My model is that the last recession (2008) was essentially financial in nature- a bunch of wealth was destroyed on paper but we lost no productive capacity. The 2002 recession was similar- most of what happened was revealing that things were valueless, rather than destroying value.

I expect this recession to be different, because it stems from an actual decrease in the availability of labor (although it's still subject to demand spirals stemming from that). I'd expect it to have more in common with the 1972 oil embargo (on which I can find zero books), which was also a sudden decrease in the supply of a crucial production component. How will the supply shock nature change the consequences of the recession? Or am I wrong that this one will be different at all?

Note: These questions are intended to provoke more babble than prune. But even the babbliest thing should be presented such that other people can build on it. So if you have a prediction, please share the reasoning or data behind it as well.

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Economics Explained argues that I'm wrong, and this recession was caused by high leverage on mediocre bets, just like the last two.


I think we might want to rephrase things here. We're not currently in a recession by official measures I don't think. Two quarters of negative GDP growth? First quarter will be low but I don't think anyone is saying it will be negative. Second quarter is yet to be seen.

If the stay at home, lots of business shutdown, most factories idled and that runs through June or July we will probably get the official recession. I don't think that will have been caused by any printing of money.

Metaculus says -6.8%. It seems very likely that March and April will be negative enough to generate 2 quarters of negative growth, even if growth resumes by May.
Was not aware of that but had not been seeing any predictions on Q1 estimates or revisions in the news sources I typically read. It will be interesting to see how good an estimate that turns into. I do think March will be an interesting month for the data. I wonder if the pulling forward demand due to stock piling by so many might not end up skewing the aggregate data or show up some compilation anomalies due to this not being a normal patter of consumption.



I think perhaps the best way to contrast the prior recession and the one we will be entering is the difference between the old credit cycle (ABC) theory and real economic shock recessions, as you seem to be doing.

I'm not as convinced the real shock will be the hit to the labor markets or even really a lack of aggregate demand. I suspect the way it will pay out will be closer to the post WWI and then great depression era type shocks. These were huge shocks to the global economic order and supply chain structure of that time. The pandemic is having a similar impact to global economic trade and relations, at a time were pressure on the existing structure was already starting to show where the cracks and fragile points lay.

While clearly Say's Law does apply, and those that lose the market to sell into may lose their ability to express demand for other peoples output -- and that will then cascade. But I would expect the response to that would be reallocation of domestic resources into increasing supplies for those lost imports. Additionally there will likely be more politically and geographically aligned trading blocks. Perhaps the implication there might be some shifting in the margins for where countries or regions are able to define their comparative advantage in trade.

Rebuilding the economic nexus (from any one countries perspective) will take some time. One might also expect that aspects of both economies of scale and perhaps scope will require the notch down in overall productivity/value creation in production due to higher average costs. But over time that will spawn new technology and so may be a wash. (I've been one of those who has not been fully on board with the whole globalization theme as a good plan. It is the easy path forward but is more fragile. A less integrated world economic structure will be more robust in the face of a greater set of shocks. I also think people will find ways to be as efficient as we have been up to now so overall wealth for the world will be close to the same.)



Technically the current recession won't be an official recession until the end of Q2, after two months of GDP decline. But this won't be a recession like any other we've seen in the 21st or 20th Centuries, so let's not quibble over definitions.

We've never before seen 10 million jobs lost in two weeks. And still haven't. The actual number is likely far higher, but most unemployment is run by the States, and many States have antiquated systems that couldn't handle the application load. Here in April it's months too soon to see how fast tens of millions of jobs can be lost, and how far down unemployment ends up.

In terms of history, the official unemployment rate at the height (depth?) of the Great Depression was 25%. We could very well be there by June, less than four months from the first pandemic lockdowns. At best, it'll take years to re-hire that many employees.

Add to that a highly likely repeat of the Panic of 2007-2008. The $2 trillion CARES Act allows for a three month moratorium on all mortgages backed by FannieMae and FreddyMac. Almost 70% of all mortgages. 90 days without payment puts every RMBS at risk of default, and failed RMBSs were the root cause of the last economic crisis. Is there another AIG betting long in the RMBS market? Are there more Lehman Brothers at risk? We don't know as nothing was actually done to fix the stability of the financial markets after the last financial crisis. We're just as much in the dark here in 2020 as Bernanke and Paulson were in 2007. (

What we do know is that the Federal Reserve does work as a backstop to the money markets and financial markets. At least we know it worked the first time. But we didn't have a chance to unwind the $3.2 trillion of extra money the Fed printed to solve the last crisis. The Fed was authorized in March to print another $4 trillion to keep the markets working in 2020. Given at least half of the GDP currently on pause, that is probably not going to be enough. We don't know what happens if the Fed's balance sheet reaches 50% of GDP. All we know is that when Germany tried the equivalent back in 1920's, it didn't go well for the Papiermark. For that matter, the Franc and Pound might have both defaulted if not for the U.S. backing the Entente powers after WWI. (

Lastly, no previous recession or depression included the risk of death. Yes, the Great Depression ended with the industrial production of WWII and troops being sent off to fight a war, but the masses of citizens on the home front were safe from the daily fear of death. Not so this time. Until there is a 100% cure or proven vaccine, the economy can't simply switch back on. No doubt some Governors will lift the lockdowns as soon as the numbers look small, but until a cure or vaccine (or a massive plan for weekly testing), we will be 45 days from 100 community cases to overflowing hospitals. We have a long way to go before we can start rebuilding the economy, and that recovery will be a lot longer and more arduous than the Great Recession or the Great Depression. Let's hope it doesn't speed up due to World War III.



Prediction: Births will decline precipitously (BOTEC: 20%-60%).

A normal recession sees a drop in birth rates of ~9%, although that is typically made up mostly of delays rather than entirely foregone children. Due to fear around interaction with the medical system, I expect it to drop much more than that.

BOTEC: ~40% of births in the US result from unplanned pregnancies. If no one took any additional precautions due to covid and everyone who was planning a pregnancy chose to postpone, that would decrease births by 60%. In reality I expect some "unplanned" pregnancies to be planned out of existence as people take more precautions, and some people to plan pregnancies even given the circumstances (disproportionately older women whose fertility window is running out, although births using fertility treatments will decline), but 60% is still a good upper bound.

I expect at least as many people to prevent pregnancy due to covid as prevent pregnancy during a recession, so there should be a minimum of 2x as many foregone or delayed births. With rounding, that's a 20% floor.



There were important obstacles to wealth creation in 2008. Inflation went negative for a while, which meant there was a decline in the wages at which labor supply and demand would remain stable. Yet wages don't adjust downward in dollar terms - employers lay off workers, rather than cut wages, because wage cuts create very unhappy workers. That's a substantial fraction of what went wrong. [This is a very condensed summary of Scott Sumner's book The Midas Paradox].

That's also happening today. Prices have declined, or at least wholesale commodities have. Wages likely haven't declined to compensate.

Yet for this month, that's just a tiny part of what's happening. Wage adjustments wouldn't keep waiters or oil drillers employed. I expect there's currently a severe shortage of nurses and delivery people, which won't be quickly solved. In that sense, what we're experiencing is a massive shift in labor, more comparable to what happens in a major war than to what happens in a recession.

Value was destroyed by WW11, the 1957 pandemic, the 1968 pandemic, and 9/11. Yet it's unclear how many of those caused recessions.

Wars and severe pandemics tend to cause inflation (for pandemics, that's likely only significant if people doubt that they'll live long enough to value having money a year from now), and inflation tends to postpone or prevent recessions.

Whether we get 2008-style labor market imbalances depends a fair amount on what inflation is like over the next couple of years.

The TIPS spread implies that the market expects low inflation for a long time, which tends to suggest a long, drawn out recession.

But I have low confidence in any forecast along these lines. Will large fractions of the newly unemployed prefer unemployment checks over new jobs that are, for now, relatively high stress and high risk? We don't have much historical evidence to guide predictions here.

The Fed has substantial power to influence inflation, but seems to have a strong tendency to under-react to large changes.

The ISM Purchasing Managers report is the fastest way to get a decent estimate of how GDP is increasing or decreasing. The ISM report on March activity surprised many people, including me, by reporting a nearly neutral level of 49.1 for March. That's a big difference from the 38.9 that was reported on October 1, 2008, which was the biggest single piece of evidence that convinced me to sell stocks in advance of the worst part of that crash (I did not handle this year's crash anywhere near as well as that). Readings below 40 indicate sharp contractions, while readings near 50 suggest activity is nearly unchanged.

I'm changing my estimate of Q1 GDP to approximately unchanged, and I'm confused as to why the ISM report doesn't show recession-like changes.

I would focus on the ISM non-manufacturing index over the manufacturing PMI since this recession is, in the short run, primarily a services recession. Non-manufacturing index will probably be hit harder and will be more indicative of Q1 GDP.

More generally, past indicators of GDP are probably going to lose some reliability. The sectoral breakdown and rapid timing & severity of the current shock are unique enough for many historical correlations to break down. Normally less important things like survey periods will also affect monthly time series more gi... (read more)

Non manufacturing index just came out: 52.5, down 4.8 points. More affected than manufacturing but still in expansion. Confusing.

|The TIPS spread implies that the market expects low inflation for a long time

Could the low spread imply that the market is skeptical about the inflation being honestly calculated by the government?

I don't see any signs that inflation calculations are expected to become less honest. There are certainly lots of opinions about how well the CPI measures what we want it to measure, but it has worked pretty well for Fed policy issues in the past, and I expect that to continue.

Max Hodges

"a bunch of wealth was lost on paper..."

I think you make light of the fact that 861,664 families lost their homes to foreclosure in 2008



No direct prediction from my side but a link to a report:

The full PDF report (linked on the website) has on page 15 a overview of possible outcomes that could be a basis for discussion.



The last recession didn't have a major impact on society. The job market was tough for a few years, but the inevitable progress of technology sent the stock market to all time highs while things continued on as before.

This recession calls into question many of the basic tenets of capitalism. What does it say about the basis of the monetary system if rent and mortgages could be suspended for 6 months with essentially no consequences? The society that comes out of this in a few years may look quite different than the one before as this could be a catalyst for a lot of the world implementing basic income.

If this coronavirus is cured by genetic engineering techniques, then the common cold, HIV, cancer, and much else will also be cured in short order, and the intense focus on treating coronavirus right now means it's not impossible or even unlikely that this could happen. A society with readily available genetic modification is quite different from this one and seriously accelerates singularity timelines.

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I don't know enough economics to have great thoughts here, but I almost wonder if it's something like people's ability to trade has been eroded. The "market", i.e., place where you trade, has been lost. I would still purchases handmade cocktails and live music experiences if I could and you would still produce them if you could, but now we're no longer able to trade, no longer able to exchange value.

I'm not sure where this line of thought leads.

My experience seemed in the opposite direction. The government was like: "stop buying face masks, you worthless muggles will waste them on yourselves, and there will be not enough left for doctors," and my neighbors on Facebook were like: "so I am staying at home with nothing much to do, and I happen to have a sewing machine, so if anyone would like to have a nice face mask for $X, just send me a private message; there are also kid-sized ones with pictures of cute animals". And in a few days I brought home a full bag of them. So it's like industry: 0; government: 0; random agenty individuals: 1.

Many shops and restaurants who didn't do this before, now offer online shopping. Sometimes starting with amateur solutions like: "I am not allowed to let people enter my restaurant these days, but cooking and selling food is technically still allowed, so if you send me a private message, I can meet you in front of my restaurant and sell you the food in a box". And a month later you see an official web application that obviously needs some more testing, but hey, it mostly works, and now you can pay online and come for the product. Not only food, but also other products which are considered non-essential, so it is not allowed to open the shop, but buying online is allowed, and this hybrid "you pay online, then you knock on my door and I give you the box in front of my shop" is technically considered online shopping.

I think it is likely I could buy a handmade cocktail on Facebook.

The problem is, this is mostly black market. My neighbors who sell the face masks are almost certainly violating dozen different regulations. But they can relatively safely assume no one would snitch on them. (Because they trade with neighbors; and because they provide something that is considered necessary but difficult to obtain using the official channels.) Offering home-made cocktails would probably be more risky.

In the economy full of regulations, trading on the market has a non-trivial fixed cost. I wonder how this worked a century or two ago. The sellers probably had to pay some fee for using the marketplace, and for many things some guild had a monopoly. But if you just tried to sell some apples?


I think perhaps one of the directions that line of thought takes us is that in this type of recession the impact is nearly uniform -- none of us are buying handmade cocktails and live music where as in other recessions some of us were not while others were.

The other difference is that many (most) of us could buy/produce those goods and services but are not allowed to. Not sure if that will offer the opportunity for all of us to "walk in the other person's shoes" and so have a bit of a better insight to just what others have experienced in the other recession where we kept our jobs and had the income to live our lives as before. Perhaps producing more social unity over division?

It'll be interesting to see if it takes some focus off of finance measures. I predict not, as that's the aggregate lens that almost everyone in power looks through.

But the fundamental problem is that there is no actual measurement of human satisfaction, and financial productivity diverges hugely from anything we'd rationally want to optimize. GDP is paperclips.

To take a dirt-simple example, person A and person B are neighbors. Person A sells bread to person B for $10/week, and pays person B $10/week to mow their lawn. Gross Neighboorhood Product is $1040/year. Now something comes along to disrupt this, and each one has to mow their own lawn and bake their own bread. It takes longer, doing things they are less skilled at, but still gets done. But it's an enormous financial loss - measured productivity goes to $0!

My intuition is that GDP is, on the margin, like 70% correlated with human flourishing.

Even in your example, it's not clear that GDP is pointing in the wrong direction.

You miss (amongst others) division of labour and specialisation / non-uniform skills. In your example the GDP might not be a good measure because every participant can stand on either side of each transaction, which makes it kind of a zero sum game. It is well known that economic interchange is not a zero sum game (citation needed, could not come up with a precise one). Extrapolating this, you would need to be able to stand on each side of all interactions that lead to the global GDP.

Your example even breaks down when you assume that the bread-baking neighbour is baking bread not only for you but for others, too. In that case economies of scale come into play which favour specialisation towards one baking all the bread and others (maybe investing into better lawnmowers and their handling skills) mowing the lawns.

Sure, I absolutely agree that that specialization and trade very often makes all participants better off. I only claim that not all financial transactions are this, and I claim that many beneficial behaviors are not tracked financially.

Financial aggregates are only a proxy for what we want, and our current common measures have been Goodhart-ed to the extent that they're actively misleading on many topics. I hold little hope for adding other measurements, and I recognize that Goodhart will apply to them as well, but it would be nice if people were more cognizant that money != value.