and international trade. It has much more to lose from disruptions.Ross Garnaut, Professorial Research Fellow in Economics, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1235602019-09-17T20:18:18Z2019-09-17T20:18:18ZWall Street is ignoring the omens of recession – here’s why<figure><img src="https://images.theconversation.com/files/292871/original/file-20190917-19083-1xltqir.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Why is this man smiling?
</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Financial-Markets-Wall-Street/ed7d188d87344e5caab8c8aa639a2dfb/21/0">AP Photo/Richard Drew</a></span></figcaption></figure><p>The world is on the <a href="https://www.cnn.com/business/live-news/recession-fears-august-2019/index.html">brink of a recession</a>, if all the <a href="https://www.businessinsider.com/next-recession-credit-investor-fears-at-record-high-baml-survey-2019-9">breathless</a> <a href="https://fortune.com/2019/09/11/is-recession-coming-us-manufacturing-trump-country/">headlines</a> are to be <a href="https://www.cnn.com/2019/09/06/business/recession-yield-curve-ny-fed/index.html">believed</a>. So why are U.S. stocks near all-time highs?</p>
<p>That’s a question my <a href="http://www.bu.edu/questrom/">MBA students</a> have been asking me lately. Even the Federal Reserve is concerned – at least <a href="https://www.bloomberg.com/news/articles/2019-09-18/fed-makes-second-straight-rate-cut-splits-on-further-action?srnd=premium">worried enough</a> to reduce U.S. borrowing costs for the second time this year. </p>
<p>Stocks are <a href="https://www.investopedia.com/investing/why-do-companies-care-about-their-stock-prices/">usually considered a barometer</a> of a company’s future prospects, so rationally you’d think market prices would be a lot lower if a <a href="https://www.cnbc.com/2019/09/11/trump-approval-rating-on-the-economy-falls-during-recession-fears.html">recession were close at hand</a>. After all, recessions are a drop in economic activity, which means consumers and businesses are buying less stuff. </p>
<p>The answer to <a href="http://businessmacroeconomics.com/">my students’ question</a> has a lot to do with profits and interest rates, but also “animal spirits.”</p>
<h2>Moving in mysterious ways</h2>
<p>Both the <a href="https://www.bloomberg.com/quote/INDU:IND">Dow Jones Industrial Average</a> and the <a href="https://www.bloomberg.com/quote/SPX:IND">Standard & Poor’s 500</a>, Wall Street’s two main gauges for the U.S. economy, hit record highs in July and have been hovering near them ever since. </p>
<p>At the same time, <a href="https://theconversation.com/how-to-invest-if-youre-worried-a-recession-is-coming-122003">signs</a> of <a href="https://theconversation.com/how-to-invest-if-youre-worried-a-recession-is-coming-122003">trouble</a> for the global economy – and the U.S. – <a href="https://markets.businessinsider.com/news/stocks/baml-fund-manager-survey-finds-fears-of-recession-at-highest-since-2009-2019-9-1028529820">have been growing</a>. By Deutsche Bank’s reckoning, U.S. stocks <a href="https://www.marketwatch.com/story/the-sp-500-should-be-13-lower-because-a-recession-is-coming-warns-deutsche-bank-2019-09-17">should be 13% lower</a> than they are today. </p>
<p>But understanding exactly why stock markets move up or down is exceptionally difficult. </p>
<p>One of the greatest economists of all time, John Maynard Keynes, believed there were “<a href="https://www.economist.com/media/pdf/animal-spirits-akerloff-e.pdf">animal spirits</a>” – essentially, emotions, instincts and other unquantifiable human behavior – that drove people to waves of optimism or pessimism, as he explained in his 1936 book “<a href="https://www.palgrave.com/gp/book/9783319703435">The General Theory of Employment, Interest and Money</a>.”</p>
<p>Keynes believed these “spirits” had a huge influence on financial market prices and conditions. But beyond these mysterious movements there are two primary factors that push overall stock prices up and down: profits and interest rates.</p>
<h2>Profit sharing</h2>
<p>The value of a public company and its shares is based on its profits. </p>
<p>Profits are just the difference between a business’s sales and its costs. Buying shares in a company gives the buyer a claim on a portion of these profits. During an economic expansion, <a href="https://hbr.org/2019/04/companies-need-to-prepare-for-the-next-economic-downturn">profits go up</a>. During a recession, profits for most companies go down.</p>
<p>Stock prices are directly related to profits because when profits rise companies have more money to give out to shareholders in dividends. This makes stocks more valuable. </p>
<p>Rising profits also mean companies have <a href="https://www.cnn.com/2019/07/30/investing/stock-buybacks-debt-leverage/index.html">more money to buy back their own shares</a>, which leaves fewer available on the open market. This reduction pushes stock prices up because each one now gets a slightly larger share of profits. </p>
<p>The impact of a share buyback is no different from what happens when any kind of product becomes hard to find. Sellers see lots of demand while they have relatively little product to supply. To balance this excess demand, they raise prices.</p>
<p><a href="https://www.cbsnews.com/news/heres-the-most-recent-sign-the-economy-is-headed-for-recession/">During recessions, companies’ profits fall</a>. Less profit means lower dividends and less money for share buybacks. Both of these reduce share prices since there is less incentive to invest.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/292870/original/file-20190917-19040-366mx2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/292870/original/file-20190917-19040-366mx2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/292870/original/file-20190917-19040-366mx2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/292870/original/file-20190917-19040-366mx2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/292870/original/file-20190917-19040-366mx2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/292870/original/file-20190917-19040-366mx2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/292870/original/file-20190917-19040-366mx2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Federal Reserve Chair Jerome Powell has been easing monetary policy in recent months.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Global-Economy/49214b2c4de642cbb327f48044701425/171/0">AP Photo/Kiichiro Sato</a></span>
</figcaption>
</figure>
<h2>The impact of interest rates</h2>
<p>The connection between profits and stock market prices is fairly easy to understand. Interest rates, on the other hand, are a bit less straightforward but are just as potent at driving stock prices. </p>
<p>In simple terms, stock prices are inversely related to interest rates. When interest rates fall, <a href="https://www.investopedia.com/investing/how-interest-rates-affect-stock-market/">stock prices usually go up</a>. And when rates rise, stock prices tend to fall.</p>
<p>Interest rates have this effect because <a href="https://www2.deloitte.com/us/en/insights/economy/issues-by-the-numbers/rising-corporate-debt-levels.html">many companies borrow money</a> to operate their business. When interest rates fall, it costs less to run the company since businesses pay less to service their debts, boosting profits. On the other hand, when rates rise, costs go up, squeezing corporate earnings. </p>
<p>Lower interest rates also boost the share prices of companies that don’t borrow money because they <a href="https://www.investopedia.com/calculator/pvcal.aspx">increase the present value</a> of their future profits. This is why money earned tomorrow is worth less than money earned today. </p>
<p>The simplest way to see this is to imagine <a href="https://theconversation.com/how-winning-1-54-billion-in-mega-millions-could-still-lead-to-bankruptcy-105275">winning a million dollars</a> right now. You’d be a lot less thrilled, however, if you were told you wouldn’t receive a dime for 25 years. And so lotteries typically let winners <a href="https://theconversation.com/got-the-winning-lottery-ticket-an-economist-explains-what-to-do-with-all-that-money-105700">take a greatly reduced lump sum</a> immediately or receive the total in smaller payouts over many years. </p>
<p>It’s the level of interest rates that determine just how much future income is worth today. Higher rates reduce the value of future prizes and profits; lower rates increase it. </p>
<h2>What occupies Wall Street</h2>
<p>To understand why stocks keep going up, we have to consider what profits and interest rates are doing, and what Wall Street traders are focused on. </p>
<p>Corporate profits, which have been <a href="https://www.bloomberg.com/opinion/articles/2019-09-01/corporate-profits-are-down-but-wages-are-up">hitting their own record highs</a> in recent years, <a href="https://www.cbsnews.com/news/heres-the-most-recent-sign-the-economy-is-headed-for-recession/">are currently stagnating</a> and are forecast to dip as a result of the <a href="https://www.thestreet.com/markets/rates-bonds/chart-corporate-profits-are-stagnating-15088966">trade war</a>. </p>
<p>However, central bankers around the world are also worried about a recession. They are working hard to prevent this recession by driving down interest rates now. For example, the European Central Bank on Sept. 12 <a href="https://www.nytimes.com/2019/09/12/business/ecb-europe-recession-stimulus.html">cut a key interest rate</a> and took other steps to ease borrowing costs for companies and businesses. And the <a href="https://www.wsj.com/articles/powell-set-to-address-economic-outlook-ahead-of-fed-meeting-11567762202">Fed followed suit</a> on Sept. 18 with a quarter-point reduction. </p>
<p>Lower interest rates encourage consumers, businesses and governments to borrow and spend more money – and boost the value of stocks. Although some investors are concerned about a recession, apparently most believe actions by the Fed and other central banks will be enough to keep the global economy humming – or at least enough to keep corporate profits high. </p>
<p>How long will the rising stock market continue? Who knows. But that’s what makes following financial markets so interesting for academics and so frustrating for individual investors.</p>
<p>[ <em>Deep knowledge, daily.</em> <a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=deepknowledge">Sign up for The Conversation’s newsletter</a>. ]</p><img src="https://counter.theconversation.com/content/123560/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jay L. Zagorsky does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>An economist unravels the seeming contradiction between stocks flirting with all-time highs and growing fears of a recession.Jay L. Zagorsky, Senior Lecturer, Boston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1220032019-08-21T12:32:30Z2019-08-21T12:32:30ZHow to invest if you’re worried a recession is coming<figure><img src="https://images.theconversation.com/files/288605/original/file-20190819-123727-5d7g7l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Even the pros don't know what's up. </span> <span class="attribution"><span class="source">AP Photo/Richard Drew</span></span></figcaption></figure><p>Although the U.S. economy <a href="https://www.cnbc.com/2019/07/26/us-gdp-second-quarter-2019.html">continues to grow</a> and <a href="https://finance.yahoo.com/news/july-2019-jobs-report-bls-215030223.html">add jobs</a>, <a href="https://www.cnbc.com/2019/08/15/trump-wants-fed-rate-cuts-unclear-if-they-would-help.html">talk</a> of a <a href="https://finance.yahoo.com/news/recession-will-be-a-slow-motion-accident-strategist-131602319.html">recession</a> is <a href="https://trends.google.com/trends/explore?date=all&geo=US&q=Recession">increasingly in the air</a> due to a number of worrying signs.</p>
<p><a href="https://www.bloomberg.com/opinion/articles/2019-08-14/u-s-businesses-are-stuck-in-trade-war-uncertainty">Business investment</a> and <a href="https://www.bloomberg.com/news/articles/2019-08-16/trump-economy-loses-luster-for-independents-in-2020-warning-sign?srnd=premium">consumer confidence</a> are taking a hit due to the growing economic jitters and uncertainty over the ongoing trade war with China. An important bond market recession warning – known as an <a href="https://fred.stlouisfed.org/graph/fredgraph.png?g=mtiz">inverted yield curve</a> – <a href="https://www.washingtonpost.com/business/2019/08/14/stocks-tank-another-recession-warning-surfaces">is spooking investors</a>. And policymakers are actively taking steps to bolster the economy, such as the Federal Reserve’s recent decision to lower short-term borrowing costs. The Trump administration <a href="https://www.washingtonpost.com/politics/trump-confirms-hes-considering-a-payroll-tax-cut-amid-mounting-economic-concerns/2019/08/20/2c97e500-c37a-11e9-9986-1fb3e4397be4_story.html">is even mulling a payroll tax cut</a> to avert a downturn. </p>
<p>A question I’m often asked as a <a href="https://scholar.google.com/citations?user=JfUEmSUAAAAJ&hl=en&oi=ao">finance professor</a> and a <a href="https://www.cfainstitute.org/en/programs/cfa/charter">CFA charterholder</a> is what should people do with their money when the economy is slowing or in a recession, which typically causes riskier assets like stocks to decline. Fear causes many people to run for the hills. </p>
<p>But the short answer, for most investors, is the exact opposite: Stick to your long-term plan and ignore day-to-day market fluctuations, however frightening they may be. Don’t take my word for it. The tried and true approach of passive investing is backed up by a lot of evidence.</p>
<h2>Most of us have money at risk</h2>
<p>While we usually associate investing with hotshot Wall Street investors and hedge funds, the truth is most of us have a stake in financial markets and their ups and downs. <a href="https://www.federalreserve.gov/publications/files/scf17.pdf">About half of American families own stocks</a> either directly or through institutional investment vehicles like mutual funds. </p>
<p>Most of the invested wealth average Americans hold is managed by professional investors who look after it for us. But the <a href="https://www.cnbc.com/2017/01/04/a-brief-history-of-the-401k-which-changed-how-americans-retire.html">continued growth</a> of defined contribution plans like 401(k)s – which require people to make choices about where to put their money – means their financial security increasingly depends on their own investment decisions.</p>
<p>Unfortunately, most people are not good investors. Individual investors who trade stocks <a href="http://dx.doi.org/10.2139/ssrn.219228">underperform the market</a> – and passive investors – by a wide margin. The more they trade, the worse they do. </p>
<p>One reason is because the pain of losses is about <a href="https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/loss-aversion/">twice as strong</a> as the pleasure of gains, which leads people to act in counterproductive ways. When faced with a threatening situation, our instinctive response is often to run or fight. But, like trying to outrun a bear, exiting the market after suffering losses is not a good idea. It often results in selling at low prices and buying higher later, once the market stress eases.</p>
<p>The good news is you don’t need a Ph.D. in finance to achieve your investment goals. All you need to do is follow some simple guidelines, backed by evidence and hard-earned market wisdom. </p>
<h2>Investing checklist</h2>
<p>First of all, don’t make any rash moves because of the growing chatter about recession or any wild gyrations on Wall Street. </p>
<p>If you have a solid investment plan in place, stick to it and ignore the noise. For everyone else, it’s worth going through the following checklist to help ensure you’re ready for any storm on the horizon.</p>
<ol>
<li><p>Define clear, measurable and achievable investment goals. For example, your goal might be to retire in 20 years at your current standard of living for the rest of your life. Without clear goals, people often approach the path to getting there piecemeal and end up with a motley collection of investments that don’t serve their actual needs. As baseball legend Yogi Berra <a href="https://www.goodreads.com/quotes/499411-if-you-don-t-know-where-you-re-going-you-ll-end-up">once said</a>, “If you don’t know where you are going, you’ll end up someplace else.” </p></li>
<li><p>Assess <a href="https://www.investopedia.com/articles/pf/07/risk_tolerance.asp">how much risk</a> you can take on. This will depend on your investment horizon, job security and attitude toward risk. A good rule of thumb is if you’re nearing retirement, you should have a smaller share of risky assets in your portfolio. If you just entered the job market as a 20-something, you can take on more risk because you have time to recover from market downturns. </p></li>
<li><p><a href="https://money.usnews.com/investing/investing-101/articles/why-diversification-is-important-in-investing">Diversify your portfolio</a>. In general, riskier assets like stocks compensate for that risk by offering <a href="https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp">higher expected returns</a>. At the same time, safer assets such as bonds tend to go up when things are bad, but offer much lower gains. If you invest a big part of your savings in a single stock, however, you are not being compensated for the risk that the company will go bust. To eliminate these uncompensated risks, diversify your portfolio to include a wide range of asset classes, such as foreign stocks and bonds, and you’ll be in a better position to endure a downturn. </p></li>
<li><p>Don’t try to pick individual stocks, identify the <a href="https://www.vanguard.com/pdf/icrwmf.pdf">best-performing actively managed funds</a> or time the market. Instead, stick to a diversified portfolio of passively managed stock and bond funds. Funds that have done well in the recent past <a href="https://www.thebalance.com/past-performance-is-no-guarantee-of-future-results-357862">may not continue to do so</a> in the future. </p></li>
<li><p>Look for low fees. Future returns are uncertain, but investment costs will certainly take a bite out of your portfolio. To keep costs down, invest in index funds whenever possible. These funds track broad market indices like the Standard & Poor’s 500 and tend to <a href="https://www.thebalance.com/investing-in-low-cost-index-funds-357951">have very low fees</a> yet <a href="https://www.cnbc.com/2019/03/15/active-fund-managers-trail-the-sp-500-for-the-ninth-year-in-a-row-in-triumph-for-indexing.html">produce higher returns</a> than the <a href="https://ssrn.com/abstract=1356021">majority of actively managed funds</a>. </p></li>
<li><p>Continue to make regular contributions to your investments, even during a recession. Try to set aside as much as you can afford. Many employers <a href="http://longevity.stanford.edu/sightlines-financial-security-special-report-mobile/">even match</a> all or some of your personal retirement contributions. Unfortunately, most Americans are <a href="http://longevity.stanford.edu/sightlines-financial-security-special-report-mobile/#retirement">not saving enough</a> for retirement. <a href="https://financialengines.com/docs/financial-engines-401k-match-report-050615.pdf">One in 4 Americans</a> enrolled in employer-sponsored defined contribution plans does not save enough to get the employer’s full match. That’s like letting your employer keep part of your salary. </p></li>
<li><p>There’s one exception to my advice about standing pat. Let’s suppose your long-term plan calls for a portfolio with 50% in U.S. stocks, 25% in international stocks and 25% in bonds. After U.S. stocks have a good run, their weight in the portfolio may increase a lot. This changes the risk of your portfolio. So <a href="https://www.vanguard.com/pdf/ISGPORE.pdf">about once a year</a>, rebalance your portfolio to match your long-term allocation targets. Doing so can make a <a href="https://www.forbes.com/sites/investor/2011/11/16/does-portfolio-rebalancing-work/#1fc4f9548393">big difference in performance</a>.</p></li>
</ol>
<p>Always keep in mind your overall investment plan and focus on the long-term goals of your portfolio. Many market declines that were scary in real time look like small blips on a long-term chart. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/288824/original/file-20190820-170922-1a1wkr5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/288824/original/file-20190820-170922-1a1wkr5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=402&fit=crop&dpr=1 600w, https://images.theconversation.com/files/288824/original/file-20190820-170922-1a1wkr5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=402&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/288824/original/file-20190820-170922-1a1wkr5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=402&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/288824/original/file-20190820-170922-1a1wkr5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=505&fit=crop&dpr=1 754w, https://images.theconversation.com/files/288824/original/file-20190820-170922-1a1wkr5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=505&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/288824/original/file-20190820-170922-1a1wkr5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=505&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Warren Buffett knows a thing or two about investing.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Earns-Berkshire-Hathaway/d7c1206a7ac2405ca58abc0667ae43e1/57/0">AP Photo/Nati Harnik</a></span>
</figcaption>
</figure>
<h2>Turbulence ahead</h2>
<p>In the long run, this approach is likely to produce better results than trying to beat the market – which <a href="https://www.investopedia.com/ask/answers/12/beating-the-market.asp">even pros</a> tend to have a hard time doing.</p>
<p><a href="https://www.cnbc.com/2017/10/03/after-winning-bet-against-hedge-funds-warren-buffett-says-hed-wager-again-on-index-funds.html">Billionaire investor Warren Buffett</a> demonstrated this by easily winning a bet that a simple S&P 500 index fund could beat a portfolio of hedge funds – <a href="https://www.investopedia.com/articles/investing/042015/10-most-famous-hedge-fund-managers.asp">supposedly the savviest investors</a> out there, at least judging by the high fees they charge.</p>
<p><a href="http://jasonzweig.com/a-note-on-benjamin-graham/">In the words</a> of legendary investor Benjamin Graham: “The investor’s chief problem and even his worst enemy is likely to be himself.” Graham, who mentored Buffett, meant that instead of making rational decisions, many investors let their emotions run wild. They buy and sell when their gut – rather than their head – tells them to. </p>
<p>Trying to outsmart the market is <a href="https://ssrn.com/abstract=1622184">akin to gambling</a> and it doesn’t work any better than playing a lottery. Passive investing is admittedly boring but is a much better bet long-term. </p>
<p>But if you follow these guidelines and fasten your seatbelt, you’ll be able to ride out the current turbulence. </p>
<p>[ <em><a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=expertise">Expertise in your inbox. Sign up for The Conversation’s newsletter and get a digest of academic takes on today’s news, every day.</a></em> ]</p><img src="https://counter.theconversation.com/content/122003/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alexander Kurov does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A growing number of investors, policymakers and others say the US economy may be at risk of spiraling downward. A finance professor explains how to ride it out.Alexander Kurov, Professor of Finance and Fred T. Tattersall Research Chair in Finance, West Virginia UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1168062019-05-09T20:06:30Z2019-05-09T20:06:30ZVital Signs: When it came to the surplus, both Bill and Scott were having a lend<p>One of the more telling moments in the third and final election debate between Scott Morrison and Bill Shorten on Wednesday night was when moderator Sabra Lane asked if, faced with an economic downturn, both leaders would be able to maintain a budget surplus.</p>
<p>Remarkably, if not at all surprisingly, both leaders said they would.</p>
<p>This is the state of budget-balance fetishism in Australia. Even if there was a major economic downturn like the Great Recession of 2008 – or the Great Depression of the 1930s, for that matter – both party leaders would probably claim they would still balance the books.</p>
<p>They wouldn’t. And they shouldn’t.</p>
<h2>Living in stimulating times</h2>
<p>Two things happen in the face of a major economic downturn. </p>
<p>The first is pretty mechanical. The economy contracts and unemployment rises. That means income tax receipts (corporate and personal) fall and GST revenue drops. On the flip side, government expenditures rise – there are more unemployment and other welfare benefits to pay. This puts a big dent in the government’s budget.</p>
<p>The second thing that happens is that a role for government stimulus spending arises. </p>
<p>The Reserve Bank would want to cut interest rates. But that may not be enough, as in 2008. Or it may not have much room to cut, as is the concern now.</p>
<p>That leaves an important role for fiscal policy. Government spending can plug the hole that is left by a contraction in private spending. This is the classic “Keynesian” response to a reduction in what economists call aggregate demand.</p>
<p>But a more modern and better way to understand the role of fiscal stimulus by government is that it affects people’s expectations. </p>
<h2>The economics of expectation</h2>
<p>The real danger in a major economic crisis is that I expect you to stop buying what I produce, so I don’t produce, which leads me not to have the income to buy what you produce, so you don’t produce. This quickly leads to a kind of expectations death spiral. My fear reinforces your fear.</p>
<p>As I have said in praising Ken Henry and Kevin Rudd’s reaction to the 2008 crisis in Australia, stimulus spending helps break and reverse this downward spiral. But to do so it needs to be big, bold and, most of all, credible. You can’t change people’s beliefs if they don’t think you will follow through.</p>
<p>That means it has to be expensive. The A$52 billion the Rudd government spent in 2008 was what it took to be big, bold and credible.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-the-gfc-and-me-ten-years-on-what-have-we-learned-103514">Vital Signs: the GFC and me. Ten years on, what have we learned?</a>
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<p>The current prime minister said during Wednesday’s debate – and at other times on the campaign trail as well – that the problem with Labor’s approach to the 2008 crisis was it “locked in spending” that led to a long-term run-up in government debt, only now being redressed.</p>
<p>Reasonable minds can differ as to whether that’s a fair characterisation of the 2008 stimulus spending. It’s not like those school halls continued to be built over and over again. But the general point is certainly valid. Temporary stimulus needs to be, well, temporary.</p>
<p>On Wednesday the opposition leader made the reasonable point that Labor plans to run larger budget surpluses than the Coalition in the years ahead thanks to its reforms to franking credits and negative gearing. This gives Labor more fiscal breathing room to fight a future economic downturn.</p>
<h2>Policy ‘space’ important</h2>
<p>As the noted economists Christina and David Romer <a href="https://eml.berkeley.edu/%7Ecromer/Reprints/Crises%20and%20Policy/Romer&RomerCrisesandPolicy.pdf">have pointed out</a>, using evidence from 24 advanced economies, fiscal and monetary policy “space” is important in ensuring stimulus programs work.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/now-is-the-time-to-plan-how-to-fight-the-next-recession-111497">Now is the time to plan how to fight the next recession</a>
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<p>What neither leader did is own up to the fact that if there is a major economic downturn – and at some point there will be – there is going to be a lot of red ink. At some level it is just the arithmetic of lower tax receipts and more government expenditure. At another level it is what policy makers have learned, through the painful experience of the Great Depression, is the optimal response.</p>
<p>But apparently politicians can’t be honest about that in the current Australian political climate. Admitting the budget might need to be in deficit seems to be the landmine of Australian politics: you step on it and you die.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/mine-are-bigger-than-yours-labors-surpluses-are-the-coalitions-worst-nightmare-116833">Mine are bigger than yours. Labor's surpluses are the Coalition's worst nightmare</a>
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<img src="https://counter.theconversation.com/content/116806/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The state of budget-balance fetishism in Australia means political leaders promise to balance the budget, no matter what.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1083722018-12-06T21:45:21Z2018-12-06T21:45:21ZCould a recession be just around the corner?<p>The U.S. economy is growing at the <a href="https://www.statista.com/statistics/188185/percent-chance-from-preceding-period-in-real-gdp-in-the-us/">fastest pace in five years</a>, American companies are earning <a href="https://seekingalpha.com/article/4203018-corporate-profits-hit-new-record-gdp-growth-revised-higher">record profits</a> and <a href="https://www.bloomberg.com/news/articles/2018-12-07/u-s-payrolls-rise-below-forecast-155-000-as-wage-gain-misses?srnd=premium">unemployment</a> is at the <a href="https://www.wsj.com/articles/u-s-unemployment-rate-falls-to-lowest-level-since-1969-1538742766">lowest level</a> in almost half a century. </p>
<p>So why are <a href="https://www.bloomberg.com/opinion/articles/2018-12-05/inverted-yield-curve-will-fed-act-to-avoid-recession">Wall Street</a> and <a href="https://www.idahopress.com/eyeonboise/economist-many-signs-that-a-recession-is-on-the-way/article_d503e726-cb7f-5b24-a334-cd8dbf3f9c30.html">some economists</a> suddenly <a href="https://www.nasdaq.com/article/is-the-economy-heading-into-a-recession-cm1065192">worried</a> about a <a href="https://realmoney.thestreet.com/investing/is-the-market-presaging-a-recession-14801840">recession</a>? </p>
<p><a href="https://www.bloomberg.com/news/articles/2018-12-05/asia-stocks-set-for-muted-start-dollar-gains-markets-wrap">Financial markets</a> in particular have been signaling that trouble is brewing. The Standard & Poor’s 500, which tracks the biggest U.S. companies, has plunged about 6 percent since Dec. 4 because of worries about trade and slowing global growth. And a key bond metric that <a href="https://www.nytimes.com/2018/12/04/business/dealbook/trump-trade-truce.html">has presaged</a> every recession since 1960 is warning another may be on the way. </p>
<p>As an <a href="https://scholar.google.com/citations?user=x5dB33oAAAAJ&hl=en&oi=ao">economist</a> who teaches and conducts research in <a href="https://www.crcpress.com/The-Economics-of-International-Trade-and-the-Environment/Batabyal-Beladi/p/book/9781566705301">international trade and finance</a>, I see three credible concerns driving the worries.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/249368/original/file-20181206-128220-gbcmn9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/249368/original/file-20181206-128220-gbcmn9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=392&fit=crop&dpr=1 600w, https://images.theconversation.com/files/249368/original/file-20181206-128220-gbcmn9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=392&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/249368/original/file-20181206-128220-gbcmn9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=392&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/249368/original/file-20181206-128220-gbcmn9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=492&fit=crop&dpr=1 754w, https://images.theconversation.com/files/249368/original/file-20181206-128220-gbcmn9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=492&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/249368/original/file-20181206-128220-gbcmn9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=492&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Concerns have grown that the recent truce between China and the U.S. won’t last.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Trump-Argentina-G20-Summit/6c0b01b2087f479d94c65f817d569d95/3/0">AP Photo/Pablo Martinez Monsivais</a></span>
</figcaption>
</figure>
<h2>Trouble in trade land</h2>
<p>One major issue is the ongoing trade war between the U.S. and China. </p>
<p>The U.S. has <a href="https://www.nytimes.com/2018/09/17/us/politics/trump-china-tariffs-trade.html">imposed tariffs</a> on about US$250 billion of Chinese imports – almost half of all trade with the country – in what I consider a <a href="https://theconversation.com/why-china-cant-meet-trumps-200-billion-trade-demand-96888">misguided</a> effort to get Beijing to buy more American goods and grant greater market access to U.S. companies. U.S. President Donald Trump has <a href="https://www.nytimes.com/2018/09/07/business/trump-china-trade-war-tariffs.html">threatened</a> to apply duties to all imports if his demands aren’t met.</p>
<p>In turn, China has <a href="https://www.wsj.com/articles/chinese-officials-scramble-to-respond-to-trumps-new-tariffs-1537275015">put tariffs</a> on $60 billion of American goods. </p>
<p><a href="https://theconversation.com/why-the-us-shouldnt-start-a-trade-war-with-china-82106">This is bad</a> for the U.S. economy because <a href="https://theconversation.com/what-is-a-tariff-an-economist-explains-93392">tariffs</a> tend to reduce trade, slowing growth and making goods more expensive for consumers. A <a href="https://taxfoundation.org/trump-tariffs-economic-distributional-impact/">just-released study</a> from the right-leaning Tax Foundation, for example, found that Trump’s tariffs have so far lowered incomes by an average of $146 a year for taxpayers who earn $27,740 to $43,800 and have reduced U.S. hiring by the equivalent of 94,300 full-time jobs.</p>
<p>On Dec. 1, markets initially <a href="https://www.barrons.com/articles/stock-market-up-on-g20-trade-deal-1543800197">breathed</a> a sigh of relief after Trump and Chinese President Xi Jinping reached a 90-day <a href="https://theconversation.com/us-china-trade-war-truce-2-reasons-why-its-unlikely-to-last-108040">truce</a> in the war, giving the two countries time to try to work through their differences. The optimism faded quickly, however, after <a href="https://www.cnbc.com/2018/12/05/china-promises-action-on-us-trade-deal-but-gives-no-details.html">conflicting reports emerged</a> about what the two leaders actually agreed to and Trump called himself a “tariff man” in a <a href="https://twitter.com/realDonaldTrump/status/1069970500535902208?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1069970500535902208&ref_url=https%3A%2F%2Fwww.vox.com%2Fpolicy-and-politics%2F2018%2F12%2F4%2F18126061%2Ftariff-man-trump-china-tweets-memes-stock-market">threatening tweet</a>. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1069970500535902208"}"></div></p>
<p>The arrest of a Huawei official in Canada on a U.S. request <a href="https://www.bloomberg.com/news/articles/2018-12-06/-shocking-huawei-arrest-threatens-to-upend-trump-xi-trade-truce?srnd=premium">further risked</a> disrupting the tentative ceasefire, showing how fragile the Trump-Xi deal is and how easily the situation could <a href="https://www.nytimes.com/2018/12/06/business/stocks-wall-street-huawei-trade.html">return to a war footing</a>.</p>
<h2>Global headwinds</h2>
<p>A second worry is slowing global growth. </p>
<p>In Europe, the combined economies of the 19 countries that use the euro barely grew in the most recent quarter – the <a href="https://www.theguardian.com/business/live/2018/oct/30/eurozone-gdp-french-italy-growth-economy-markets-business-live">lowest in four years</a> – and economists are warning recession may be coming to the continent. At the same time, Britain’s impending and potentially chaotic exit from the European Union is expected to <a href="https://www.cnn.com/2018/11/28/economy/brexit-economic-impact/index.html">hammer</a> its economy. </p>
<p>And Trump’s trade war and tariffs – which are not only <a href="https://www.cnbc.com/2018/09/19/chinas-economy-could-feel-far-more-pain-than-us-in-trade-wars.html">squeezing</a> the Chinese economy but <a href="https://www.apnews.com/002d5601b9824b199fb9d2a889c5f8ac">many other countries</a> such as Canada, Mexico and members of the EU – are making matters worse. </p>
<p>All these challenges <a href="https://www.imf.org/en/Publications/WEO/Issues/2018/09/24/world-economic-outlook-october-2018">convinced</a> the International Monetary Fund to lower its global growth forecast for 2019 from 3.7 percent to 3.5 percent and warn of increasing “downside risks” as a result of the tariffs and other problems. </p>
<p>A global growth slowdown means foreigners will buy less American-made stuff, which ultimately hurts the U.S. economy.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/249367/original/file-20181206-128208-x7knkf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/249367/original/file-20181206-128208-x7knkf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=417&fit=crop&dpr=1 600w, https://images.theconversation.com/files/249367/original/file-20181206-128208-x7knkf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=417&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/249367/original/file-20181206-128208-x7knkf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=417&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/249367/original/file-20181206-128208-x7knkf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=524&fit=crop&dpr=1 754w, https://images.theconversation.com/files/249367/original/file-20181206-128208-x7knkf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=524&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/249367/original/file-20181206-128208-x7knkf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=524&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Fed Chair Jerome Powell may slow the pace of interest rate hikes.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Federal-Reserve-Powell/87c47d0e39b24ea9bfa25e16eee441bc/2/0">AP Photo/Cliff Owen, File</a></span>
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<h2>The Fed’s fears</h2>
<p>These problems are serious enough that they’re even rattling the Federal Reserve. </p>
<p>Until now, the U.S. central bank has been on a deliberate path of gradually raising interest rates on the premise that the American economy was fundamentally strong and would continue to grow. As recently as October, Fed Chair Jerome Powell <a href="https://www.nytimes.com/2018/10/02/business/jerome-powell-fed-economic-outlook.html">described</a> the economy’s low unemployment and subdued inflation as sustainable and “not too good to be true.” </p>
<p>That may no longer be the case. Wall Street traders, who previously had some faith that the Fed will follow through on its <a href="https://economyandmarkets.com/economy/central-banks/mixed-messages-on-inflation/">plan to raise rates</a> several times in both 2019 and 2020, increasingly <a href="https://www.bloomberg.com/news/articles/2018-12-06/traders-starting-to-doubt-fed-will-raise-rates-even-once-in-2019">don’t expect even a single rate hike</a> next year. Since the central bank typically raises rates when the economy is strong, that suggests they believe it has serious concerns about its trajectory. </p>
<p>The resulting unpredictability over what the Fed’s going to do next <a href="https://finance.yahoo.com/news/investors-fear-fed-may-flying-blind-122739680.html">has shaken investors</a> and markets and contributed to fears about an impending <a href="https://www.investopedia.com/terms/r/recession.asp">recession</a>, which is typically defined as two straight quarters of declines in overall economic activity. We may learn more on Dec. 19, when the Fed is <a href="https://seekingalpha.com/article/4222340-fed-meeting-december-18minus-19-2018-impact-rate-rise">expected</a> to raise interest rates for the ninth time since 2015.</p>
<p>So is a recession imminent? </p>
<p>The <a href="https://www.nber.org/cycles.html">current expansion</a> has lasted since the official end of the Great Recession in June 2009, or almost nine and a half years. If it lasts seven months more, it’ll be the longest expansion in at least 160 years. </p>
<p>Because of the cyclical nature of business activity, there is no question that a recession will <a href="https://www.economist.com/special-report/2018/10/13/another-economic-downturn-is-just-a-matter-of-time">inevitably</a> occur at some point in the future. Whether it’ll happen next year or further down the road is hard to predict. But you could argue, perhaps we’re due.</p><img src="https://counter.theconversation.com/content/108372/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Amitrajeet A. Batabyal does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Financial markets are increasingly worried the US economy is heading for a crash. An economist explains what’s got investors spooked.Amitrajeet A. Batabyal, Arthur J. Gosnell Professor of Economics, Rochester Institute of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/924712018-03-19T10:38:10Z2018-03-19T10:38:10ZRecent stock market sell-off foreshadows a new Great Recession<figure><img src="https://images.theconversation.com/files/210667/original/file-20180315-104676-j2vnia.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">An ice sculpture titled 'Main Street Meltdown' melts near Wall Street.</span> <span class="attribution"><span class="source">AP Photo/Frank Franklin II</span></span></figcaption></figure><p>In early February, concerns about inflation and rising interest rates sent global financial markets into a frenzy, <a href="https://www.npr.org/sections/thetwo-way/2018/02/05/583325123/stocks-extend-losses-with-dow-dropping-more-than-300-points-at-the-open">prompting the biggest single-day drop</a> ever in the Dow Jones Industrial Average. Stocks have since recovered some of their losses.</p>
<p>A similar episode occurred exactly 10 years earlier, <a href="https://blogs.cfainstitute.org/investor/2017/01/31/the-ars-debacle-the-forgotten-crisis-of-2008/">though few may remember</a>. In February 2008, the failure of an obscure market precipitated a <a href="https://blogs.cfainstitute.org/investor/2017/01/31/the-ars-debacle-the-forgotten-crisis-of-2008/">similar selling frenzy</a>. At the time, this sell-off went mostly unrecognized as a harbinger of something worse because the stock market quickly recovered. </p>
<p>Just as the world shouldn’t have been complacent in 2008, we shouldn’t rest easy today. Both events are proverbial dead canaries in a coal mine. </p>
<p>That’s because they have something else in common. Both stemmed from worries that rising borrowing costs would hurt debt-burdened consumers, the housing market and ultimately the U.S. economy.</p>
<p>Our soon-to-be-published research shows that the same problems that led to the biggest financial market meltdown since the Great Depression are alive and well today. </p>
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<h2>2008’s canary in a coal mine</h2>
<p>In the mid-2000s, the U.S. economy <a href="http://www.washingtonpost.com/wp-dyn/content/article/2007/01/31/AR2007013100422.html?referrer=email">seemed to be riding high</a>, but two key problems lurked below the surface: excessive household debt and a housing bubble.</p>
<p>Part of the first problem was that real, <a href="https://fred.stlouisfed.org/series/MEHOINUSA672N">inflation-adjusted household incomes were actually lower</a> than they had been in the late 1990s. To maintain living standards, Americans took on more debt thanks to <a href="https://fred.stlouisfed.org/series/FEDFUNDS">relatively low borrowing costs</a> and weak underwriting standards among lenders. <a href="https://www.newyorkfed.org/microeconomics/hhdc.html">Total household debt soared</a> more than 50 percent, from a little over US$8 trillion in 2004 to $12.69 trillion by 2008. </p>
<p>That brings us to the second problem. Most of that was mortgage debt. The housing bubble pushed it to the point <a href="http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/son2008.pdf">that it was unsustainable</a> as housing prices outstripped incomes, leading banks to come up with <a href="https://www.theguardian.com/business/2007/sep/30/5">ever creative ways</a> to lend people money they ultimately couldn’t pay back. </p>
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<p>At around the same time, the Federal Reserve began to lift interest rates, from 2004 to 2006, making credit more expensive. This reduced consumer spending as more of households’ falling real incomes went to repay debt, thus <a href="https://fred.stlouisfed.org/series/GDP">slowing economic growth</a> and the housing market. </p>
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<p>To <a href="http://keenomics.s3.amazonaws.com/debtdeflation_media/2007/03/SteveKeenDebtReportNovember2006.pdf">some observers</a>, it was only a matter of time before an economic recession or worse. </p>
<p>Among the first significant signs that things were seriously amiss came from the <a href="http://www.mondaq.com/unitedstates/x/60418/securitization+structured+finance/AuctionRate+Securities+Bidders+Remorse+A+Primer">auction rate securities</a> market, which was worth about $330 billion at its peak in 2008. Auction rate securities are essentially packages of mortgages, student loans and other medium- to long-term debt. Back in 2008, broker dealers held weekly <a href="https://www.investopedia.com/terms/d/dutchauction.asp">Dutch auctions</a> at which these short-term securities changed hands and interest rates were set after a bidding process. <a href="https://www.barrons.com/articles/SB121159302439419325">Credit-rating agencies gave them</a> their <a href="https://www.investopedia.com/terms/a/aaa.asp">super-safe ranking of AAA</a>. </p>
<p>Investors <a href="https://blogs.cfainstitute.org/investor/2017/01/31/the-ars-debacle-the-forgotten-crisis-of-2008/">liked them</a> because they were paid a much higher rate than other short-term securities with AAA ratings. Because they could be sold quickly to investors, borrowers could get loans more easily. </p>
<p>But on Feb. 7, 2008, the <a href="https://fas.org/sgp/crs/misc/RL34672.pdf">market began to seize up</a>. It started when the big investment banks, responsible for ensuring the market had plenty of “liquidity” by purchasing the securities if demand was weak, backed away because a growing number of households couldn’t repay their debts and this was beginning to squeeze their bottom lines. </p>
<p>This spooked investors, who sensed something was wrong. By the end of the month, there were no auctions, and billions of dollars in securities were frozen. The auction rate securities market remains closed to this day. </p>
<p>Within months of its February seizure, the broader market had moved on, as the Dow Jones Index reached the year’s peak by May. Yet the event sent ripples throughout the economy as investors continued to avoid mortgage-related assets. </p>
<p>By September 2008, when investment bank Lehman Brothers collapsed because of problems with these securities, the Great Recession was in full swing. </p>
<h2>Deja vu?</h2>
<p>Fast forward to today. </p>
<p>The economy has mostly recovered from the financial crisis, the <a href="https://data.bls.gov/timeseries/LNS14000000">unemployment rate has dropped</a> from 10 percent in 2009 to 4.1 percent in January and <a href="https://fred.stlouisfed.org/series/MEHOINUSA672N">real median household income surged</a> to a record at the end of 2016. </p>
<p>Good news, right? </p>
<p>Our new research shows that these rosy-looking stats conceal the same two related problems as 10 years ago: excessive consumer debt (relative to income) and unaffordable housing.</p>
<p>First, debt and income. After falling in the aftermath of the Great Recession, debt is once again reaching new highs. Especially worrisome, nonmortgage household debt (student loans and credit cards) has soared at a rapid pace and <a href="https://www.newyorkfed.org/microeconomics/hhdc.html">is now 41 percent above</a> its previous peak in 2008. We estimate that the resulting interest payments on nonmortage household debt have reduced living standards of the typical household by 3.1 percent since 2008. That either lowers consumption or prolongs the vicious cycle of more and more household debt. </p>
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<p>But things are even worse than this. Income data ignore <a href="http://www.pewresearch.org/fact-tank/2017/05/05/its-becoming-more-common-for-young-adults-to-live-at-home-and-for-longer-stretches/">recent demographic shifts</a>, such as more multi-generation households and college students living with their parents longer. We adjusted household income by family size because more people living together requires more money to attain the same living standards. Our data show this has lowered average living standards by 3.3 percent. This is on top of the 3.1 drop due to greater interest payments on nonmortgage debt.</p>
<p>Second, although there is no great housing bubble today, the fundamental problem is the same as 10 years ago – people with average incomes cannot afford to buy and live in an average priced home. Low interest rates helped the housing market recover, but <a href="https://www.usatoday.com/story/money/2017/07/25/u-s-home-prices-reach-record-high-6th-straight-month/507808001">also helped drive prices to record highs</a>. </p>
<p>Just like before the 2008 crisis, incomes <a href="https://www.cnbc.com/2018/03/13/economist-home-prices-are-increasing-twice-as-fast-as-income-growth.html">have not kept pace</a> with home prices. Too many people cannot afford to buy a home. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/210997/original/file-20180319-31602-1tgo5lb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/210997/original/file-20180319-31602-1tgo5lb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=403&fit=crop&dpr=1 600w, https://images.theconversation.com/files/210997/original/file-20180319-31602-1tgo5lb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=403&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/210997/original/file-20180319-31602-1tgo5lb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=403&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/210997/original/file-20180319-31602-1tgo5lb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=507&fit=crop&dpr=1 754w, https://images.theconversation.com/files/210997/original/file-20180319-31602-1tgo5lb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=507&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/210997/original/file-20180319-31602-1tgo5lb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=507&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Dark days ahead?</span>
<span class="attribution"><span class="source">Sunny Boy/Shutterstock.com</span></span>
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<h2>Storm clouds brewing</h2>
<p>So what does this all mean? </p>
<p>Home prices and consumer debt are again at record highs, and the Fed has been steadily raising benchmark borrowing costs for over a year now. The central bank <a href="https://www.cnbc.com/2018/01/30/fed-will-be-forced-to-raise-rates-more-rapidly-than-expected-cnbc-fed-survey.html">is expected</a> to accelerate the process because the recent tax cut is likely to cause inflation to rise, requiring the Fed to lift interest rates to cool things down. This will hurt the housing market, pushing more homeowners underwater and making it harder for them to pay their mortgages and repay other debt.</p>
<p>At the same time, incomes have only grown modestly and, as our research shows, average American households have 6 percent to 7 percent less spending power than they did a decade ago, before the global financial system collapsed. Something will have to give. Households can take on more debt to maintain their living standards for a short while, or they can significantly reduce their spending. </p>
<p>In either case, the U.S. economy is primed for another recession. We believe it’s not a question of if. It’s a question of when.</p><img src="https://counter.theconversation.com/content/92471/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The collapse of an obscure corner of the financial market a decade ago foreshadowed the Great Recession. The stock-market swoon in February should offer a similar warning.Steven Pressman, Professor of Economics, Colorado State UniversityRobert H. Scott III, Professor of Economics & Finance, Monmouth UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/828602017-09-05T14:44:17Z2017-09-05T14:44:17ZObsession with growth won’t help South Africa’s economic recovery<figure><img src="https://images.theconversation.com/files/184552/original/file-20170904-17292-rj9c0l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Unemployed South African workers wait for scarce jobs as the economy struggles to create employment. </span> <span class="attribution"><span class="source">EPA/NIC BOTHMA</span></span></figcaption></figure><p><em>Faced with a growing economic crisis, South Africa’s new Finance Minister, Malusi Gigaba, has come up with a <a href="http://www.treasury.gov.za/comm_media/press/2017/2017071301%20Government%E2%80%99s%20inclusive%20growth%20action%20plan.pdf">14 point plan</a> to turn the country’s economic fortunes around. Sibonelo Radebe asked Mohammad Amir Anwar to assess the plan.</em></p>
<p><strong>How do you rate the recovery plan?</strong></p>
<p>It’s still early days but one thing is clear. The plan was put in place as a response to the <a href="https://theconversation.com/what-a-downgrade-means-for-south-africa-and-what-it-can-do-about-it-75704">credit rating downgrades</a> experienced in the second quarter of 2017. It comes with a greater focus on monetary and fiscal frameworks, a slippery area which has served <a href="https://theconversation.com/why-south-africa-should-undo-mandelas-economic-deals-52767">neo-liberal agendas</a> in the post-1994 South Africa.</p>
<p>Instead of focusing on policies that allow redistribution of wealth and creating sociopolitical and economic opportunities for those who were left out of the system, successive ANC governments have been obsessed with neo-liberal dictates which have served to <a href="http://www.sahistory.org.za/sites/default/files/file%20uploads%20/professor_jeremy_seekings_nicoli_nattrass_classbookos.org_.pdf">maintain</a> apartheid inspired economic structures.</p>
<p>It’s unfortunate that Gigaba is still toeing the neo-liberal line despite all his political <a href="http://ewn.co.za/2017/06/30/gigaba-says-drastic-measures-needed-to-growth-sa-s-economy">rhetoric</a>, including a call for <a href="https://mg.co.za/article/2017-05-09-mps-grill-gigaba-on-radical-economic-transformation">radical economic transformation</a>. </p>
<p>This neo-liberal approach assumes that economic growth is the sole criterion to put the country back on the right track. This <a href="https://theconversation.com/growth-is-dying-as-the-silver-bullet-for-success-why-this-may-be-good-thing-78427">obsession with growth</a> means that the focus is on short-term fiscal and monetary issues to gain the confidence of investors in the economy. Testament to this are the short deadlines of the plan and the accompanying narratives. These include <a href="http://www.huffingtonpost.co.za/2017/07/13/governments-economic-growth-action-plan-gigabas-speech-in-f_a_23027748/">references</a> to reforms that “would support both businesses and consumer confidence, thereby laying the foundation for an economic recovery”.</p>
<p>It would seem that not much thinking has gone into changing the underlying structures of the economy for the long-term. </p>
<p><strong>What are the most positive elements of the plan?</strong></p>
<p>The minister has spoken about including different stakeholders in the recovery plan, which seems to be a good approach. South Africa’s history of segregation needs to be met with inclusive policies. Public consultations with key stakeholders and consensus must be key to any recovery plan.</p>
<p>The plan to tackle non-performing <a href="https://www.businesslive.co.za/rdm/business/2017-03-24-sinking-fast-the-perilous-state-of-sas-six-big-state-owned-companies/">state-owned enterprises</a> is very encouraging. But reckless recapitalisation by injecting public money into non-performing entities will only divert government resources, which could otherwise be used to help poor and marginalised people. </p>
<p>Government should realise that fixing troubled state-owned enterprises requires deep restructuring of the way they are operated and led. Boards that are part of the problem in terms of incompetency and corruption must be dissolved and reconstituted. Corrupt officials must be held accountable. Enhancing public-private partnership in some enterprises can also eliminate inefficiencies. </p>
<p>Another positive is that each of the 14 points and sub-points came with a deadline. This can focus the mind and ensure that work gets done. South Africa has seen many plans in the past come and go with no results.</p>
<p>But some of the dates are far too ambitious. For example, Gigaba speaks of finalising the Minerals and Petroleum Development Act amendment process by December 2017. This deadline is too tight and could result in low levels of participation. This will defeat the objective of getting stakeholder buy-in.</p>
<p><strong>What are the most critical things that are missing from it?</strong></p>
<p>Not enough attention has been given to job creation. The South African economy has for a very long time experienced <a href="http://www.economist.com/node/16248641">jobless economic growth</a>. This meant that the country’s jobless rate remained stubbornly high for many years. Recent figures of unemployment touching <a href="https://www.bloomberg.com/news/articles/2017-06-01/south-africa-jobless-rate-rises-to-14-year-high-in-first-quarter">27.7%</a> are indeed worrying. Youth unemployment is said to be <a href="http://data.worldbank.org/indicator/SL.UEM.1524.ZS">52%</a>. Any plan that addresses only economic growth without the creation of job opportunities will be found wanting.</p>
<p>The South African government’s priority should be to boost employment, by focusing on sectors that can easily generate jobs. I welcome the suggestion to boost the small, medium and micro-enterprises sector by giving them a share in public procurement. Small enterprises have been recognised for their potential to <a href="http://www.tandfonline.com/doi/full/10.1080/0376835042000325697?needAccess=true&instName=University+of+Oxford">aid</a> sustainable economic development and to create jobs.</p>
<p>The plan does not give details of overhauling the most important sectors of the economy: mining and agriculture. These sectors are key to generating growth and employment and can be used to drive economic transformation and empower communities that are at the margins of the economy.</p>
<p>For this to happen, the South African government needs to adopt radical approaches that include new and sustainable ways of doing business and redistribution of land.</p>
<p>There is a strong case for government to ensure that mining companies reinvest in workers and local economies. This can be done through investment in education of workers and forming business linkages with local companies that enable technology and knowledge transfer for a <a href="http://www.tandfonline.com/doi/full/10.1080/03056244.2017.1333412?needAccess=true&instName=University+of+Oxford">viable industrial transformation</a>. Unemployed mine workers (and farm workers too) should be given new kinds of vocational training and education to help them find work elsewhere.</p>
<p><strong>How do the ANC’s internal power struggles affect the plan?</strong></p>
<p>The ANC’s leadership is in disarray. Intra-party fighting has led to opposing factions being formed, with each propagating its own <a href="http://www.huffingtonpost.co.za/2017/04/27/ndz-vs-cr17-battle-for-the-anc-underway_a_22058354/">economic vision</a>. This increases the likelihood that a new crop of ANC leaders will change policy. Constant reshuffling and changes in key government positions can seriously affect policy plans and lead to uncertainty about the future. </p>
<p>A new leader will have to bring cohesion into an already fractured party, encourage all members to unite and work for a better South Africa and, most importantly, tackle corruption both in and outside party circles.</p><img src="https://counter.theconversation.com/content/82860/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mohammad Amir Anwar does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa’s recently announced economic recovery plan failed to break away from the cumbersome neo-liberal line.Mohammad Amir Anwar, Post-doctoral Research Fellow, University of OxfordLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/789532017-06-06T14:55:04Z2017-06-06T14:55:04ZSouth Africa’s in a recession. Here’s what that means<figure><img src="https://images.theconversation.com/files/172449/original/file-20170606-3668-mo39s0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The bad news keeps piling up for South Africa's economy. </span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>South Africa has been rocked by news that it has slipped into a <a href="http://ewn.co.za/2017/06/06/sa-gdp-up-year-on-year-but-enters-recession">recession</a> after its gross domestic product (GDP) declined 0.7% during the first quarter of 2017 after contracting by 0.3% in the fourth quarter of 2016. Jannie Rossouw explains what it means.</em></p>
<p><strong>What is a technical recession?</strong></p>
<p>It’s when an economy suffers two consecutive quarters of negative economic performance. It refers to shrinking economic output, sometimes also known as negative economic growth or economic decline. </p>
<p>In short, it implies that the economic activity of a country is declining. This is never a good thing. In South Africa’s case it’s particularly serious because the country needs strong economic growth to make inroads into <a href="http://ewn.co.za/2016/05/09/SA-unemployment-rate-rises">unemployment</a>, which currently stands at more than 27%.</p>
<p>South Africa desperately needs a strong economy for other reasons too. The first is that the living standards of its citizens can’t improve without economic growth. The second is that the economy needs to grow for the government to be able to increase revenue to meet its growing <a href="https://theconversation.com/why-social-grants-matter-in-south-africa-they-support-33-of-the-nation-73087">social welfare budget</a>. </p>
<p>There are other ways to describe a recession, although the technical definition is one that’s generally accepted. Other definitions include “an economy performing below potential” or “an increase in the output gap”. As an aside, it’s interesting to note that there’s a technical definition for a recession, but no agreed definition for a depression (as in <a href="http://www.history.com/topics/great-depression">Great Depression</a> of the 1930s).</p>
<p>South Africa’s economy showed marginal positive growth for 2016, although it then contracted in the fourth quarter of the year. With similar contraction in the first quarter of 2017, the country entered a technical recession. </p>
<p>If the economy shows positive growth for the remaining three quarters of this year, South Africa will avert a recession for the calendar year 2017.</p>
<p><strong>What caused it?</strong> </p>
<p>Economic activity contracted over a wide range of sectors, including construction, manufacturing and transport. Only mining and agriculture made a positive contribution to output growth. All other sectors contracted. </p>
<p>This reflects subdued demand throughout the South African economy. The data on the first quarter confirms what many small and medium business owners have been saying since the beginning of 2017 – that <a href="http://www.fin24.com/Economy/Consumer-confidence-deteriorates-notably-index-20150506">demand is down</a> and that business conditions are tough. </p>
<p>The important question is whether this recession will continue in the second quarter – April to June, or whether there will be a turn around to economic growth. </p>
<p><strong>Who’s to blame?</strong></p>
<p>It’s difficult to say who is to blame. But it must be noted that recessions are rare events, as policies are generally aimed at economic growth. This is the second recession experienced in the post 1994 South Africa.</p>
<p>Rapid economic growth depends on investment, which in turn is dependent on confidence and positive expectations of the country’s future. President Jacob Zuma’s administration doesn’t instil confidence. This partly explains subdued investment. The recent <a href="https://theconversation.com/what-a-downgrade-means-for-south-africa-and-what-it-can-do-about-it-75704">credit risk downgrades</a> into sub-investment grade has made South Africa a less attractive investment destination.</p>
<p>The lack of confidence is also reflected in suppressed demand, which in turn results in contractions in economic output. </p>
<p><strong>How do we get out of it?</strong></p>
<p>Investment is required to get South Africa out of its depressed economic conditions. Investment will boost demand in the economy, with positive spill-over effects into a number of sectors. </p>
<p>Naturally restoring South Africa’s credit risk rating to investment grade would help boost investment. A better credit rating would reduce the risk of investing in the country.</p>
<p>The <a href="http://www.timeslive.co.za/politics/2017/04/04/Moody%E2%80%99s-says-it-may-downgrade-SA%E2%80%99s-credit-rating-after-Cabinet-reshuffle">upcoming</a> credit rating decision from global credit rating agency Moodys’ is going to be a critical moment. This after two big rating agencies Fitch Ratings and Standard & Poors downgraded some of South Africa’s instruments into sub-investment grade. A downgrade from Moodys’ will trigger massive capital flights which will exert further pressure on the economy. </p>
<p><strong>What company are we keeping? Are other countries in the same boat at the moment?</strong></p>
<p>South Africa is joining a growing list of countries which have slipped into technical recessions. These include Ecuador, Equatorial Guinea and Venezuela. It’s important to remember that a country’s status can change from quarter to quarter depending on its growth rate. This means that an assessment of economic growth or recession status needs to be made based on the most recent data.</p><img src="https://counter.theconversation.com/content/78953/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jannie Rossouw is an NRF-rated researcher and receives research funding from the NRF.</span></em></p>South Africa has recorded two consecutive GDP contractions. What does it mean?Jannie Rossouw, Head of School of Economic & Business Sciences, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/788302017-06-06T01:42:19Z2017-06-06T01:42:19ZThere’ll be no records set this week by Australian economic growth figures<figure><img src="https://images.theconversation.com/files/172220/original/file-20170605-31023-8c9rpo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australia would need to avoid consecutive quarters of negative real GDP growth until at least 2024 if it is truly to be able to claim this "world record" as its own.</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>With the release of the March quarter national accounts, there have been reports the Australian economy could <a href="http://www.afr.com/news/economy/hollands-growth-record-set-to-fall-to-australia-says-deloitte-20170129-gu0u3d">break the Netherlands’ “world record” for continuous growth</a>. But there are three problems with this assertion.</p>
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<p>It’s now been 103 quarters (25 years and 9 months) since Australia last had consecutive quarters of negative growth in real gross domestic product (GDP), in the March and June quarters of 1991. </p>
<p>Contrary to much-repeated claims, the Netherlands didn’t experience more than a quarter-century of economic growth without consecutive quarters of negative real GDP growth between the early 1980s and the global financial crisis.</p>
<p>The Netherlands’ real GDP declined by 0.3% in the June quarter of 2003, and by 0.01% in the September quarter of that year, <a href="http://statline.cbs.nl/Statweb/publication/?VW=T&DM=SLEN&PA=82601ENG&D1=1&D2=a&D3=0-3,5-8,10-13,15-18,20-23,25-28,30-33,35-38,40-43,45-48,50-53,55-58,60-63,65-68,70-73,75-78,80-83,85-88,90-93,95-98,100-103,105-108,l&HD=170516-1418&LA=EN&HDR=G1&STB=T,G2">according to data published by Statistics Netherlands </a> and, separately, by the OECD. So, at best, the Netherlands went for only 22 years without experiencing a recession. Australia surpassed that benchmark in 2013.</p>
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<p>Yes, that second quarterly decline in 2003 was almost imperceptible. But sporting records are delineated by margins as small as one one-hundredth of a second, so we can’t blithely discount a -0.01% fall in real GDP as “not relevant”.</p>
<p>Even if you blinked and missed that tiny second successive decline in real GDP in the September quarter of 2003, the Netherlands still wouldn’t hold the record for the longest run of continuous economic growth. That belongs to Japan – which, <a href="https://data.oecd.org/gdp/quarterly-gdp.htm#indicator-chart">according to OECD data</a>, went from the March quarter of 1960 to the March quarter of 1993 without ever registering two or more consecutive quarters of negative growth in real GDP. That’s 133 quarters, or more than 33 years. </p>
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<p>Indeed, if Japanese GDP data were available on a quarterly basis earlier than 1960 it’s likely that this run of continuous economic growth would have been even longer, perhaps as long as 38 years, inferring from annual data available back to 1955. So Australia would need to avoid consecutive quarters of negative real GDP growth until at least 2024 if it is truly to be able to claim this “world record” as its own.</p>
<p>Even more importantly, the definition of a technical recession as (two or more consecutive quarters of negative growth in real GDP) is, as former RBA Governor <a href="http://www.rba.gov.au/speeches/2009/sp-gov-210409.html">Glenn Stevens said</a>, “not very useful”. It was originally proposed in December 1974 <a href="http://www.saul-eslake.com/difference-recession-depression/#sthash.AAisq1mp.dpbs">by Julius Shishkin</a>, who at that time was the head of the Economic Research and Analysis Division of the US Census Bureau (now the Bureau of Economic Analysis, which publishes the US national accounts). </p>
<p><a href="http://www.nber.org/cycles/recessions_faq.html">It’s not used to identify</a> recessions in the US. It takes no account of differences over time, or as between countries, in the rates of growth of either population or productivity – which are the key determinants of whether a given rate of economic growth is sufficient to prevent a sharp rise in unemployment. This is something which most people (other than economists) would use to delineate a recession.</p>
<p>While Australia has avoided consecutive quarterly contractions in real GDP since the first half of 1991, we’ve had two periods of consecutive quarterly declines in real per capita GDP (in 2000 and 2006). We’ve also had two periods of consecutive quarterly declines in real gross domestic income or GDI, which takes account of income gains or losses accruing from movements in Australia’s terms of trade (in 2008-09, and in 2014). Perhaps most meaningfully of all, Australia has had two episodes where the unemployment rate has risen by one percentage point or more in 12 months or less (in 2001 and 2009).</p>
<p>That’s still a better track record than almost any other advanced economy during the past quarter-century or so – and it reflects well on the quality of economic management (and the nature of our luck) over this period. Nonetheless, we shouldn’t be in the business of awarding ourselves prizes to which we’re not entitled.</p><img src="https://counter.theconversation.com/content/78830/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Saul Eslake does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>We shouldn’t be in the business of awarding ourselves prizes to which we’re not entitled.Saul Eslake, Vice-Chancellor’s Fellow, University of TasmaniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/706382016-12-30T21:11:40Z2016-12-30T21:11:40ZHow to get ready for the economic recession coming in 2017<figure><img src="https://images.theconversation.com/files/151464/original/image-20161224-17282-1a0fopj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Time to stock up?</span> <span class="attribution"><span class="source">Canned goods via www.shutterstock.com</span></span></figcaption></figure><p>My outlook for 2017 and beyond is that the U.S. economy will likely see another recession. </p>
<p>Yes, the economic picture currently looks wonderful. The Dow and S&P 500 are <a href="http://money.cnn.com/2016/11/22/investing/dow-trump-19000-stocks-alltime-highs/">at record levels</a>. <a href="http://www.bbc.com/news/business-38181041">Unemployment is well below</a> 5 percent of the labor force. <a href="http://www.forbes.com/sites/timworstall/2016/11/17/us-inflation-to-2-1-but-no-this-isnt-the-inflation-the-federal-reserve-is-looking-for/#3479c3da68ba">Inflation is still tame</a>. The U.S. <a href="http://www.wsj.com/articles/strong-dollar-could-be-rallys-weak-link-1479474002">dollar is strong</a>.</p>
<p>The U.S. economy has grown dramatically over the long run. <a href="http://www.bea.gov/national/xls/gdplev.xls">GDP has increased by one-third</a> since the beginning of the 21st century, even after adjusting for inflation. </p>
<p>However, capitalist economies do not simply grow steadily larger. Instead, their long-term growth is periodically punctured by downturns.</p>
<p>The <a href="http://www.nber.org/cycles/cyclesmain.html">record of all economic ups and downs</a> over the last century and a half shows the U.S. economy has experienced 33 recessions. This means recessions occur roughly once every five years.</p>
<p>Our present economic expansion has lasted far longer than five years. The Great Recession <a href="http://www.nber.org/cycles/sept2010.html">ended in June 2009</a>, about seven and half years ago. Even though many indicators look amazing today, if history is any guide, we are due for another economic downturn.</p>
<p>In which case, it’s a <a href="https://www.youtube.com/watch?v=Orp2yeTIpsA">good time for a primer</a> on recessions and how to prepare for them.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/Orp2yeTIpsA?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Recession, explained.</span></figcaption>
</figure>
<h2>Who calls a recession?</h2>
<p>The dates of when recessions in the U.S. begin and end are declared by a nonpartisan organization called the <a href="http://www.nber.org/">National Bureau of Economic Research</a>, or NBER. Within the NBER, a small committee, <a href="http://www.nber.org/cycles/members.html">currently comprising nine professors</a>, officially decides when a recession has occurred usually months after the fact. </p>
<p>The group does not use two quarters of falling GDP as their guide, a common rule of thumb journalists and others employ to describe recessions. That’s in part because <a href="http://www.bea.gov/national/an1.htm#2016annualupdate">GDP figures are often revised</a> by the U.S. government. Deciding when a country is or is not in a recession based on numbers that are constantly moving is not sensible. </p>
<p>Instead the <a href="http://www.nber.org/cycles/recessions.html">committee uses many factors</a> beyond GDP such as employment, income, industrial production and retail sales.</p>
<h2>How long are the longest expansions?</h2>
<p>In U.S. economic history, no economic expansion has lasted more than a decade.</p>
<p>The current economic expansion is the <a href="http://www.nber.org/cycles/cyclesmain.html">fourth-longest on record</a>. This record stretches all the way back to the 1850s.</p>
<p>The three longer booms all occurred since <a href="https://news.osu.edu/news/2016/12/12/ohio-state-will-host-dec.-17-celebration-of-john-glenns-life/">John Glenn</a> orbited the Earth. The third-longest expansion started in 1982 and lasted close to eight years. The second-longest began in 1961 and lasted a bit less than nine years. The longest expansion we’ve experienced started in 1991 and lasted a decade, <a href="http://time.com/3741681/2000-dotcom-stock-bust/">until the dot-com bubble burst</a> in 2001.</p>
<p>This means that the current period of growth is entering the economic history books as something special. In just a few months it will overtake the 1982 boom and become the third-longest U.S. expansion on record.</p>
<h2>How much longer can it continue?</h2>
<p>No one knows <a href="https://www.thebalance.com/causes-of-economic-recession-3306010">why economic expansions end</a>. It could be a sudden trigger like the <a href="http://www.cnbc.com/2016/09/15/on-this-day-8-years-ago-lehman-brothers-collapsed-have-we-learned-anything.html">collapse of Lehman Brothers</a> in late 2008 or just a general loss of confidence. </p>
<p>Economic theories, such as works by economist <a href="http://www.economist.com/news/economics-brief/21702740-second-article-our-series-seminal-economic-ideas-looks-hyman-minskys">Hyman Minsky</a>, explain that the longer an expansion continues, the more likely a recession becomes. </p>
<p>The length of an expansion matters because banks lower their lending standards over time. At the end of very long expansions, banks and finance companies are willing to lend to almost anyone because they become overly optimistic. Some of this willingness to lend carelessly is <a href="http://www.wsj.com/articles/delinquencies-rise-on-growing-volume-of-subprime-auto-loans-1480523653">currently seen in U.S. car loans</a>. </p>
<p>In <a href="https://keenomics.s3.amazonaws.com/debtdeflation_media/papers/Keen1995FinanceEconomicBreakdown_JPKE_OCRed.pdf">Minsky models</a> the economy is like a game of musical chairs at a party. Everyone has a wonderful time until the music stops and everyone wants to sit down simultaneously. Then suddenly “the euphoria becomes a panic, the boom becomes a slump.”</p>
<p>Whatever the reasons that expansions end, the fact that the U.S. has never had an expansion that lasted longer than a decade does not bode well for the current one lasting much longer.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/151466/original/image-20161224-17305-19deld0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/151466/original/image-20161224-17305-19deld0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=371&fit=crop&dpr=1 600w, https://images.theconversation.com/files/151466/original/image-20161224-17305-19deld0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=371&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/151466/original/image-20161224-17305-19deld0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=371&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/151466/original/image-20161224-17305-19deld0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=467&fit=crop&dpr=1 754w, https://images.theconversation.com/files/151466/original/image-20161224-17305-19deld0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=467&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/151466/original/image-20161224-17305-19deld0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=467&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Keep it well stuffed.</span>
<span class="attribution"><span class="source">Piggie bank via www.shutterstock.com</span></span>
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</figure>
<h2>What should you do?</h2>
<p>No individual has the power to <a href="http://businessmacroeconomics.com/">stop a recession</a>. However, by planning you can mitigate the impact an economic downturn has on you and your family. </p>
<p>Right now most people are enjoying good economic times. They will not last forever. Save some money now. Pay down credit card debt and other loans. Give yourself a financial cushion that will protect you in the event of an economic downturn. </p>
<p>How much you need to save depends on your risk tolerance. One guide is that over the past century and a half, the typical recession has lasted less than 1.5 years.</p>
<p>Recessions do not come like clockwork, however. The data suggest no clear pattern of how long expansions last. But since only three expansions since the 1850s have beaten the one we are currently living through, it’s best not to be overconfident that the current one will continue forever. </p>
<p>Instead, make some plans now to mitigate the next downturn. Even if I am wrong, the worst thing that will happen is that you will have less debt and more money saved. Is that so bad?</p><img src="https://counter.theconversation.com/content/70638/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jay L. Zagorsky does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The current US economic expansion is nearly the third-longest since the 1850s, making a recession likely in 2017. It’s time to get ready.Jay L. Zagorsky, Economist and Research Scientist, The Ohio State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/543742016-03-07T11:04:05Z2016-03-07T11:04:05ZWhat makes one economy more resilient than another?<figure><img src="https://images.theconversation.com/files/113781/original/image-20160303-9481-1o5tnhk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A study in resilience.</span> <span class="attribution"><span class="source">Ice bath via www.shutterstock.com</span></span></figcaption></figure><p>Markets have been in <a href="http://www.theguardian.com/business/marketforceslive/2016/feb/11/recession-global-stock-markets-lows-federal-reserve-economy">turmoil</a> for much of the year on concerns the global economy is heading for another recession. The suspected culprits are many: the plunging price of commodities and oil, crisis in the Middle East, a slowing China and other emerging countries and weak prospects for financial markets in general.</p>
<p>Coming less than a decade since the global financial crisis dealt a devastating blow to economies around the world, the current challenges raise the question of how resilient our societies are to such shocks. </p>
<p>In our own research, we pondered a different question: what factors make one region more resilient than another? The answer could help us understand how to make our economies better able to resist the next shock, be it financial, a natural disaster or something else. </p>
<h2>The study of resilience</h2>
<p>Resilience has become a hot topic among policymakers, academics and the public more generally alongside growing concerns about climate change and the increasing frequency of natural disasters. </p>
<p>The concept of resilience <a href="http://www.jstor.org/stable/2096802?seq=1#page_scan_tab_contents'">emerged</a> in the scientific literature in the early 1970s and is commonly defined as “the capacity of a system to regenerate itself after a particular shock.” In recent years, the concept and science of resilience have been widely applied in ecology, biodiversity and most recently on climate change adaptation. </p>
<p>The study of economic resilience, however, is still in its infancy, with early studies such as <a href="https://cjres.oxfordjournals.org/content/3/1/27.abstract?sid=2a825f46-102b-4aaa-9537-5640618fd613">this one</a> in 2009 attempting to better understand the concept and its implications. Taking a page from the other sciences, we defined “economic resilience” as the capacity of an economy to resist a particular shock and to recover rapidly to the previous level of growth or better.</p>
<p>To help us quantify resilience, we narrowed the definition further by describing it as the capacity of an economy that suffers an economic downturn to restore or return to the pre-crisis level of employment growth.</p>
<p>The mathematical formulation of resilience can be seen in this <a href="http://journal.srsa.org/ojs/index.php/RRS/article/download/45.2.2/pdf">paper</a>, but the main point is that the formula attempts to capture how large and rapid the rebound is that occurs after the drop to restore employment growth of a region. </p>
<h2>Counties in crisis</h2>
<p>We aimed to use this regional economic resilience formula to better understand the factors that determine what makes one regional economy more resilient than another. So we examined the employment levels and growth rates across all counties in the U.S. and observed how they responded to the global financial crisis of 2007-2008. </p>
<p>The following illustration shows the various scenarios of how county employment responded to the crisis, with the percentages showing the share of the total U.S. counties that experienced each pattern of change. The vertical axes of the charts show employment levels, while the horizontal axes measure time (months). The black lines represent the actual employment levels over time, the dotted green lines project where the county would have gone had the pace continued (without crisis) and the red arrows show when the financial crisis struck. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/112097/original/image-20160219-12817-1j7pq0r.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/112097/original/image-20160219-12817-1j7pq0r.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=453&fit=crop&dpr=1 600w, https://images.theconversation.com/files/112097/original/image-20160219-12817-1j7pq0r.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=453&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/112097/original/image-20160219-12817-1j7pq0r.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=453&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/112097/original/image-20160219-12817-1j7pq0r.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=570&fit=crop&dpr=1 754w, https://images.theconversation.com/files/112097/original/image-20160219-12817-1j7pq0r.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=570&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/112097/original/image-20160219-12817-1j7pq0r.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=570&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption"></span>
<span class="attribution"><span class="license">Author provided</span></span>
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<p>The top three smaller charts show that 9.7 percent of U.S. counties experienced little or no change in the employment trend over the period or failed to rebound after the growth rate fell off. The 0.4 percent of counties that showed no decline actually are the most resilient, and worthy of in-depth future study, because they were not affected at all by the crisis. The bottom two smaller charts, representing 9.1 percent of counties, showed a pre-shock downward trend in employment that worsened in 2008/2009 but that later recovered, to varying degrees.</p>
<p>The focus of our research is on the 81.2 percent of counties that had positive employment growth before the financial crisis, suffered an employment drop and later recovered. In other words, they experienced two turning points over this period. These counties are the ones, by our definition, that showed resilience, although to differing degrees. </p>
<p>For example, employment in 2.9 percent of counties showed growth before the crisis. Once it hit, employment levels dropped but quickly returned to and then even exceeded the expected number of jobs that the county would have had without the crisis (dashed green line). On the other hand, 57.3 percent had higher employment levels than before the crisis, but by 2014 had still not reached the employment numbers they would have had without the crisis. The other 21 percent of counties also returned to positive growth after the slump but at a slower pace – and one that would make it difficult for them, if not impossible, to catch up to levels of employment they would have had, had the crisis never existed.</p>
<p>The interesting question to us was whether or not these different patterns of regional economic resilience could be explained by particularities of the respective counties. </p>
<h2>Methods behind the measurements</h2>
<p>To answer this question and better understand what regional peculiarities support or detract from resilience, we developed a simple statistical model to capture how different factors may or may not explain the variability of resilience across counties.</p>
<p>Included among the factors we studied was the age distribution of the population, because we hypothesized that having relatively more experienced workers would better allow counties to adjust to the crisis. </p>
<p>For the same reason, we paid particular attention to self-employment as a proxy for innovation and entrepreneurship, because <a href="http://link.springer.com/article/10.1007%2Fs11187-015-9677-6">it has been shown</a> to help economies better adjust to trade shocks such as those associated with increased imports from China. </p>
<p>In addition, we included a measure of regional economic complexity and a measure of industrial diversity.</p>
<p>Our measure of diversity is simply the share of different types of industries that are represented in a county. To measure complexity, we used the <a href="http://www.bea.gov/industry/io_benchmark.htm">national input-output matrix table</a> to calculate how interconnected the county’s industries are. In other words, a county with industries that are more connected on one another (they buy or sell products from/to different industries) may have a comparative advantage because its economic activity is more complex. For example, industries such as semiconductor manufacturing and telecommunications were the most complex in our measure as reflected by their large buying and selling relationships with other sectors, in relative terms.</p>
<p>Thus a county in which these industries are important would have a higher level of regional economic complexity.</p>
<h2>What makes a county resilient</h2>
<p>Our key findings are that counties with higher shares of relatively young workers (aged 25-44 years) on average had lower resilience, suggesting that having a more experienced labor force allowed counties to cope better after the financial crisis. </p>
<p>Surprisingly, having a more highly educated workforce, on the other hand, did not appear to make a county more resilient. As expected, though, a higher share of self-employed workers in a county was unambiguously associated with greater resilience.</p>
<p>Our research also showed that counties with greater diversity succeeded in warding off a severe recession but diversity did not contribute to a resumption of growth. That is, counties with greater diversity experienced a smaller drop, but they also did not enjoy a rapid recovery. Ultimately, higher levels of diversity are associated with less resilience. </p>
<p>On the other hand, counties with more complex economies also avoided large drops but experienced faster recoveries, and thus they were more resilient. </p>
<p>Interestingly, when we examined the link between the two (by observing how the variables diversity and complexity interacted), we found that their interaction led to a stronger positive effect for both variables. This means that the effect of complexity on resilience becomes more positive at higher levels of diversity, while diversity’s impact turns positive at higher levels of complexity. </p>
<p>Clearly, this is worthy of further exploration in future research. </p>
<h2>What does it all mean</h2>
<p>So what does this mean as we brace for the next shock to our economies, and where do we go from here?</p>
<p>Perhaps most importantly, the next shock doesn’t have to be financial like in 2008. Regions exposed to other shocks such as natural disasters and climate change can take lessons from research on economic resilience to better prepare their systems. </p>
<p>Our results do suggest that regions with more experienced workers and higher levels of self-employment may be more protected from a shock. Furthermore, those regions that have higher levels of both diversity and complexity may suffer less in the next downturn. However, as suggested from our results, simply having employment spread across a variety of industries – economic diversity – helps counties avoid big drops, but does not necessarily enhance resilience. </p>
<p>In general, more research is needed to better understand how regions can adapt and improve their resilience to different shocks, especially considering that few if any direct interventions of local, state and/or federal governments may directly enhance resilience. For example, it may be difficult for local governments to target or attract especially diverse or complex industries. </p>
<p>However, other policies such as providing general entrepreneurship training programs or ensuring that local economic conditions favor entrepreneurs or the self-employed could be effective in raising the resilience of regions at a cost much lower than the damages caused by a larger financial shock or crisis.</p><img src="https://counter.theconversation.com/content/54374/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephan J. Goetz receives funding from USDA, National Institute of Food and Agriculture.</span></em></p><p class="fine-print"><em><span>David A. Fleming-Muñoz and Yicheol Han do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Markets have been on a rocky ride all year on concerns another recession looms. Here are a few lessons we can learn from the last one.Stephan J. Goetz, Professor of Agricultural and Regional Economics, Penn StateDavid A. Fleming-Muñoz, Economist, CSIROYicheol Han, Postdoctoral Scholar, Penn StateLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/539412016-02-04T11:08:53Z2016-02-04T11:08:53ZHow do we know if we’re in a global recession?<figure><img src="https://images.theconversation.com/files/110215/original/image-20160203-5826-y8dnii.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Recessions affect us all.</span> <span class="attribution"><span class="source">Unemployed line via www.shutterstock.com</span></span></figcaption></figure><p>Since the start of this year, stock markets around the world have fallen as panicked investors have begun believing that the world is slipping into <a href="http://www.wsj.com/articles/a-global-recession-may-be-brewing-in-china-1439764500">economic malaise</a>. </p>
<p>This <a href="http://www.marketwatch.com/story/another-great-recession-threatens-world-financial-markets-2016-01-12">fear</a> has also driven down prices of commodities like oil and copper and impelled <a href="http://www.wsj.com/articles/central-banks-go-to-new-lengths-to-boost-economies-1454098658">some central banks</a>, like Japan’s, to make dramatic efforts to boost growth. The concerns are being magnified by memories of the <a href="http://www.cnbc.com/2016/01/15/a-recession-worse-than-2008-is-coming-commentary.html">worldwide recession of 2008 and 2009</a>, when many countries experienced widespread joblessness, business bankruptcies and homelessness.</p>
<p>While national and international leaders cannot prevent worldwide economic downturns, a coordinated response among them can mitigate some of the impact. But it’s hard to rally government resources to this cause without the ability to determine whether we are actually in a recession or not. </p>
<p>So how do we know when the world is in a <a href="http://www.barrons.com/articles/the-global-recession-of-2016-1450511060">recession</a> and such a response is needed?</p>
<h2>What <em>is</em> a recession?</h2>
<p>To answer this question, first we need to understand what it means to actually be in a recession. </p>
<p>The generally accepted – and rather broad – <a href="http://businessmacroeconomics.com/">definition of recession</a> is a period of time when economic activity declines. While most people agree with this, there is controversy over how to translate it into practice. </p>
<p>Currently, three methods are used to determine when the world is in a recession.</p>
<p><strong>1) Threshold definition</strong></p>
<p>One way of defining a recession is when world output falls below a certain benchmark or threshold. For example, if global gross domestic product grows <a href="http://news.sky.com/story/1564804/world-is-on-brink-of-new-recession-imf-warns">less than 2.5 percent or 3 percent</a> a year, that means the world is in a recession. </p>
<p>It’s a yardstick the <a href="http://www.imf.org/external/np/tr/2001/tr010924.htm">International Monetary Fund</a> has used in the past and some in the media still employ. </p>
<p>Why 2.5 percent or 3 percent? Doesn’t a recession suggest an actual <em>decline</em> in GDP? The thinking is that since the world’s population is growing rapidly, each person’s slice of the global economic pie shrinks unless the overall pie expands by the same pace. If the <a href="http://esa.un.org/unpd/wpp/Graphs/Probabilistic/POP/TOT/">world’s population</a> is growing at 2 percent a year, as it was during the 1990s, world GDP has to increase at least 2 percent to keep up.</p>
<p>Many people, including current economists at the IMF (see box 1.1 <a href="https://www.imf.org/external/pubs/ft/weo/2002/01/pdf/chapter1.pdf">here</a>), feel the threshold definition is problematic because if the world is growing at 3 percent then total production doubles roughly every quarter-century. Doubling output in such a short period of time, even if population increases, does not match the general definition’s spirit of declining economic activity.</p>
<p>Nevertheless, the world is currently nowhere close to being in a recession by this definition, since the <a href="https://www.imf.org/external/pubs/ft/weo/2016/update/01/index.htm">IMF estimates</a> that world GDP will grow by 3.4 percent in 2016 and 3.6 percent in 2017, compared with <a href="http://www.worldometers.info/world-population/">population growth</a> of barely more than 1 percent.</p>
<p><strong>2) GDP definition</strong></p>
<p>A second definition of recession is when GDP falls two quarters in a row. This definition is <a href="http://www.investopedia.com/terms/r/recession.asp">widely known</a>, often quoted in the press and more closely matches the idea of declining activity since GDP is currently the best measure of what countries and the world produce.</p>
<p>The best way to calculate the world’s actual GDP is to simply add together the quarterly GDP figures provided by every country. Unfortunately, this simple method has a number of problems. </p>
<p>First, some countries provide only yearly data, like the <a href="http://www.cbsi.com.sb/">Solomon Islands</a>, while others in the midst of civil war or strife, such as <a href="https://www.chathamhouse.org/sites/files/chathamhouse/field/field_document/20150623SyriaEconomyButter.pdf">Syria</a>, Yemen and <a href="http://www.cbl.gov.ly/ar/images/stories/bohot/bulletinQ2.pdf">Libya</a>, cannot provide any information. </p>
<p>None of these countries is a major economic power, of course, so their data woudn’t make a huge difference to the end result. But if the world is on the knife edge of being or not being in a recession, knowing what is happening economically in small countries or in war-torn areas could be the determining factor in deciding if the world overall is expanding or contracting.</p>
<p>Second, some very large countries like the U.S. and India revise their GDP figures very frequently. U.S. GDP figures are <a href="https://www.bea.gov/papers/pdf/fixler_gdp_revise.pdf">revised a minimum of three times</a> and then are periodically revised roughly every five years as better data become available. It is hard to determine if the world is in a recession if a key country’s data are constantly being modified.</p>
<p>It is doubtful the world is currently in a recession based on the two consecutive quarters of negative GDP growth definition. While the U.S.‘ most recent figure of <a href="http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm">0.7 percent</a> growth in the fourth quarter of 2015 was lower than expected, it was not negative. OECD tables that <a href="https://stats.oecd.org/index.aspx?queryid=350">track quarterly growth</a> among the largest countries show a few negative numbers in places like Brazil and Greece, but the vast majority of the world’s economies have positive values.</p>
<p><strong>3) Committee of experts</strong></p>
<p>The third method of determining if the world is in a recession is to ask a nonpartisan panel of wise men and women. Both Europe and the U.S. use this method to determine – officially – if either is in a recession.</p>
<p>In Europe, <a href="http://cepr.org/content/euro-area-business-cycle-dating-committee">nine people</a> associated with the Centre for Economic Policy Research, or CEPR, make the determination. In the U.S., an <a href="http://www.nber.org/cycles/members.html">eight-person</a> committee at the National Bureau of Economic Research, or NBER, carries out the same task.</p>
<p>Both committees comprise academics who look at a wide <a href="http://www.nber.org/cycles/general_statement.html">variety of economic data</a>. When the committee concludes (by consensus) that the economy is declining, it declares a recession; when it decides the economy has resumed expanding, it declares the end of the recession.</p>
<p>The primary problem with wise advisers is that by design there is no consistent methodology. Each recession is treated as a unique experience that is assessed using a wide variety of data.</p>
<p>The other problem is that the process is historical. Until the committee makes its declaration – usually not until long after a recession has begun – no one is really sure of the state of the world. Finally, it is much harder to do this for the world than for a country because there is a wider variety of data to consider.</p>
<p>Is the world in a recession based on the opinion of the experts? This is impossible to know since neither CEPR or the NBER makes statements ahead of any pronouncement.</p>
<h2>A new alternative definition</h2>
<p>I believe it is time for a new definition to be added to the list: a recession is when the growth of GDP per capita is negative for at least half a year. </p>
<p>This is a modification of the threshold and GDP definitions and simply means that a recession is whenever the average person’s piece of the world’s economic pie shrinks for a sustained period of time. </p>
<p>Currently, <a href="http://databank.worldbank.org/data/reports.aspx?Code=NY.GDP.PCAP.CD&id=af3ce82b&report_name=Popular_indicators&populartype=series&ispopular=y">GDP per capita</a> has been growing about 1 percent per year, after shrinking a dramatic 6 percent during the 2008-09 economic downturn.</p>
<p>I prefer this new definition because it is useful not only when population is rising but also useful in places like Japan and Eastern Europe where <a href="http://esa.un.org/unpd/wpp/Publications/Files/World_Population_2015_Wallchart.pdf">population is or will be falling</a>. </p>
<p>While not all GDP and population data can be <a href="http://blogs.wsj.com/chinarealtime/2016/01/27/china-gdp-growth-could-be-as-low-as-4-3-chinese-professor-says/">trusted completely</a>, it is important to handle both rising and falling populations. Classifying a country that experiences a 1 percent decline in GDP when population falls by 3 percent as “in a recession” does not make sense for the reasons explained above. </p>
<h2>What can be done?</h2>
<p>There are numerous international treaties and organizations designed to coordinate <a href="https://www.wto.org/">world trade</a>, <a href="http://www.nato.int/">defense</a> and <a href="http://www.who.int/en/">global health</a>. </p>
<p>However, presently there is no organization that has the mandate to define, determine or coordinate a response to an international recession. The lack of a responsible organization is a huge problem since global recessions affect all of us. </p>
<p>Whatever definition is chosen, it needs to be simple enough to be widely understood, be easy to make accurate forecasts and handle countries that have declining populations as well as rising ones.</p>
<p>I don’t believe the world is presently in a recession, based on my preferred method. Nevertheless, sooner or later the world will experience another economic downturn. When this happens we cannot hope that an individual country changing its economic policies will cure a global problem. </p>
<p>Instead, today we need an international organization to define and declare global recessions and marshal a global response to return the world to prosperity.</p><img src="https://counter.theconversation.com/content/53941/count.gif" alt="The Conversation" width="1" height="1" />
Stock markets have been falling all year on concern the world risks slipping into a recession, which begs the question: how would we know if we were in one?Jay L. Zagorsky, Economist and Research Scientist, The Ohio State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/533892016-01-29T04:05:59Z2016-01-29T04:05:59ZCivil service pay: South Africa has some harsh choices to make<figure><img src="https://images.theconversation.com/files/109467/original/image-20160128-1030-1a2zcwn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Thousands of civil service employees gather during a protest march for higher pay at the Union Buildings in Pretoria in 2010.</span> <span class="attribution"><span class="source">EPA/Jon Hrusa</span></span></figcaption></figure><p>South Africa faces a looming fiscal cliff owing to growth in social grant expenditure and civil service remuneration, combined with a slowdown in the growth of the economy. A fiscal cliff is when a country’s finances reach a potential crisis point where it can no longer sustain its existing expenditure levels.</p>
<p>The Irish Republic is an example of a country that faced a fiscal cliff of this nature. Following on the international financial crisis of 2007/08, the country’s gross domestic product (GDP) declined by 7.7% up to 2010, with a concomitant decline in government revenue.</p>
<p>Ireland had to face harsh fiscal choices. The government used a combination of tax increases amounting to some €11bn and expenditure cuts amounting to some €19bn to restore the fiscal balance.</p>
<p>Civil service remuneration was one expenditure item subjected to a substantial cut. At senior level the reduction in remuneration amounted to 28%, while the average reduction in remuneration amounted to 19%. This happened at a time when the Irish rate of inflation was about 0.5% per annum.</p>
<p>The harsh choices made by the Irish government show the consequences once a country has reached the precipice of a fiscal cliff.</p>
<h2>What South Africa did when the going was good</h2>
<p>South Africa was also a beneficiary of rapid economic growth in the period running up to the financial crisis of 2007/08. The South African government also used expansionary fiscal policy - increases in government expenditure - funded by tax increases and increased borrowing in response to the financial crisis. These attempts to sustain economic growth were unsuccessful, with South Africa suffering a recession in 2009.</p>
<p>But the South African response differed considerably in respect of the civil service. Civil service employment has continued to grow since 2008 - from 1.3 million to nearly 1.6 million in 2015 - as was the case with civil service remuneration.</p>
<p>This growth in employment did not result in increased productivity. There was no marked improvement in output per worker. This would have resulted, for example, in improved service delivery. <a href="http://www.thensg.gov.za/MediaLib/Downloads/Downloads/17thPublicSectorTrainersForumPSTFConference/Ms%20Lelane%20Janse%20Van%20Rensburg%20-%20Puplic%20Sector%20Productivity%201-15.pdf">ProductivitySA</a> reports that improving productivity is a challenge facing the South African civil service.</p>
<p>In the 2015/16-fiscal year the public sector remuneration agreement resulted in a <a href="http://www.treasury.gov.za/documents/national%20budget/2015/ene/FullENE.pdf">10.1% increase</a> in the remuneration and benefits of government employees. Over the remainder of the period of the agreement the rate of increase in civil service remuneration will be above 8% per annum, while inflation will be around 5% per annum.</p>
<p>Civil servants will therefore get substantial real remuneration increases.</p>
<h2>Burden on the fiscus</h2>
<p>As a percentage of the government’s tax revenue, civil service remuneration will increase from 33.3% in the 2007/08-fiscal year to 45.4% in the 2018/19-fiscal year. Civil service remuneration amounts to nearly 12% of the South African GDP. This is a substantially higher percentage than in other <a href="https://www.imf.org/external/pubs/ft/scr/2014/cr14338.pdf">developing countries</a>.</p>
<p>The government faces a broad spectrum of spending priorities other than paying the remuneration of civil servants. This includes items such as capital expenditure (investing in the future of the country), which amounts to some 7% of total expenditure, and interest on government debt, amounting to some 9,4% of expenditure. </p>
<p>This places a considerable burden on government finances and therefore on the South African tax payer. The government raises income mainly by means of taxes. The most important of these are income tax on individual tax payers, company tax on the profits of companies and value-added tax. Additional income sources include items such as fuel taxes, customs duties and excise duties.</p>
<p>This leaves no doubt that the South African government faces tough choices. The Irish Republic faced these choices some years ago. More recently Tanzania has had to consider them too.</p>
<p>Since his inauguration on 5 November 2015, Tanzanian President John Magufuli has made tough choices in the implementation of austerity steps. A case in point is a <a href="http://www.reuters.com/article/us-tanzania-christmas-idUSKBN0TF1W620151126">decision to redirect</a> TZS200 billion (some US$100 000) previously budgeted for a party after the opening of Parliament to the buying of hospital beds.</p>
<p>Other examples of austerity measures in Tanzania are the scrapping of government Christmas cards and a reconsideration of the number of officials who can fly first and business class.</p>
<p>The Irish and Tanzanian examples show that the South African government has not really seriously considered austerity measures in containing government expenditure. It still has a long way to go.</p>
<p>At more than 45% of government revenue, it is clear that the civil service remuneration bill is the most serious challenge facing government finances. Growth since 2008 has brought civil service remuneration expenditure to an unsustainable level.</p>
<h2>Multidimensional approach needed</h2>
<p>First, the government should urgently announce a moratorium on civil service employment growth. Simply put: no additional appointments until the end of the current unaffordable remuneration adjustment cycle. South Africa has reached its upper limit in the number of civil servants that can be sustained.</p>
<p>Secondly, the government as employer should explain to trade unions that the current three-year remuneration adjustment settlement is the last of these generous general adjustments. Owing to affordability constraints, this generosity cannot be repeated. When the current agreement lapses, it will be necessary to freeze civil service remuneration in nominal terms, which means real reductions after inflation. The alternative may ultimately be remuneration reductions as was the case in the Irish Republic.</p>
<p>No general adjustments still imply some increase in civil service remuneration. The remuneration bill will still increase owing to notch increases (some 1% per annum) and promotions (some 1% to 1.5% per annum).</p>
<p>This would be the ideal scenario because the civil service salary bill would then fall as a percentage of tax collections, and as a percentage of GDP. But the achievement of this outcome requires some very hard choices.</p><img src="https://counter.theconversation.com/content/53389/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jannie Rossouw does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa’s government should urgently announce a moratorium on civil service employment growth. The country has reached its upper limit in the number of civil servants that can be sustained.Jannie Rossouw, Head of School of Economic & Business Sciences, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/460562015-09-08T10:11:42Z2015-09-08T10:11:42ZBaby booms and busts: how population growth spurts affect the economy<figure><img src="https://images.theconversation.com/files/93593/original/image-20150901-13419-r1hc2e.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Does a boom in babies give the economy a boost or cause a bust?</span> <span class="attribution"><span class="source">Baby money via www.shutterstock.com</span></span></figcaption></figure><p>A baby boom is generally considered to be a sustained increase and then decrease in the birth rate. The United States, the UK and other industrialized economies have experienced only one such baby boom since 1900 – the one that occurred after World War II.</p>
<p>In addition, many <a href="https://ideas.repec.org/a/bla/popdev/v26y2000i2p235-261.html">currently developing economies</a> such as India, Pakistan and Thailand have experienced a baby boom since 1950 as a result of a sustained decline in infant and child mortality rates as a result of improved medicine and sanitation.</p>
<p>So what’s the economic impact of these baby booms? Do demographics play a role in determining when an economy expands and contracts? Do they boost incomes or cause them to fall as more young people enter the workforce? I’ve been studying the impact of baby booms on wages, unemployment, patterns of retirement and gross domestic product (GDP) growth for 20 years and, while there are some questions that haven’t been answered, here’s what we’ve learned so far.</p>
<h2>Negative impact on employment</h2>
<p>The initial impact of a baby boom is decidedly negative for personal incomes.</p>
<p>Baby booms inevitably lead to changes in the relative size of various age cohorts – that is, a rise in the ratio of younger to older adults – a phenomenon <a href="http://www.jstor.org/stable/2061197?seq=1#page_scan_tab_contents">first described by economist Richard Easterlin</a>. (In statistics, a cohort is a group of subjects who have shared a particular event together during a particular time span.) </p>
<p>These effects cause a decline in young males’ income relative to workers in their prime, a higher unemployment rate, a lower labor force participation rate and a <a href="http://eric.ed.gov/?id=EJ547606">lower college wage premium</a> among these younger workers. </p>
<p>This occurs because younger workers are generally poor substitutes for older ones, so the increased supply of youths leads to <a href="https://ideas.repec.org/a/spr/jopoec/v12y1999i2p215-272.html">these negative employment results</a>.</p>
<p>Back in the 1950s, entry-level young males in the US were able to achieve incomes equal to their fathers’ current income. This was because of that age group’s reduced relative size as a result of the low birth rates in the 1930s. But by 1985 – about the time the peak of the baby boom had entered the labor force – that relative income had fallen to 0.3; in other words, entry-level men were earning less than one-third of what their fathers made. </p>
<p>In developing countries, these relative cohort size effects – the reduction in young males’ relative income and increase in their unemployment rate – are <a href="http://ukcatalogue.oup.com/product/9780198292579.do">multiplied</a> by the impact of increasing modern development, especially the rising level of women’s education. </p>
<p>In addition, the large influx of baby boomers into the labor market in the US forced many older workers, who would otherwise be working in “bridge jobs” prior to retirement, into earlier retirement. This explains how the average age of retirement for <a href="http://ftp.iza.org/dp4652.pdf">men</a> and <a href="http://ftp.iza.org/dp4653.pdf">women</a> went down in the 1980s.</p>
<p>This decline in income relative to their parents and their own material aspirations has a host of repercussions on family life. It leads to <a href="http://ftp.iza.org/dp5886.pdf">reduced</a> or delayed marriage, <a href="http://www.sciencedirect.com/science/article/pii/S105353579980095X">lower</a> fertility rates and <a href="http://www.jstor.org/stable/2808013">increased</a> female labor force participation rates as young people struggle to respond to their worsened prospects. </p>
<h2>From boom to bust … to boom?</h2>
<p>The reduction in relative income – which the US experienced in the ‘60s and '70s – thus results in a subsequent “baby bust” as people delay starting a family.</p>
<p>It was <a href="http://www.jstor.org/stable/2061197">hypothesized</a> that these baby booms might be self-replicating as reduced birth rates on the trailing edge of the boom caused the subsequent cohort to be smaller in size, thus leading to better labor force conditions, increased birth rates and an “echo boom” in the next generation. </p>
<p>This theory was based on what led to the baby boom in the first place, when the favorable labor market conditions experienced in the 1950s emerged as a result of fewer children being born during the 1930s, reducing the young-to-old-adult ratio. </p>
<p>Though the echo boom of the 2000s represented an increase in the absolute number of young adults, it didn’t lift their cohort size relative to their parents because birth rates have remained fairly stable at low rates since the end of the post-WWII baby boom. </p>
<p>That has not, however, translated into significantly better labor conditions, at least not the kind experienced by young adults in the 1950s that led to the baby boom. The reasons for this phenomenon have not yet been explained.</p>
<h2>So can changing demographics cause recessions?</h2>
<p>Another way of exploring the effects of changes in the proportion of young adults in the population is to look at fluctuations in the relative size of the young adult population over time. These seem to have a <a href="http://link.springer.com/chapter/10.1007/978-1-4020-4481-6_10">significant effect</a> on the economy. </p>
<p>As young adults move out of high school and college and set up their own households, they generate new demands for housing, consumer appliances, cars and all the other goods attendant on starting a new adult life. These new households don’t account for a large share of total expenditures, but they represent a major share of the growth in total consumer expenditures each year. </p>
<p>So what happens if, after a period of growth in this age group, the trend reverses? It is likely that industries counting on further strong growth will be forced to cut back on production, and in turn to cut back on deliveries from suppliers – which will in turn cut back on deliveries from their suppliers, creating a snowball effect throughout the economy. </p>
<p>This picture is supported by the patterns over the past 110 years depicted in the graph shown below.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/93590/original/image-20150901-13412-hc6vo2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/93590/original/image-20150901-13412-hc6vo2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=431&fit=crop&dpr=1 600w, https://images.theconversation.com/files/93590/original/image-20150901-13412-hc6vo2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=431&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/93590/original/image-20150901-13412-hc6vo2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=431&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/93590/original/image-20150901-13412-hc6vo2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=542&fit=crop&dpr=1 754w, https://images.theconversation.com/files/93590/original/image-20150901-13412-hc6vo2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=542&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/93590/original/image-20150901-13412-hc6vo2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=542&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The graph tracks the three-year moving average of the annual rate of change in the proportion of young adults in the US. The red vertical lines indicate the beginnings of recessions. Data past 2020 are projections.</span>
<span class="attribution"><span class="source">US Census Bureau</span></span>
</figcaption>
</figure>
<p>The curve on the graph represents a three-year moving average of the annual rate of change in the proportion of young adults in the US population, as given by the United States Census Bureau. “Young adults” are defined as those aged 15-19 prior to 1950, and 20-24 in the years after, given changing levels of education over time. This curve is overlaid with vertical lines that mark the start of recessions, as <a href="http://www.nber.org/cycles.html">defined</a> by the National Bureau of Economic Research.</p>
<p>There is a very close correspondence between the vertical lines, and peaks in the curve, as well as points where the curve turns negative. In addition, the deep trough between 1937 and 1958 contained another four recessions, and there were two in the trough between 1910 and 1920 (not marked on the graph). The only recessions over the last 110 years that don’t appear to correspond to features of the curve, are those in 1920, 1926 and 1960. </p>
<p>The pattern of causation – if it is one – cannot run from the economy to demographics, since these are young people born over 15 years before each economic downturn. In addition, there’s a one-year lag in the age groups that has been used to control for possible migration effects of a recession – that is, how many people left the US as a result of worse labor market conditions.</p>
<p>The fact that no “double dip” recession occurred in 2012, even as the share of young people fell that year, might be the result of the economic stimulus applied after the most recent recession.</p>
<h2>Food for future thought</h2>
<p>Obviously there are many other factors associated with economic downturns, but aspects of the empirical regularity <a href="http://repec.iza.org/dp4436.pdf">demonstrated</a> here can be seen in many countries over the past 50 years – especially regarding the international financial crises of 1980-82, 1992-94, and 1996-98 and 2007-2008. </p>
<p>This is not to say that demographics were the sole cause of the recessions, but rather that they influenced the timing of such events, given a host of other possible factors. For example, did they play a role in determining when the recent housing bubble burst? That question has yet to be answered, but further study may shine some light.</p>
<hr>
<p><em>This article is part of a series on <a href="https://theconversation.com/uk/topics/whats-next-for-the-baby-boomers">What’s next for the baby boomers</a>.</em></p><img src="https://counter.theconversation.com/content/46056/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Diane J Macunovich does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Research shows baby booms are generally bad news for the economy – at least for the boom’s babies.Diane J Macunovich, Professor of Economics, University of RedlandsLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/427052015-06-05T16:51:05Z2015-06-05T16:51:05ZNot everyone who worries about immigrants is a bigot – they’re just in a moral bind<figure><img src="https://images.theconversation.com/files/84119/original/image-20150605-8736-om303j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">St Anton, Austria: living together isn't always easy. </span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/the_junes/3339176436/sizes/l">the_junes/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span></figcaption></figure><p>Immigration and integration rate among <a href="http://ec.europa.eu/dgs/home-affairs/what-we-do/policies/european-agenda-migration/background-information/docs/communication_on_the_european_agenda_on_migration_en.pdf">the public’s top concerns</a> in most Western nations. Across Europe, <a href="http://www.independent.co.uk/news/world/europe/european-election-results-2014-farright-parties-flourish-across-europe-in-snub-to-austerity-9434069.html">support has grown</a> for right-wing political parties that lobby for tighter border controls and tougher restrictions on migrants. The <a href="http://www.bbc.co.uk/news/election/2015/results">popularity of UKIP</a> in the UK’s most recent election is just one example. </p>
<p>When examining this development, critics and commentators tend to focus on the broad brushstrokes: they <a href="http://www.theguardian.com/commentisfree/2015/apr/20/britain-criminally-stupid-race-immigration">rail against</a> the ideological problems of racism, xenophobia, and religious intolerance. Of course, these kinds of abhorrent ideologies do still exist in societies across the globe. But the media tends to overlook the nuances of how Joe Bloggs and Jane Doe actually make sense of their relationships with the immigrants living nearby. </p>
<p>As a result, locals can feel ignored and misunderstood – like they’ve been put in a box marked “racist”. Governments and mainstream political parties could do more to address and reduce these people’s small, everyday fears about sharing spaces and experiences with immigrants. But as it stands, it’s more likely that these voters will be wooed by parties that express those fears, and demand more radical solutions. </p>
<h2>Making sense</h2>
<p>As an academic, I seek to understand how local people make sense of their relationship with immigrants. To this end, I have spent seven years studying how citizens interpret the way immigrants consume goods and services in their local communities.</p>
<p>My research – which <a href="http://jcr.oxfordjournals.org/content/42/1/109">appears in</a> the June issue of the Journal of Consumer Research – took place in a small town in rural Austria, located somewhere between the iconic ski resorts Sölden, St. Anton, and Garmisch-Partenkirchen. Here, my aim was to examine how the locals responded when the Turkish guest workers who arrived in the 1960s became Austrian citizens, and began to consume local brands, shop in local supermarkets and settle in local neighbourhoods. </p>
<p>Over this period, I interviewed local and immigrant consumers, observed their interactions, and collected relevant media reports. By analysing these materials with reference to <a href="http://www.sscnet.ucla.edu/anthro/faculty/fiske/pubs/Fiske_Four_Elementary_Forms_Sociality_1992.pdf">the work of</a> American sociologist Alan Fiske, I formed an understanding of how and why locals have struggled to reconfigure their relationship with Turkish immigrants, from the 1960s to today. </p>
<h2>A tale of two ethnicities</h2>
<p>In the 1960s, when the Turkish guest workers first came to town, their relationship with the local Austrians was essentially based on a market exchange. Because the guest workers came to work and earn money, rather than becoming part of the Austrian society, local citizens felt no need to adjust their way of life. Instead, they met the Turkish men with some curiosity, provided them with the (often overpriced) resources they needed to do their job, and otherwise the two groups left each other alone.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/84121/original/image-20150605-8736-1gfszo7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/84121/original/image-20150605-8736-1gfszo7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=366&fit=crop&dpr=1 600w, https://images.theconversation.com/files/84121/original/image-20150605-8736-1gfszo7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=366&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/84121/original/image-20150605-8736-1gfszo7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=366&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/84121/original/image-20150605-8736-1gfszo7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=459&fit=crop&dpr=1 754w, https://images.theconversation.com/files/84121/original/image-20150605-8736-1gfszo7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=459&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/84121/original/image-20150605-8736-1gfszo7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=459&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Turkish immigrants in the 1960s.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/54665539@N03/5357539510/sizes/l">Ozan Huseyin/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>But after <a href="http://econ.economicshelp.org/2010/02/economy-of-1970s.html">the economic crises</a> in the mid 1970s, reforms to immigration laws meant that guest workers were able to stay longer, and eventually become proper Austrian citizens. As the immigrants spent more in the local economy – instead of saving or sending their earnings back to Turkey – the locals no longer thought about their relationships with immigrants solely as a mutually beneficial market exchange. The way they relate to immigrants was also influenced by the changes they perceived to their community, their structures of authority, and their equality as citizens. </p>
<p>As the relationships between locals and immigrants became more complex, tensions rose. Immigrants became formally equal citizens, and a part of Austrian life. They began to open their own businesses, buy luxury cars and local houses, send their children to local schools, live out their religious faith more overtly, and vote according to their own interests. </p>
<h2>Local knowledge?</h2>
<p>The locals formed four key interpretations of these developments, and their role in them. First, locals regarded some of their dealings with the Turkish immigrants to be “selling out”, at the expense of the local community. For example, even though neighbours often urged each other to sell their houses to other local buyers, many would nevertheless sell their houses to Turkish buyers, who would pay higher prices. </p>
<p>When locals saw Turkish immigrants establishing themselves in the community, they felt their own authority was being eroded. When locals saw Turkish immigrants drive luxury cars – a globally recognised symbol of social and economic status – they felt obliged to rebuild the hierarchy by discrediting the Turkish practice of a “shared family” car. Turkish families would collect the income from all family members to buy one premium brand car. In contrast, locals opted for individual vehicles, characterising the Turkish immigrants’ practice as inferior, on the basis that it did not afford them the same amount of freedom and independence. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/84118/original/image-20150605-8711-qwic0h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/84118/original/image-20150605-8711-qwic0h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/84118/original/image-20150605-8711-qwic0h.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/84118/original/image-20150605-8711-qwic0h.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/84118/original/image-20150605-8711-qwic0h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/84118/original/image-20150605-8711-qwic0h.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/84118/original/image-20150605-8711-qwic0h.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Status symbol.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/nrmadriversseat/6474905617/sizes/l">The National Roads and Motorists' Association</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Locals were also concerned with issues of fairness. They perceived immigrants to be exploiting the welfare state by claiming benefits for adopted children living in Turkey and violating local cultural norms, for example, by regularly barbecuing in a typically unused shared courtyard. Immigrants were seen to do this with the support of local authorities, and this made locals feel as though they were being treated unfairly. As a consequence, locals felt it was legitimate to disadvantage and discredit immigrants where they could, for example, denying them access to market resources, having them wait longer at the local doctors, and letting them feel their disregard in their everyday interactions. </p>
<p>Finally – and perhaps most importantly – locals felt they were caught in an inescapable bind between local and global morals. As Europeans, the Austrian locals firmly stood by the humanist ideals of equality, freedom, and democracy, which have contributed to the peace and affluence of their country after World War II. But these ideals also require that locals and immigrants are treated as equals, without any special privileges afforded to either group on the basis of their ethnicity. </p>
<p>In contrast, in their roles as community members, locals tended to defend their privileges as longstanding customers of the local supermarket, inhabitants of local neighbourhoods, and voters who decide the fate of their society and culture. They felt they had earned these privileges, by having inhabited, defended, culturally shaped and economically developed their town for decades, or even centuries. </p>
<p>From this perspective, inequalities in the local community were seen as a natural outcome of prior achievements. Locals believed that immigrants need to earn their place at the table, and prove their loyalty to the local community. </p>
<p>As a consequence of these perceptions, locals who generally admire Turkish culture and people, and who disagree with racist ideologies, end up discriminating against Turkish immigrant consumers. They did this as a way of trying to protect an (outdated) relationship in which Austrians were the benevolent hosts, and Turkish immigrants the hard-working, undemanding guests. </p>
<h2>A moral conflict</h2>
<p>Clearly, these demands are incompatible. But it seems that locals have not yet figured out a way to reconcile the conflicting perspectives. Often, locals even realise that their discriminatory practices are morally wrong on a global scale, but have not found suitable ways to deal with these contradictions. This is the kind of challenge facing citizens of Western democracies around the globe. </p>
<p>But even recognising these contradictions can take us some way toward finding a solution. Local citizens can reflect on the many ways their expectations about market exchanges, community, authority and equality can result in discrimination against immigrants. If locals are willing to adjust their expectations about the privileges they’re entitled to, and empathise with immigrants who are often being deprived of the opportunity to grow and prosper, then many of these tensions may dissipate. </p>
<p>In particular, depriving immigrants of opportunities for upward social mobility (rather then encouraging them to thrive) produces exactly those problems that locals don’t want; namely, status anxiety and competition between ethnic groups and discrimination. Because in the UK poorer people <a href="http://www.jrf.org.uk/sites/files/jrf/parenting-poverty.pdf">tend to have more children</a> than richer people, poor immigrant groups tend to grow faster. This then creates further anxieties among locals – who are bearing fewer children – about being “taken over”. </p>
<p>In turn, politicians can keep an eye on the changing relationships between their constituents, to better understand which ethnic groups interpret their relationships with other ethnic groups as misaligned, and why. By thinking about tensions between ethnic groups as a result of complex changes to the ways they interact, instead of simplistic racist ideologies, politicians would be able to use more effective measures to address these problems. </p>
<p>If immigrants and locals are to form cohesive, cooperative societies, they must be able to come together and define the boundaries for cultural change in their local community. By identifying which cultural elements locals and immigrants wish to protect, and which are open to change, and by creating rules about equal treatment in government and in the marketplace, we could encourage interactions that enhance mutual respect, rather than just tolerance.</p><img src="https://counter.theconversation.com/content/42705/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Marius K. Luedicke does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>An expert spent seven years studying the interactions between locals and immigrants: this is what he found.Marius K. Luedicke, Senior Lecturer in Marketing, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/342722014-12-12T11:34:09Z2014-12-12T11:34:09ZFewer births and divorces, more violence: how the recession affected the American family<figure><img src="https://images.theconversation.com/files/66636/original/image-20141208-5146-1h6qz0r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">shutterstock</span> </figcaption></figure><p>Observers may be quick to declare social trends “good” or “bad” for families, but such conclusions are rarely justified. What’s good for one family – or group of families – may be bad for another. And within families, interests do not always align. Divorce is “bad” for a family in the sense of breaking it apart, but it may be beneficial, or even essential, for one or both partners or their children.</p>
<p>This kind of ambiguity makes it difficult to assess what kind of impact the recent recession and its aftermath had on families. But for researchers, at least, it offers a lot of job security – so many questions, so much going on. In any case, here’s where we stand so far.</p>
<p>The effect of the Great Recession on family trends in the United States has been dramatic with regard to birth rates and divorce, and has been strongly suggestive of family violence, but less clear for marriage and cohabitation. </p>
<p>Marriage rates declined, and cohabitation rates increased, but these trends were already underway, and the recession didn’t alter them much. When trends don’t change direction it’s difficult to identify an effect of a shock this broad. However, with both birth rates and divorce, clear patterns emerged.</p>
<h2>Birth rates: a sharp drop</h2>
<p>The most dramatic impact was on birth rates, which dropped precipitously, especially for young women, as a result of the economic crisis. How do we know? First, the timing of the fertility decline is <a href="https://familyinequality.wordpress.com/2011/08/19/is-fertility-ready-to-rebound/">very suggestive</a>. After increasing steadily from the beginning of 2002 until late 2007, birth rates dropped sharply. (The decline has since slowed for some groups after 2010, but the US still saw record-low birth rates for teenagers and women ages 20-24 <a href="http://www.cdc.gov/nchs/data/nvsr/nvsr63/nvsr63_02.pdf">as late as 2012</a>.)</p>
<p>Second, the <a href="http://ann.sagepub.com/content/650/1/214">decline in fertility was steeper</a> in states with greater increases in unemployment. Although we don’t have the data to determine which couple did or did not have a child in response to economic changes, this pattern supports the idea that financial concerns convinced some people to not have a child.</p>
<p>That interpretation is supported by the third trend: the fertility drop was more pronounced <a href="http://www.cdc.gov/nchs/data/databriefs/db60.pdf">among younger women</a> – and there was no drop at all among women over 40. That may mean the fertility decline represents births postponed by families that intend to have children later – an option older women may not have – which fits previous research on economic shocks. </p>
<p>It seems likely that people who are on the fence about having a baby can be swayed by perceived financial hardship or uncertainty. From <a href="http://www.demographic-research.org/volumes/vol31/23/31-23.pdf">research on 27 European countries</a>, we know that people with troubled family financial situations are more likely to say they are unsure whether they will meet their stated childbearing goals – that is, economic uncertainty doesn’t change their familial aims but may increase uncertainty in whether they will be met.</p>
<p>However, some births delayed inevitably become births foregone. Based on the effect of unemployment on birth rates in earlier periods, it appears a substantial number of young women who postponed births will end up never having children. By <a href="http://www.pnas.org/content/111/41/14734">one estimate</a>, women who were in their early 20s during the Great Recession are projected to have some 400,000 fewer lifetime births and an additional 1.5% of them will never have a birth.</p>
<h2>Divorce rates: a counter-intuitive reaction</h2>
<p>In the case of divorce, the pattern is counter-intuitive. Although economic hardship and insecurity adds stress to relationships and increases the risk of divorce, the overall <a href="http://www.sciencedirect.com/science/article/pii/S0049089X10002917">divorce rate usually drops</a> when unemployment rates rise. </p>
<p>Researchers believe that, like births, people postpone divorces during economic crises because of the costs of divorcing – not just legal fees, but also housing transitions (which were especially difficult in the Great Recession) and employment disruptions. </p>
<p>My <a href="http://www.terpconnect.umd.edu/%7Epnc/PRPR14.pdf">own research</a> found that there was a sharp drop in the divorce rate in 2009 that can reasonably be attributed to the recession. But, as we suspect will be the case with births, there appears to have been a divorce-rate rebound in the years that followed.</p>
<h2>Domestic violence: a spike along with joblessness</h2>
<p>Family violence has become much less common since the 1990s. The reasons are not entirely clear, but they certainly include the overall drop in violent crime, improved response from social service and non-governmental organizations, and improvements in women’s relative economic status. However, when the recession hit there was a spike in intimate-partner violence, coinciding with the sharp rise in men’s unemployment rates (I show the trends <a href="https://familyinequality.wordpress.com/2013/11/07/maybe-the-recession-increased-violence-after-all/">here</a>).</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/66645/original/image-20141208-5146-osqx1c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/66645/original/image-20141208-5146-osqx1c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/66645/original/image-20141208-5146-osqx1c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=706&fit=crop&dpr=1 600w, https://images.theconversation.com/files/66645/original/image-20141208-5146-osqx1c.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=706&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/66645/original/image-20141208-5146-osqx1c.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=706&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/66645/original/image-20141208-5146-osqx1c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=887&fit=crop&dpr=1 754w, https://images.theconversation.com/files/66645/original/image-20141208-5146-osqx1c.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=887&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/66645/original/image-20141208-5146-osqx1c.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=887&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Intimate partner violence and changes in men’s unemployment rate, 1999-2013.</span>
<span class="attribution"><span class="source">Philip N. Cohen</span></span>
</figcaption>
</figure>
<p>As with the other trends, it’s hard to make a case based on timing alone, but the evidence is fairly strong that the economic shock increased family stress and violence. For example, one study showed that mothers were more likely to report <a href="http://www.sciencedirect.com/science/article/pii/S0145213413002226">spanking their children</a> in the months when consumer confidence fell. Another study found a <a href="http://pediatrics.aappublications.org/content/early/2011/09/15/peds.2010-2185.abstract">jump in abusive head trauma</a> cases during the recession in several regions. And there have been many anecdotal and journalist accounts of increases in family violence, emerging as <a href="https://familyinequality.wordpress.com/2009/12/30/recession-begets-family-violence/">early as 2009</a>. Are these direct results of the economic stress or mere correlation? It’s hard to say for sure. </p>
<p>The ultimate impact of these trends on American families will likely take years to emerge. The recession may have affected the pattern of marriage in ways we don’t yet understand – how couples selected each other, who got married and who didn’t – and may create measurable group of marriages that are marked for future effects as yet unforeseen. Like the young adults who entered the labor market during the period of high unemployment and whose career trajectories will be forever altered unfavorably, how these families bear the scars cannot be predicted. Time will tell.</p><img src="https://counter.theconversation.com/content/34272/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Philip Cohen does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Observers may be quick to declare social trends “good” or “bad” for families, but such conclusions are rarely justified. What’s good for one family – or group of families – may be bad for another. And…Philip Cohen, Professor of Sociology, University of MarylandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/336022014-10-30T06:28:44Z2014-10-30T06:28:44ZWhy reducing energy consumption through a recession doesn’t really count<figure><img src="https://images.theconversation.com/files/63179/original/sp274mzd-1414582725.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">We're using less petrol – there's a recession on, you know ...</span> <span class="attribution"><span class="source">Antony</span>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>Readers of the Financial Times would have recently encountered a story that encompasses the <a href="http://www.ft.com/cms/s/32aa240c-5558-11e4-89e8-00144feab7de,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F32aa240c-5558-11e4-89e8-00144feab7de.html%3Fsiteedition%3Duk&siteedition=uk&_i_referer=http%3A%2F%2Fsearch.ft.com%2Fsearch%3FqueryText%3Ddaniel%2Byergin%2Boil#axzz3HX1BCn5G">paper’s version of bad/good news</a> when it comes to the oil business. According to the author Daniel Yergin, the bad news is that several major oil exporters are suffering from insurrection and civil war, which threatens global supplies. But, there is also good news: </p>
<blockquote>
<p>The sum of these risks is trumped by the old-fashioned forces of supply and demand. While there may be a surplus of geopolitical risk in the world, there is an even greater surplus of oil. </p>
</blockquote>
<p>To deconstruct these sentences, I set aside the glaring misuse of “supply and demand” (be it “old-fashioned” or up-to-date, these so-called forces apply only in an imaginary world of perfect competition, which the petroleum market is not). Readers discover that the trump card in question comes out of the US deck of energy cards. To be specific: “US crude oil is up almost 80% from 2008” and this year US production exceeded that of Saudi Arabia, making the Land of the Free the world’s largest source of black gold.</p>
<p>So, to paraphrase: a lot of bad stuff is happening in the parts of the world where we used to get our oil, but that’s ok because there’s a new kid on the energy producing block, and it’s one of our friends.</p>
<h2>US takes over the oil race</h2>
<p>The chart below shows this US race to first place through 2013, when the Saudis were still number one with 13.1% of world output, and the US hot on Saudi heels with 10.8% (Saudi Arabia and the US are measured on the left axis, world output is on the right). According to Yergin, the increase in US production will more than compensate for any declines in conflict-affected oil producing countries.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/63163/original/3qqf6xy8-1414574273.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/63163/original/3qqf6xy8-1414574273.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/63163/original/3qqf6xy8-1414574273.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=428&fit=crop&dpr=1 600w, https://images.theconversation.com/files/63163/original/3qqf6xy8-1414574273.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=428&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/63163/original/3qqf6xy8-1414574273.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=428&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/63163/original/3qqf6xy8-1414574273.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=537&fit=crop&dpr=1 754w, https://images.theconversation.com/files/63163/original/3qqf6xy8-1414574273.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=537&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/63163/original/3qqf6xy8-1414574273.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=537&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Crude Petroleum Production, USA, Saudi Arabia & the World 1990-2013
(millions of barrels per day with global share for 2013 in legend)</span>
<span class="attribution"><span class="source">BP Statistical Review of World Energy June 2014.</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<h2>Energy prices</h2>
<p>As if to verify the cliche that there is nothing as old as yesterday’s newspaper, just three days later the FT ran another article with the title: “<a href="http://www.ft.com/cms/s/0/5f482c9a-5619-11e4-bbd6-00144feab7de.html">Crude oil rallies sharply after near four-year low</a>”. In fairness to Yergin and his “good news” about an oil glut, petroleum prices are notoriously variable – and evidence suggests that he might be correct over the medium term.</p>
<p>The chart below shows the prices of petroleum (based on the “West Texas Intermediate”, a crude oil grade used as a benchmark in oil pricing), natural gas (the average price for OECD countries), and coal (US central Appalachia – again a benchmark for pricing), all divided by the US producer price index to give a measure of “real” energy prices. </p>
<p>Essentially, the result measures whether energy prices go up or down compared to other goods and services. Since 2010, the annual price of all three major energy sources of greenhouse emissions have either declined (coal substantially, natural gas slightly) or flat-lined (petroleum).</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/63164/original/7fzpwmpq-1414576286.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/63164/original/7fzpwmpq-1414576286.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/63164/original/7fzpwmpq-1414576286.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=406&fit=crop&dpr=1 600w, https://images.theconversation.com/files/63164/original/7fzpwmpq-1414576286.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=406&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/63164/original/7fzpwmpq-1414576286.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=406&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/63164/original/7fzpwmpq-1414576286.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=511&fit=crop&dpr=1 754w, https://images.theconversation.com/files/63164/original/7fzpwmpq-1414576286.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=511&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/63164/original/7fzpwmpq-1414576286.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=511&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Index of Real Global Prices of Petroleum, Natural Gas & Coal, 1990-2013.
(deflated by the US wholesale price index, 2007 = 100)</span>
<span class="attribution"><span class="source">BP Statistical Review of World Energy June 2014.</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>The evidence further shows that petrol prices at the pump have declined for the past two-and-a-half years from a cross-national average of 141p per litre in April 2012 to 125p now – down by about 13% (see chart below). If the pump price were deflated by the cost of other goods and services bought by households, the decline would be close to 20%.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/63166/original/k9r5p646-1414578297.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/63166/original/k9r5p646-1414578297.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=377&fit=crop&dpr=1 600w, https://images.theconversation.com/files/63166/original/k9r5p646-1414578297.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=377&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/63166/original/k9r5p646-1414578297.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=377&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/63166/original/k9r5p646-1414578297.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=474&fit=crop&dpr=1 754w, https://images.theconversation.com/files/63166/original/k9r5p646-1414578297.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=474&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/63166/original/k9r5p646-1414578297.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=474&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">UK retail petrol price, weekly June 2003 - October 2014 (pence/litre)</span>
<span class="attribution"><span class="source">BP Statistical Review of World Energy June 2014</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>Either way, a cheaper price at the pump has to be good news, right? It certainly is for all those readers who are eagerly looking forward to the end of civilisation as we know it, but not so great for those of us hoping that the planet might achieve environmental sustainability. This is because how much of a commodity households buy depends on their incomes and the price of that commodity.</p>
<h2>Energy consumption</h2>
<p>In the chart below we see that from 1990 up until the financial crisis in 2007-2008, UK consumption of petroleum hardly changed. Meanwhile, from 1990 to the end of the century natural gas replaced coal, for both for heating households and in factories and offices. After 2007, coal consumption increased, primarily due to businesses using more as coal prices declined substantially compared to prices for oil and gas. </p>
<p>As worrisome as this increase in use of coal is, the lower consumption of oil and gas (12% and 20%, respectively) did not result from conservation policies. It was instead because of a failure of household income and manufacturing production to recover since 2008. In other words, if the Great Recession had not occurred, it is a safe bet that consumption of hydrocarbons would today be much greater than in 2007. Needless to say, reducing energy use by a massive recession is not the best approach to conservation.</p>
<p>On the chance that the consequence of increased use of solid fuels is not obvious, an Environmental UK pamphlet reminds us: </p>
<blockquote>
<p>Using coal and other mineral solid fuels for home heating will usually result in higher emissions of both local air pollutants (such as particles and sulphur dioxide) and carbon dioxide (the greenhouse gas) than an equivalent natural gas-fired system, and therefore coal fired heating will normally have a higher environmental impact than gas.</p>
</blockquote>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/63167/original/4m7vc7f4-1414578353.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/63167/original/4m7vc7f4-1414578353.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/63167/original/4m7vc7f4-1414578353.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=428&fit=crop&dpr=1 600w, https://images.theconversation.com/files/63167/original/4m7vc7f4-1414578353.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=428&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/63167/original/4m7vc7f4-1414578353.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=428&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/63167/original/4m7vc7f4-1414578353.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=537&fit=crop&dpr=1 754w, https://images.theconversation.com/files/63167/original/4m7vc7f4-1414578353.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=537&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/63167/original/4m7vc7f4-1414578353.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=537&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Index of UK consumption of petroleum, natural gas & coal, 1990-2013.
(2007 = 100)</span>
<span class="attribution"><span class="source">BP Statistical Review of World Energy June 2014.</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>A 2013 report from the <a href="http://uk-air.defra.gov.uk/library/annualreport/viewonline?year=2013_issue_1">Department for Environmental, Food and Rural Affairs</a> warned that after substantial reductions in emissions of air pollutants during the 1990s and early 2000s the “rate of reduction has slowed”. In the specific case of sulphur dioxide, an 11% increase in 2012 wiped out the decline of the previous two years.</p>
<p>It is ironic that the only substantial reduction in UK consumption of fossil fuels came during the severe economic downturn after 2007. If the chancellor had not pursued policies to depress recovery, which I have <a href="https://theconversation.com/profiles/john-weeks-125574">discussed in detail in previous articles</a> , Britain would be considerably more polluted than it is now.</p>
<p>In a grand scheme to destroy the environment, a lower price of petrol is a minor matter. However, its impact on consumption is significant – and more for business users than households. Perhaps the greatest importance of low energy prices lies in the message they send – business as usual in face of the greatest threat to the planet.</p><img src="https://counter.theconversation.com/content/33602/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Weeks does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Readers of the Financial Times would have recently encountered a story that encompasses the paper’s version of bad/good news when it comes to the oil business. According to the author Daniel Yergin, the…John Weeks, Professor Emeritus, SOAS, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/283112014-06-23T17:49:20Z2014-06-23T17:49:20ZLook at the data to understand the risks for the Australian economy<p>What are the risks in the economic outlook for Australia? </p>
<p>Typically, prognosticators take a scenario-based (aka “story-telling”) approach to answering this sort of question. And usually these scenarios end up as a litany of woes about what the future holds (such as weak productivity growth, unfunded fiscal liabilities, and highly unfavourable demographic trends). </p>
<p>But for most economists gathering at the Joint Econometric Society Australasian and Australian Conference of Economists Meeting in Hobart next week, the more natural approach to answering this question is to consider formal econometric analysis of the macroeconomic data.</p>
<p>Without going into the gory details of how to do this, I want to provide a sense of what such analysis says about the short-run and long-run risks in the economic outlook for Australia.</p>
<p>I consider two key indicators of economic activity: output growth and inflation. The short-run risks are captured by statistical distributions for these indicators, while the long-run risks relate to possible changes in these distributions.</p>
<h2>Short-Run Risks for Australian Output Growth</h2>
<p>The graph below plots output growth for Australia and the United States.</p>
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<a href="https://images.theconversation.com/files/51838/original/xrcxbypn-1403487244.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/51838/original/xrcxbypn-1403487244.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/51838/original/xrcxbypn-1403487244.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=392&fit=crop&dpr=1 600w, https://images.theconversation.com/files/51838/original/xrcxbypn-1403487244.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=392&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/51838/original/xrcxbypn-1403487244.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=392&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/51838/original/xrcxbypn-1403487244.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=493&fit=crop&dpr=1 754w, https://images.theconversation.com/files/51838/original/xrcxbypn-1403487244.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=493&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/51838/original/xrcxbypn-1403487244.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=493&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p>It’s clear from the graph that output growth for both countries has been much less volatile since the mid-1980s. Economists, who like to label everything as “Great” (e.g., the “Great Depression” and the “Great Recession”), refer to this stabilization as the “Great Moderation”.</p>
<p>Even a casual glance at the graph makes it clear that the Great Moderation was not a myth, as has been asserted by some commentators, but is very real. Yes, the US economy had large negative growth rates in 2008. But since then, output growth has been stable, if lacklustre. Australian output growth also remained stable throughout this period.</p>
<p>The reasons behind the Great Moderation are highly contested. But at least a couple of leading explanations suggest it should persist in the future.
The most compelling explanation is that the economy now faces “smaller shocks” due, in part, to a changing structure towards services and away from manufacturing (although the reduced volatility occurs within services and manufacturing, not just due to their shifting importance). </p>
<p>Also, monetary policy likely played some role by stabilising inflation, leading to fewer movements along the “Phillips curve” (i.e., the short-run link between inflation and output). Note, however, that US output growth remained stable after the global financial crisis, despite the US Federal Reserve facing a “zero lower bound” constraint on interest rates. So a paramount role for monetary policy in stabilising output growth is doubtful. </p>
<p>Consistent with the visual impression in the graph above, formal tests suggest the statistical distribution for Australian output growth has remained fixed since the mid-1980s. Based on this distribution, the short-run outlook has real GDP growing at a 3% annualised rate, with a standard deviation of 1.5 percentage points for year-on-year growth summarising the risk in this prediction. In words, output growth could well be 1.5% or 4.5%, but there is a low probability that it will be less than 0% or greater than 6%. </p>
<p>Notably, a major recession along the lines of what happened to the United States in
the global crisis is extremely unlikely based on this distribution, although other statistical modelling suggests the probability of some sort of recession for Australia is less remote, but still small, at close to 15% over the next two years.</p>
<h2>Short-Run Risks for Australian Inflation</h2>
<p>The graph below plots inflation for Australia and the United States.</p>
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<a href="https://images.theconversation.com/files/51839/original/kc5x29v5-1403487244.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/51839/original/kc5x29v5-1403487244.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/51839/original/kc5x29v5-1403487244.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=392&fit=crop&dpr=1 600w, https://images.theconversation.com/files/51839/original/kc5x29v5-1403487244.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=392&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/51839/original/kc5x29v5-1403487244.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=392&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/51839/original/kc5x29v5-1403487244.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=493&fit=crop&dpr=1 754w, https://images.theconversation.com/files/51839/original/kc5x29v5-1403487244.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=493&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/51839/original/kc5x29v5-1403487244.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=493&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p>This graph shows that Australian inflation has been lower and less volatile since the early 1990s, especially in comparison to the 1970s. This pattern of stabilisation roughly mirrors that of US inflation, also plotted in the graph, although the timing is a bit later in Australia. </p>
<p>The stabilisation of US inflation in the early 1980s coincides with major changes in the Federal Reserve’s monetary policy at the time, while a link to monetary policy for Australia is strongly supported by the anchoring of inflation expectations (such as the measure also reported in the inflation graph based on the difference between yields for 10-year nominal and real Australian government bonds) at the start of the inflation-targeting era in the early 1990s.</p>
<p>Consistent with the visual impression in the inflation graph and similar to output growth, formal tests suggest a fixed statistical distribution for Australian inflation in recent years, albeit since the early 1990s only when inflation targeting was put in place. </p>
<p>Based on this distribution, the short-run outlook has inflation at a 2.5% annualised rate (exactly the midpoint of the RBA’s target range), with a standard deviation of 1.3 percentage points for year-on-year inflation summarising the risk in this prediction. In words, the headline inflation rate could well be 1% or 4%, but it is unlikely that it will be much more extreme than that.</p>
<p>A major recession might push Australian interest rates to the zero lower bound, along the lines of what has happened in Japan, the United States, and Europe. However, if the RBA were to follow similar unconventional policies to those conducted by the Federal Reserve in recent years, the US experience suggests that inflation volatility should remain contained.</p>
<h2>Long-Run Risks for the Australian Economy</h2>
<p>The main long-run risks for the Australian economy are that the statistical distributions of output growth and inflation could change in some fundamental way, as they have in the past. </p>
<p>Given the reasons for the past changes discussed above, it seems unlikely that output growth and inflation will return to their pre-Great Moderation patterns. A downside of this is that long-run output growth now appears to be lower than it was in the 1960s and 1970s. Furthermore, there is always a risk that long-run output growth could fall further. </p>
<p>It is notable that the average growth rate for the Australian economy was as high as 5% in the 1960s when worldwide productivity growth was high, but has only been 2.8% over the last decade. At the same time, average growth has been reasonably steady since the mid-1980s. So an imminent end to economic growth, as might be suggested by the most dire scenario-based analysis, is quite unlikely.</p>
<p>The key point is that to really understand the risks in the economic outlook, it is important to step back from a story-telling approach, no matter how compelling, and take an an objective look at the data. Doing so provides some encouraging bounds on the likely risks for the Australian economy. </p>
<p><em>Professor James Morley will present an assessment of risks in the outlook for the Australian economy for the “Chief Economists Session” at the Joint Econometric Society Australasian and Australian Conference of Economists Meeting in Hobart on 1-4 July.</em></p><img src="https://counter.theconversation.com/content/28311/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>James Morley receives funding from the Australian Research Council.</span></em></p>What are the risks in the economic outlook for Australia? Typically, prognosticators take a scenario-based (aka “story-telling”) approach to answering this sort of question. And usually these scenarios…James Morley, Professor of Economics and Associate Dean (Research), UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.