Finance

What Past Recessions Can Teach Us About The Next One

While a temporarily shrinking economy may be unavoidable, there are variables we can control.

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analysis-gce97e1d67_1920The U.S. economy is still creating jobs — half a million in March alone. Stocks remain one good rally away from all-time highs. And American households have socked away about $2.5 trillion in excess savings.

Despite all this, a number of prominent financial industry insiders are predicting a recession.

“Over the past 75 years, every time inflation has exceeded 4% and unemployment has gone below 5%, the U.S. economy has gone into a recession within two years,” Former Treasury Secretary Lawrence Summers recently wrote in a Washington Post op-ed. At least in the short-term, inflation has far exceeded 4%, and the unemployment rate dropped to only 3.6% in March. Summers puts the odds of recession by the end of 2023 at 80 percent.

Everyday Americans are even shorter on optimism than the experts. A survey conducted in late March found that 81 percent of U.S. adults think the U.S. will experience a recession in the coming months of 2022.

Their timing might be a bit off, but they’ll be right eventually: The U.S. will go through another recession.

The oldest Baby Boomers have been through about a dozen recessions in their lifetimes. While a temporarily shrinking economy may be unavoidable, perhaps there is something we can learn from past recessions to help us make the next recession (and the one after that, and the one after that) shorter and less consequential.

Not surprisingly, several 20th century recessions were spurred by changes in government and individual spending related to warfare. The U.S. saw recessions in the wake of World War II, the Korean War, and the Gulf War.

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You probably don’t need to bring recessions into it in order to believe that ending all war would be a good thing, but that’s also a tall order. There are more controllable variables than global conflict.

Like dependence on foreign fossil fuels. The sad feedback loop between the U.S. economy and oil prices has caused a number of national economic shocks. The war-related recessions also inevitably have energy price problems stirred into the soup (especially the Gulf War recession, when global oil prices more than doubled). Yet oil price and supply issues have plenty of firepower to crater the economy all on their own.

The 1973 OPEC embargo on oil imports and the multiple energy crises of the early 1980s due to falling Iranian oil output are prime examples of why it is not a great idea to have your economy at the mercy of fossil fuels buried beneath other countries. While we’re not quite there yet, we fortunately have made great progress in fields that reduce our dependence on foreign oil, like electric vehicles and sustainable domestic energy production.

Obviously green technologies have supply chain issues of their own and are far from perfect. Even so, if there is one achievable thing we should do as a society to lessen the likelihood of a recession, and to reduce the severity of the next recession when it does ultimately arrive, it is doubling, tripling, and quadrupling down on industries and technologies which will make the United States more energy independent.

Of course, though unexciting compared to brave warriors charging into combat or black gold bubbling up from the earth’s crust, the role of monetary policy in creating recessions cannot be ignored. Tighter monetary policy, despite often accomplishing its goal of stemming inflation, has been blamed for more than one recession. For instance, in 1982 then-Federal Reserve Chairman Paul Volcker pushed interest rates to 21.5 percent. Inflation did plummet — but so did GDP.

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Although there are plenty of predictions out there, the truth is that nobody really knows exactly when the next recession is coming, or exactly what the cause will be. I’m personally very skeptical that the U.S. will see a recession within the next year.

But when the next recession does come — and it will come, eventually — hopefully we’ll have done more to ready ourselves than wring our hands and endlessly speculate. So, while we all wait to see who is most right about the next recession (everyone conveniently forgets about the spectacularly wrong predictions), let’s do our best to actually prepare.

Do what you can to help get us off of foreign oil, and let’s all try to create some independent reserve funds so we don’t have to beg for a government bailout next time.

Jonathan Wolf is a civil litigator and author of Your Debt-Free JD (affiliate link). He has taught legal writing, written for a wide variety of publications, and made it both his business and his pleasure to be financially and scientifically literate. Any views he expresses are probably pure gold, but are nonetheless solely his own and should not be attributed to any organization with which he is affiliated. He wouldn’t want to share the credit anyway. He can be reached at jon_wolf@hotmail.com. 

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