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A Recession by Choice

Since peaking on February 19th at 3,386, markets are down, as of writing, 25% from their peak. Entering bear market territory posits the question of recession territory. Can the bear be put down before the cascading effects of a bear on the run materializes? That question remains to be answered.

One read on the current stock market situation is that investors are simply trying to find the landing point for earnings. Given the massive uncertainty around the potential contagion, it seems perfectly reasonable that markets would “overreact”.

With that said, are the fundamentals in trouble? For some industries – travel, tourism, conventions – the answer is clearly yes. Canceled cruise ships, forgone vacations, and webinared business meetings add up. Connected businesses will certainly be affected in the short-run. Can a recession be avoided? If the answer is no, then a large part of the triggers for the recession would have been self-imposed – or a recession by choice.

A recession by choice refers to the idea that businesses, schools, and consumers are choosing to forgo economic activity and this choice becomes a self-fulfilling prophecy.

Have we ever had a recession by choice? The answer is no, although the answer depends on what a “recession by choice” means. Let’s review the historical triggers for recessions starting all the way back in 1797:

1797. In 1797, land speculation was big – until it wasn’t. The land speculation bubble burst, and it ended up sending the largest landowner in the U.S. – Robert Morris – to jail. The economy was weakened simultaneously by Europe exporting deflation to the U.S. Overall, the recession was largely caused by factors distanced from the control of businesses and consumers.

1857. The 1857 recession was triggered by the failure of the Ohio Life Insurance Company. Casualties from this failure included 5,000 business failures. As with the 1797 recession, the 1857 recession was caused by factors distanced from the control of businesses and consumers.

1873. Fast forward to 1873, the largest bank in the U.S. – Jay Cooke and Company – failed. Towards the end of the recessions in 1877, the economy dealt with the Great Railroad Strike. Fortunately, the recession ended in 1878. Again, the recession was not caused by businesses and consumers self-selecting to forgo economic activities.

1893. Another railroad-triggered recession materialized in 1893, this time the culprit being Reading Railroad. Combining this with bank closures, the 1893 recession saw the unemployment rate surpass 12% and 500 bank closures. As with the previous recessions, the 1893 experience was somewhat distanced from businesses and consumers consciously choosing to forgo investment and spending.

1907. One of the most influential recessions that had a lasting effect was the recession of 1907. Why? In response to the collapse of New York’s Knickerbocker Trust Co, Congress created perhaps the most powerful financial institution the world has ever known – the U.S. Federal Reserve. Again, the recession was not caused by conscientious limiting of economic activity.

1929-1938. The most famous of recessions is the Great Depression. The Great Recession saw the American unemployment rate surpass 25%, the stock market gave up 89% of its value (peak to trough), 9,000 banks failed, the Smoot-Hawley Tariffs partially caused global trade to drop by 2/3rds, and droughts hurt farmers. The Great Recession certainly had no self-selection for furthering the recession.

1945. In the aftermath of World War II, the American economy soured, partially due to a drop in demand from the government for military weapons. The recession was, again, not caused by self-imposed recession triggering behavior.

1949. In 1949, the economy suffered a mild adjustment following a period of monetary tightening. Other factors included the prohibition of child labor, a 75-cent per hour minimum wage, and some rent control, among other things. Again, no conscious triggering of a recession.

1953. The short 1953 recession stemmed from the demobilization following the Korean War. As with the previous recessions, consumers and businesses did not consciously opt to send the U.S. economy into a recession.

1957. In 1957, we got our first “Fed is solely responsible” recession, with the recession being triggered by contractionary monetary policy. Again, no conscious self-pushing into a recession.

1960. Although debated, the 1960 recession was probably caused by what some refer to as a “rolling adjustment”, meaning that major manufacturing industries were responding to a shift in demand. For instance, Americans shifted increasingly from American-made cars to compact and often foreign-made cars. This led to a decline in manufacturing. As with previous recessions, there was no conscious self-pushing into a recession.

1970. The 1970 recession was triggered by increasing inflation, which caused the federal government to employ restrictive monetary policy. As before, consumers and businesses had no conscious choice in the matter.

1973-1975. The mid-1970s recession was partially triggered by wage-price controls, which led to high prices and reduced demand. The economy was also suffering from high inflation and made the mistake of the U.S. going off of the gold standard, which resulted in stagflation. Again, no conscious self-inflicting harm.

1980-1982. Paul Volcker took center stage in the early 1980s. His inflation-fighting tactics worked to beat inflation but caused a recession that led to the dismissal of President Carter from office. If consumers or businesses had had a choice, they likely would not have opted for such consequences.

1990-1991. Among the factors leading to early 1990s recession was the defaults caused by the savings and loan crisis. Consumers and businesses, of course, had no conscious choice in the matter.

2001. In 2001, the global economy contracted as a consequence of tech bubble bursting. Economic conditions were made worse by the 9/11 attack, which caused a strong deterioration in consumer spending. If given the choice, it seems unlikely that businesses and consumers would have consciously opted for such an outcome.

2008-2009. Around 210 years after land speculation led to the first American recession, housing took the helm of the trigger again. This time around, the recession was caused by the collapse of subprime mortgages and the socialized risk that was inadequately addressed. As with all previous recessions, the global financial crisis from 2008 to 2009 was not consciously accepted.

Fast forward to 2020. In none of the prior recessions did companies voluntarily opt to hurt their bottom line or consumers consciously decide to forgo spending without being forced to forgo spending because of weakened economic conditions.

We’re in a brave new world. Consumers and companies are consciously opting for a recession – by choice. Simply amazing.

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