Why a Recession Might Not be Such a Bad Thing: Considerations on a “Hard Landing”

It is thought that one million years ago our ancestors began an extended migration from Africa to the rest of the Earth. Humans scattered worldwide in thousands of hunter-gatherer bands that fed themselves with human meat almost as frequently as they ate the meat of other animals. Presently we abhor cannibalism and proudly claim the superiority of our civilization, the civilization of the pyramids of Egypt, the great monuments of Babylon and India, and the Great Wall of China; the civilization of the geometry of the old Greeks, the Arabic numeric system, the physics of Einstein and Heisenberg; the civilization of the music of Beethoven and Stravinsky, the literature of Shakespeare and Tolstoy, the movies of John Huston and Akira Kurosawa. This is the human civilization that has allowed us to travel to the moon and has defeated such scourges of humanity as syphilis, leprosy, smallpox, nearsightedness, and many others, and is probably close to defeating cancer. Our civilization has grown powerful enough to allow us to modify conditions on Earth in many ways, intended and unintended. Mankind is now also able to destroy itself. Most of this has been accomplished in just a few centuries during which human civilization has exploded, and the embryo of a worldwide human community has emerged. This embryonic worldwide human community is manifested in increasing connections and communications across the world, in the economic interdependence of nations, in increasingly shared cultural and ethical values, in the mobility of humans across continents, in the existence of religious, commercial and cultural communities, and in the presence of organizations that extend across nations and continents. Finally, the idea of a human world society is reflected in the existence of the United Nations, an entity officially supposed to manage global issues and maintain world peace.

One of the key components of modern civilization is our ability to obtain large quantities of energy from a variety of sources. This has allowed us to modify the Earth’s environment in so many ways and to such a degree that the term “Anthropocene” has been proposed, on solid grounds, to mean a new era in the biogeological evolution of our planet. We humans are now the determining factor in the evolution of the Earth as a living system. Indeed, our activities are creating a major wave of extinctions of living beings, what has been labeled the sixth extinction. Furthermore, several national governments now control atomic arsenals which are sufficient to destroy the whole of humanity in a nuclear holocaust. If that does not happen, rapidly developing climate change will very likely precipitate the Earth toward major changes by making coastal zones uninhabitable and by significantly disturbing our ability to produce the food needed by the eight billion people now living on Earth—which will be ten billion in a few decades if no major demographic disaster occurs. If all this were not ominous enough, now experts on AI, artificial intelligence, tell us that this fresh invention of humankind can lead us toward utter calamity.

These predictions do not refer to a future centuries away. They have a scope of just decades. Despite this, and revealing the immediatism of our present social context, they are systematically ignored when discussing prospects and perspectives for “the near future,” as politicians and economic pundits are wont to do. In the US there are the specific concerns and significant fears about the next years on both the Democratic and the Republican sides of the political spectrum: the terrifying possibility (for the Democrats) of Trump winning the presidency in 2024, and (for the Republicans) the continuation of the deleterious Biden rule that is destroying the country. But leaving aside these political concerns, it could perhaps be proper to say that the major worries of politicians and commentators in recent times have been the following three: first, the war in Ukraine, signaling the aggressiveness of Russia; second, the similar animosity of China, more or less aligned with Russia “against us,” and increasingly viewed by most analysts (conservative or liberal) as an utterly evil empire whose steady ascent must be stopped by all means; and last, but not least, the possibility of a major economic crisis, generally referred to in more-or-less sweetened language as “a recession,” “a downturn,” or a “hard landing.” With these or other euphemistic terms economic commentators and advisors, usually working for governments, big banks, industrial corporations, international institutions, or academia, try as much as possible to avoid scaring their constituencies—rich investors—and, to a lesser extent, the public at large. Terms such as “economic crisis” or “depression” are systematically avoided by mainstream economic commentators. If anyone discussing economic issues uses any of these terms to refer to a potential outcome soon, it is almost certain that he or she is rather an outsider from the economic establishment.

The past two years, 2021 and 2022, were extremely eventful in economic terms. They followed the dismal depression of the pandemic-marked 2020, when according to the World Bank the world economy shrank 3.1 percent, a contraction almost three times as big as the one that occurred in 2009, during the Great Recession. That was at the time considered an almost unthinkable event, a “black swan,” because of what was then perceived as a dramatic worldwide economic contraction of 1.3 percent. The magnitude of the economic contraction of 2020, almost three times as deep as the Great Recession of 2009, is rarely mentioned, as both mainstream economists and leaders of political forces of almost any kind have been anxious not to look in the rearview mirror and instead have expressed enthusiasm for the quick recovery of the economy after the bleak year 2020. According to the World Bank, the global economy grew 6 percent in 2021, and 3.1 percent in 2022. Thus, the discussions in 2021 and 2022 were mostly on whether the generous use of government money—mostly coming from budget deficits to support incomes—initiated in many countries during 2020 would or would not trigger significant inflation.

In 2020 and 2021 economic pundits were divided on this, with optimists like Paul Krugman seeing only a very small chance of major inflation and skeptics about governmental spending like Gregory Mankiw predicting inflation reaching undesired levels. When inflation emerged and reached substantial rates beginning in mid-2021, Krugman had to acknowledge that he had been too optimistic. But then inflation faded from the economic discussions, and in 2022 a gloomy mood descended on business gurus, economists, and financial institutions, who almost unanimously saw a recession coming. There were basically no dissenting voices; the only differences of opinion among “experts” were on how deep the recession would be. But months passed and the recession did not start, so that forecasts started to be less pessimistic. In the late months of 2022, talk of a recession was muted. Then, in 2023, news about layoffs in leading companies—Facebook, Google, 3M, Disney, FedEx—and financial turmoil affecting major banks in the United States and Switzerland, together with persistent inflation or even hyperinflation in many countries of the world, led to more dire economic predictions for the rest of 2023 and 2024. Tentative forecasts of a recession in 2023 or 2024 appeared again. At any rate, high uncertainty about the near future since the 2020 pandemic has been widespread among economists and financial experts. In June the New York Times published a long article significantly entitled, “Why It Seems Everything We Knew About The Global Economy Is No Longer True.”

A common element of many predictions is a certain degree of ambiguity regarding the unit that the prediction refers to. While forecasts made by the IMF or other international entities generally refer to a global recession, i.e. a crisis of the world economy, the comments of politicians and other analysts usually refer to recessions of the domestic economy. In the case of the US, this is implied by the notion that recessions are caused, or at least “triggered,” by the increase of interest rates by the Federal Reserve. The idea that the recessions of the early 1980s in the US were caused by Paul Volcker raising interest rates as Chair of the Federal Reserve System is indeed “a fact” commonly accepted by many—though not all—economists and non-economists. That “fact” is just based on circumstantial examinations, not on solid analyses. The notion that the recessions of the US economy in the early 1980s or recessions in general in whatever time and country are caused by “too high” interest rates is one of some many notions disputed in the proto-scientific discipline of macroeconomics.

Though discussions of the world economy and its crises are generally avoided by mainstream economists, M. Ayhan Kose and Marco E. Terrones, economists of the International Monetary Fund, proposed in 2015 that four global recessions had occurred in 1975, 1982, 1991, and 2009. As I have argued elsewhere, the criteria used by Kose and Terrones to date these “global recessions” were quite dubious. Of course, there are different ways to date the crises of the world economy, but in my opinion the best method is to use estimates of capital formation. Capital formation is another way to say investment, and since the times of Wesley C. Mitchell and Jan Tinbergen, it is known that the key element of a recession is a drop in investment. The WDI database of the World Bank provides estimates of gross capital formation in the world economy. Thus, a global recession should be marked by a drop in capital formation in the world economy. As shown in the upper panel of the accompanying figure, capital formation in the world economy experienced reversals six times in the past half century, specifically in the years 1975, 1980-1982, 1991-1993, 2001-2002, 2008-2009, and 2020. The two recessions that, according to the usual chronologies, were observed in the US during the first half of 1980 and the year and a half between July 1981 and November 1982 were from this point of view parts of a global recession that extended for the first three years of the 1980s.

The proper unit of analysis when discussing economic issues is not obvious. Why should we talk about a recession in the US economy rather than in the economy of, say, California or Minnesota? Should we be talking about recessions in the European Union rather than in France or Italy? The tradition dating back to the 1930s and the economist Simon Kuznets is to focus macroeconomic discussions specifically on national economies, because the nation-state is the political unit for which attempts to deal with economic turbulence are assumed to be possible. However, it is obvious that in recent decades the process of globalization has intensified quickly, so that referring to recessions in national economies is increasingly irrelevant. Any superficial examination of the economic turbulences that occurred in, say the mid-1970s, the turn of the century, or 2020 reveals the commonality of economic disarray in a variety of countries—indeed, most countries of the world. These were crises of the world economy, a “construct” whose birthdate is dated differently by various historians and economists but which has clearly emerged as a definite entity in recent decades.

Now, if we consider that the entity that experiences periods of economic recession or expansion is the global economy, does it make any sense to attribute the causation of an event like the recession of the early 1980s to the maneuvers of the US Federal Reserve led by Paul Volcker, as done so often by economic commentators? If the Great Recession that emerged worldwide in 2008 is, as it obviously was, a crisis of the world economy, does it make any sense to attribute it to the policies of the US government and the US Federal Reserve led by Alan Greenspan, as many economists, such as Anna Schwartz, the coauthor of the famous Milton Friedman, once did?

In a New York Times piece published on May this year under the title, “Will The U.S. Economy Pull Off a ‘Soft Landing’?”, Paul Krugman discussed the views of different economists on how easy, hard, or likely it is that the government and the Federal Reserve will be able to manage inflation and economic issues, avoiding a “hard landing,” that is, a recession. Krugman starts by mentioning that COVID-19 “dealt a hammer blow to the US economy,” which lost “22 million jobs between February and April 2020,” and continues for two pages mostly without any reference to anything outside the US borders. In passing, Krugman mentions that the enormous shock to the economic system of COVID-19 was “made worse by Russia’s invasion of Ukraine,” but that is his only reference to something beyond the US economy when analyzing the potential outcomes of the present situation. According to Krugman, policymakers “have great power over the economy, at least in the short term.” But then he clarifies what he means: in his view, power “isn’t the same as precision.” When raising interest rates, the Federal Reserve hopes this will lead, says Krugman, to “lower inflation and probably a rise in unemployment. But how big will these effects be? Nobody is really sure.” To complete his acknowledgement of the inability of present-day economics to make any precise forecast of the effects of economic policies, Krugman explains that the Fed began raising rates in March 2022 following policies that economists almost without exception considered appropriate. Despite these policies, unemployment has barely changed, and inflation is still too high. “Does this mean that the Fed hasn’t done enough? Maybe. But it’s also possible that the Fed has already done too much but we haven’t yet seen the effects of past rate hikes. I know perfectly reasonable, well-informed economists holding both views.”

Here we have one of today’s most highly reputed economists acknowledging openly that economic policy provides tools that are very rough—if they are effective at all.

Whether inflation will be reduced or not and whether unemployment will increase or not in the US in 2023 or 2024 are just specific aspects of how the world economy will evolve. The usual approach of mainstream economics when discussing effects of economic policies is often to ignore many factors by using the “other things being equal” clause. However, when discussing the effect of an increase in interest rates or of a decrease in production of oil on the economic reality of the complex world in which we live, the idea of “holding other things equal” is utterly unrealistic.

Economics pretends to be a science, but it is just a set of theories that are used to provide explanations of some aspects of the modern world, more specifically, the market system, or capitalism. These theories are mutually inconsistent; overall they have a very poor fit to reality; and they are remarkably useless for making economic predictions. In physics too, relativity theory and quantum mechanics are not consistent, but both have revealed an outstanding ability to predict empirical outcomes. That is not the case of, say, Monetarism and New Keynesian economics. Authors discussing economic issues from these or other economic perspectives disagree on major parts of economic theory. Indeed, it would be more proper to say that there are several different inconsistent economic theories that provide different models on how our economic system works and quite opposite recommendations on the economic policies to be applied. There is no evidence that any of these economic theories provides more accurate forecasts of economic trends than the others. The recently deceased Nobel winner Robert E. Lucas Jr. proclaimed in his 2003 presidential address to the American Economic Association that macroeconomics had to all intents and purposes succeeded “for many decades” in its task of preventing economic depressions. Since then, this has been proved obviously false at least twice, in 2009 and 2020.

Other academic disciplines that make forecasts have proven to be much more successful than economics in predicting events. Astronomy and Earth science have a high degree of precision in forecasting events such as eclipses, the positions of comets, planets, stars, and Earth phenomena like tides. Meteorology is sometimes compared with economics and there have been economists who have said that the forecasting record of both disciplines is not very different in terms of accuracy. This is wrong, as meteorology has a very high degree of accuracy in predicting weather in a near future of days, and integrated with other geosciences has been extremely accurate in predicting the long-term evolution of the climate since the 1980s. Thus, the predictions in the 1980s and 1990s of rising global temperatures and increasing frequency of extreme weather events have been consistently verified in the past three decades. For the scientific community at large, these manifestations of climate change are quite evidently connected to the human activities that put greenhouse gases into the atmosphere. But that link is denied by a few scientists and a crowd of science skeptics composed of fundamentalist people of different kinds in all shades of the political spectrum, from the extreme right to the extreme left.

Unfortunately, a fundamentalist notion that is regularly entertained by most economists, many social scientists, and most analysts of social issues is the idea that the growth of GDP is a good thing for all people and every country and that growing the economy must be the general purpose of governmental policies. This notion is however absolute nonsense. What reality shows is that the growth of greenhouse emissions, both at national and world levels, is directly proportional to the rate of growth of the economy. The “more prosperous” a year is, the faster we advance toward climate disaster. This is clearly demonstrated by the fact that emissions of CO₂ and other greenhouse gases stagnate or decrease when the economy slows down or contracts and, contrarily, they dramatically increase when the economy “recovers.” As is shown in the lower panel of the accompanying figure, the only periods of decline of global emissions of CO₂ in the past half century were the years in which the world economy was in crisis. Global fossil CO₂ emissions decreased by 5 percent in 2020 because of the economic depression associated with the COVID-19 pandemic, but then increased by 5.3 percent in 2021, because of the economic rebound that was acclaimed with joy by most politicians. The same relationship between GDP and emissions has been observed for each national economy and for the world at large since data on economic growth and CO₂ emissions are available. Thus, emissions of greenhouse gases stagnated or declined during the Great Depression of the 1930s and during the global economic crises of 1975, 1980–1982, 1991–1993, 2001–2002, 2008–2009, and 2020—that is, during the crises of the world economy that are presented in the accompanying figure.

The rationale usually employed to justify the claim that economic crises are the most important disaster to prevent is that they bring with them an outstanding level of human suffering. Businesses fail, people lose their jobs, and even deaths increase because of suicides and many other kinds of ailments, as ex-president Trump remarked several times during his last year in office. In many ways, though, this reasoning is false. Certainly, suicides tend to increase slightly during recessions, but deaths from all other causes of death tend to decrease and, indeed, overall mortality generally increases (over and above its long-term trend) during periods of economic growth, not during recessions. Several extra million deaths occurred worldwide during the economic meltdown of 2020, but these deaths were caused by COVID-19, not by economic stress. During the Great Recession mortality did not increase at all in the United States and significantly decreased in countries of Europe where the economic contraction was particularly severe.

A remarkable lesson of 2020 was that governments worldwide used public resources to avoid the generalized impoverishment of wage workers and small business owners that the stoppage of economic activity imposed by the policies to slow COVID-19 transmission would have otherwise caused. These steps were taken because it was obvious that, otherwise, people would have become desperate, and the consequences could have been unimaginable. We all like to travel, to go out for a beer or a coffee or a meal. During the pandemic many of these things were severely restricted by national or local government policies. Though many people considered these restrictions to be intolerable attacks on individual freedom, for many others all these things that were temporarily lost during the pandemic were a fair price to pay to avoid more deaths. Our twenty-first century economy allows for a lot of leeway to stop producing many unneeded (even harmful) things for a while without causing major suffering to most of the population. But most people have small savings, and they depend on regular income to pay for basic needs, be it the purchase of food or electricity, or the payment of the apartment rent or the house mortgage. It was for this reason that in the United States as well as many other countries important policies and subsidies were put in place to avoid evictions or hunger or other hardships because of losses in income when people became unemployed.

I am close to retirement and a global recession in 2023 or 2024 will likely hit my financial prospects. This is a personal circumstance that I share with many others. But there are many other considerations that go beyond personal interests. To start with, a global recession will significantly delay the progress toward climate disaster much more than all the electric cars that are being produced or engineered to be produced in the future. A global recession will strongly reduce the demand for crude oil and natural gas, and the fossil fuel revenues of Russia will likely plummet, putting serious pressure on Putin to end the Russian aggression to Ukraine. A global recession will for sure significantly cut the demand for Chinese and Indian exports and thus might significantly weaken the grasp of Xi Jinping and the Communist Party on Chinese society and the increasingly authoritarian rule of the fundamentalist BJP party of Narendra Modi in India, opening the door to a reinforcement of civil liberties in the two most populated countries of the world. In those and other countries, a global recession might perhaps trigger movements like those of the Arab Spring, Occupy Wall Street in the US, or the indignados in Europe, movements that, albeit short-lived, created some prospect of hope for humanity in the 2010s.

The present world system is based on economic competition of corporations across the world, as well as economic, political and military antagonism among nations and military blocs. The system is only “healthy” when it is growing, and it is then when it advances quickly toward the worst outcomes for humanity and for life on Earth. Outsized rates of economic growth in China since the 1990s led that country to occupy the first place as world emitter of greenhouse gases. They also led to the conversion of China into a military power that now competes for world supremacy. The world system is like a runaway train accelerating toward the extreme downward slopes and cliffs of global warming and nuclear war. Global economic crises are like little rocks on the rails. They slow down the train and might even derail it onto a plain, which would certainly be much better than the train falling off one of the precipices ahead. Given the almost absolute incapacity of governments to do anything practical and effective to slow down climate change and military rearmament, a global recession could be a positive thing for the long-term interests of humanity. Of course, in the short run it will bring discomfort and “declines in the standard of living” for the rich and the middle class and suffering for the millions who live month to month with very little margin to skip payments. For this reason, a global recession in 2023 or 2024 could also help Donald Trump win the presidential election in 2024. Would a Donald Trump victory open the way to a Third World War or a dictatorship or a civil war in the United States? These are much more difficult questions to answer, and they go beyond the scope of this article. Given our deficient knowledge of the main determinants of social outcomes in our chaotic world, what is clear, though, is that whether or not these outcomes occur is very likely quite independent of the economic policies that the US Federal Reserve or the US government will put in place over the next few months.

REFERENCES AND SOURCES

• Much of what is written in this article is supported by data presented in extenso in my book Six crises of the world economy: Globalization and economic turbulence from the 1970s to the COVID-19 pandemic (Palgrave-Macmillan, forthcoming).
  
• I elaborated the figure in this article from data in the WDI database of the World Bank (wdi.worldbank.org/) and the CAIT database of the World Resources Institute (www.wri.org/).
  
• For recent archeologic evidence of cannibalism see Carbonell et al., “Cultural cannibalism as a Paleoeconomic system in the European lower Pleistocene: The case of level TD6 of Gran Dolina (Sierra de Atapuerca, Burgos, Spain),” Current Anthropology 51(4), 2010. Marvin Harris in Our kind (New York, Harper, 1989) discussed cannibalism as a common characteristic of human societies against the view that cannibalism is a myth. This idea was maintained by some anthropologists worried by the supposed imperialistic and racist implications of the existence of man-eating societies (see The man-eating myth: Anthropology and anthropophagy by W. Arens, Oxford University Press, 1980).
  
• For the views of the International Monetary Fund on global economic crises, see the book by Ayhan Kose and Marco Terrones Collapse and revival: Understanding global recessions and recoveries (Washington, DC, IMF, 2015).
  
• On greenhouse gas emissions before and after 2020, see European Union Science Hub, “Global CO₂ emissions rebound in 2021 after temporary reduction during COVID lockdown”, joint-research-centre.ec.europa.eu/jrc-news-and-updates/global-co2-emissions-rebound-2021-after-temporary-reduction-during-covid19-lockdown-2022-10-14_en (accessed 25 June 2023). For the links between economic growth and the growth of emissions or atmospheric concentrations of CO₂ see my contributions with Ed Ionides and Oscar Carpintero: “Climate change and the world economy: Short-run determinants of atmospheric CO₂”, Environmental Science & Policy 21, 50-62, 2012; “Dynamics and economic aspects of climate change”, in Kang & Banga, eds., Combating climate change: An agricultural perspective (Boca Ratón, CRC Press, 2013).
  
• For the effects of the Great Recession and other economic crises on mortality, see Strumpf et al., “Did the Great Recession affect mortality rates in the metropolitan United States? Effects on mortality by age, gender and cause of death”, Social Science & Medicine 189: 11-16, 2017; Tapia and Ionides, “Population health and the economy: Mortality and the Great Recession in Europe”, Health Economics 26(12):e219-e235, 2017; Tapia & Diez Roux, “Life and death during the Great Depression,” PNAS 106 (41) 17290-17295, 2009.
  
• For views of economists on perspectives of inflation in 2021, see Ben Winck and Ayelet Sheffey, “Economists are divided about how bad inflation is going to get. Here are the 14 loudest voices on both sides of the issue” (Insider, July 15, 2021, www.businessinsider.com/inflation-stimulus-debate-economic-growth-spending-federal-reserve-larry-summers-2021-3). For Paul Krugman’s views see his New York Times articles, “Learn to stop worrying and love debt” (4 December 2020, p. A27), “Does America have too much debt? (Jan 4, 2023, www.nytimes.com/2023/01/24/opinion/us-debt-deficit-economy.html), and “Will the U.S. economy pull off a ‘soft landing’?” (May 18, 2023).
  
• An excellent survey of the views of mainstream economists on the prospects for the near future is the article by John Cassidy, “Even the experts don’t really know where inflation and jobs are headed” (The New Yorker, February 28, 2023). The article “Why it seems everything we knew about the global economy is no longer true” is by Patricia Cohen (The New York Times, 18 July 2023, www.nytimes.com/2023/06/18/business/economy/global-economy-us-china.html).
  
• That meteorology had failed in predictions perhaps as much as economics is discussed by Kevin Hoover in his Causality in macroeconomics (Cambridge University Press, 2001).
  
• Anna J. Schwartz—the coauthor with Milton Friedman of the monetarist classic A Monetary History of the United States 1867-1960—blamed his “comrade-in-ideas” Alan Greenspan and the policies of the Federal Reserve as causes of the Great Recession in her chapter on “Origins of the financial market crisis of 2008,” in Booth, ed., Verdict on the crash: Causes and policy implications (London, Institute of Economic Affairs, 2010).