Is The Looming Recession a Man Made Disaster?
We all are taught that business runs in cycles, it has its own boom and bust periods. When everything is going north nobody asks why but when things go awry or starts moving southwards then there is a debate. Economists all over the world are still debating the criteria(s) and are not unanimous as when to label a particular period as recessionary. Most widely used indicator for proclaiming recession is significant decline in economic activity for a sustained period which in other words means fall in demand and consumption. But the larger question is not WHAT but WHY, why it happens is the question that haunted the general public for ages. Why suddenly the prices of everyday essentials goes inflationary, why the interest rates takes a pivot northwards, why there is sudden mass layoffs etc. We need to dig deeper if we want answers to these questions.
Economic Principles and their Failures in curbing Recession(s)
In 1776 Adam Smith who is known as father of economics wrote his seminal book ‘Wealth of Nations’ and gave the idea of laissez faire i.e. free market economics and wanted the state to take back seat and let the invisible hand i.e. demand and supply do the trick. Things worked well but then came the Great Depression of 1930’s and Laissez faire principle failed to curb it. As state was not proactive in regulating the economy it failed miserably in preventing it. Thus in aftermath of Great Depression state came on the driver seat and played a proactive role in shaping and regulating the economy andso the birth of Keynesian Model took place. John Meynard Keynes and President Roosevelt unveiled ‘New Deal’ and ushered a new era of state led reforms in easing the lives of people who suffered due to Great Depression. Keynesian model directed the state to spend more in order to stimulate demand and not worry too much about fiscal deficit. As when the demand gets stimulated in the economy and the masses feel confident in spending more then the state should increase tax and cover up the excess fiscal deficit. For the time being Keynesian model was hailed by all and it was seen as a panacea to all economic problems. But then came the Oil shock of 1970’s and the Keynesian model fell flat in the face of it. Keynes main idea was demand management in the economyby larger spending by the state but the supply side was altogether ignored by Keynesian model.The oil shock of 1970’s has nothing to do with demand as it was caused by artificially created supply shock of oil by Gulf countries in order to protest against the US for siding with Israel in the war. As the supply of oil was chocked and demand remained constant what followed was a high level of inflation and decline in economic growth worldwide. The term stagflation was coined in order the describe the contemporary situation. Then from the ashes of Keynesian model rose the Monetarists, there arrival came as a breathe of fresh air in the economic world. Their main focus was on monetary management in the economy rather than demand management. Milton Friedman was a great profounder of this school of thought. He said demand growth in Keynesian economy is false growth and the growth is nothing but inflation which is due to the excess liquidity in the economy. Friedman was inspired by the principle of classical economics and said that regulation of liquidity in economy is necessary to manage the aggregate demand and government role should be minimal in this. It is the central bank of the economy which should keep a watchful eye and chart out a monetary policy to manage liquidity. From then on the role of central banks all over the world increased and every central bank from time to time sits and regulate the liquidity in the economy. But this system also faced a setback in 2008 when Global Financial Crisis hit the world. Banks in the United States went frenzy in giving housing loans without due diligence of the borrowers and sooner than later it became a bubble. With the bankruptcy of Lehmann Brothers the bubble was burst and the world once again went into the disturbing ensconce of recession. Milton model failed because the central bank despite being the financial guardian of the economy failed to regulate the inconsiderate activities of the local banks. It let the bubble build up which could have been nipped in bud had the central bank been more watchful.
How the Current Recession is different from earlier recessions
The current recession is different and unique in many ways from earlier recessions. Covid-19 hit us unexpectedly in 2019, its viralityand mortality posed a serious threat to the existing human lives and it raised a question of trade off upon the governments world over to make a choice between life and economic activity. Fortunately sense prevailed and they chose life over business. A selfinduced complete lock down was announced and almost all economic activities came to halt at once. The method may have seemed logical at that time but in hindsight it looks questionable and more of a knee jerk reaction. Generally in all recession(s) since World War II there is an inverse relationship between GDP growth and Unemployment levels. But this recession is unique as we are seeing decline in GDP numbers but instead of higher unemployment figures, the data published showing that the unemployment levels are also declining. This is really a first of a kind recession.
To Err is Human
First we have to admit that the pandemic hit us suddenly and its impact was global. There was no standard template or SOP’s to deal with such health crisis on world level. Economic activities came to halt due to lock downs, tax collection figures were falling by the day and on top of this government has to sustain the livelihoods of general public as well. It was evident that there going to be a huge fiscal burden for the forthcoming years. To finance this extra burden government took the obvious but painful route- they started printing money. US printed more than $ 3 trillion in 2020 alone. The market was flushed with excess liquidity. Barring few sectors almost all sectors of economy saw growth particularly the stock market which has risen like phoenix in the pandemic years and achieved its all-time high figures. But all was not ok with the economy. Somehow we survived the worst years of pandemic but the method we chose to handle the pandemic has now come to haunt us in form of Inflation. In Post pandemic times due to excess liquidity and falling GDP numbers, inflation skyrocketed in many countries. Now the central banks themselves want the economy to go into some form of recession in order to tame the inflation numbers and they are doing it by increasing the repo rates on a continuous basis. But still despite increasing the repo rate by more than 250 basis points in last 2 years, the inflation numbers are not coming to their tolerable limits. And this is exasperating for every central bank in the world. If in pandemic the tradeoff was between life and commerce here in post pandemic the tradeoff is between inflation and recession.
If the pandemic was not enough, to make the situation worse we have a war on our hands which is cherry on top making it like a perfect storm. The Russia-Ukraine war in the times of pandemic has triggered a energy crisis and a cascading effect on inflation, the sanctions has impacted the world growth numbers. Human actions has made the pandemic go from worse to worst.
Final Verdict
Although no government in the world has admitted yet that they are in recession but the number speaks for themselves. It is true that no two recessions are alike. But the potential recession is looking like the most unique one we’ve ever seen. And for all the speculation and talk of uncertainty, if there’s one thing economists seem to agree on is that this recession is here to stay and if the world does not come together leaving behind their petty issues and deal it multilaterally then this is going to get worse than the Great Depressions.
##Published in Core Magazine ,2023 by WBSEFAMA