Not your older sister’s recession

As I keep saying, not only is this not your granddad’s recession; it’s not like any recent recession. Check out these tweets from JW Mason:

Those of us who teach basic macro generally use a AS/AD model where recessions can be caused by either demand or supply shocks. Students might get the impression that both types are fairly common. In fact, almost all recessions in the US are due to demand shocks. So when a bona fide supply shock (aka real shock) comes along, we don’t know what to make of it.

If the Covid pandemic were to end soon, the economy would recover quickly. If not (and of course it’s not likely to end soon), then there’s a real danger that this morphs into a demand-side recession. But as of today, it still looks like a real shock.

In 2009, it was hard to get people to buy houses, cars and boats. If Covid ends, it won’t be hard to get people to go out to eat, go on vacations, or get haircuts.

HT: Matt Yglesias



13 Responses to “Not your older sister’s recession”

  1. Gravatar of John Hall John Hall
    29. October 2020 at 11:23

    JW Mason must not be paying attention because the GDP numbers were fairly close to the Bloomberg Consensus forecast and just modestly shy of the Atlanta GDPNow estimate.

    One interesting tidbit from the report was that disposable personal income rose significantly in Q2 but then corrected in Q3, largely due to the impact of government benefits.

    To the point about aggregate demand and supply, I’m not sure how well that really applies here. I would expect significantly higher inflation in a traditional aggregate supply shock than we have observed (alternately, the aggregate demand curve could be very elastic). We certainly have observed a huge shock to services spending and a corresponding increase in savings over this period, as if people took the money they normally spent on going out and left it in their banks instead. The increase in savings helped was likely coincident with a shift in the demand for money higher, which should have contributed to a demand shock.

  2. Gravatar of Ran Ran
    29. October 2020 at 12:12

    The boat load of stimulus has to have helped. It’s also worth noting that the middle & upper-middle class have faired MUCH better through this and it’s those folks who are driving the home-buying and retail markets anyway. The financial pain of the lower quartile has been, imo, greatly masked by the suspension of evictions and utility disconnects.

    Just for example, accounts receivable at my employer (a mid-sized electric utility) grown by at least ten fold compared to last year. At some point, we’re going to have to acknowledge that those accounts will never be paid off and book a big loss. We utilities will survive but the same can’t be said about the nations landlords…

  3. Gravatar of xu xu
    29. October 2020 at 12:17

    Are you really echoing the doom and gloom Biden camp again: covid will NEVER be over. A dark dystopian winter is coming to destroy us all. RUN FOR YOUR LIVES!

    How about a little optimism?? Covid is rounding the corner. The fatality rate is less than 1%. Hospitals are not being overrun with patients. We have more than enough beds and equipment. And with the therapeutics we already have, and the vaccines coming out shortly, life will return to normal.

    Let’s just hope its not the “new normal” that these leftists want.

  4. Gravatar of ssumner ssumner
    29. October 2020 at 12:59

    Ran, You said:

    “The boat load of stimulus has to have helped.”

    It certainly helped some people. But the termination of stimulus at the end of July did not have the effect that stimulus proponents expected.

    Xu, I meant it won’t end within a few weeks. I do expect it to end some time next year.

  5. Gravatar of Benjamin Cole Benjamin Cole
    29. October 2020 at 16:57

    Quantitative easing, in combination with federal fiscal deficits, is the equivalent of a money-financed fiscal program, aka “a helicopter drop,” or so says Michael Woodford.

    The US national budget is still running in deficit, although not as large as the Trump Administration or House Democrats wanted. By the outlook of Michael Woodford, we are still running helicopter-drop style stimulus.

    However, since capital markets are globalized, huge ($400 trillion, maybe a lot more) and glutted, I am not sure the helicopter drops would be any more stimulative than simply borrowing the money and spending it. The old-fashioned notion of “crowding out” does not apply now.

    A key insight to remember is that there is no “national economy” when it comes to globalized capital markets. Money is extraordinary abundant, liquid and fungible.

    Still, the practice of quantitative easing appears to allow the US government to spend more domestically than it taxes, without building up net debts. Inflation does not appear to be a risk.

    The idea that US taxpayers have become more debt-burdened in the last year is a legal and accounting fiction. The US taxpayers will send interest, in part, to the Federal Reserve which will send it back to US taxpayers through the US Treasury.

    The Temple of Conventional Macroeconomic Theology needs some new totems.

    It may be that quantitative easing can stabilize capital markets, preventing rapid declines. But again, we must ponder that there are four major central banks and perhaps two minor central banks in operation at any time upon global capital markets.

  6. Gravatar of Benjamin Cole Benjamin Cole
    29. October 2020 at 19:11

    BTW. Moody’s just released a paper, “Credit Disputes Equities Gloom.”

    Short story is yields have not budged much, even as we have an equities correction of late.

    I believe in EMT, or EMH.

    But, it is interesting that credit markets are not seeing the same story as equity markets.

    We can reason backwards by tautology to affirm our priors, but….

  7. Gravatar of Benjamin Cole Benjamin Cole
    29. October 2020 at 23:27

    Add on: If anyone wonders is there is a “capital glut” or not….

    “Ant Group’s initial public offering drew a record 19.05 trillion yuan ($2.84 trillion) in bids from retail investors on the Shanghai side as mom-and-pop investors vied to grab a share of the world’s largest IPO.”—Nikkei Asian Review

    This is for a $35 billion IPO, some of which is already sold to institutional investors. That’s just in Shanghai, and just from retail investors, and just in one IPO.

    Germany, of course, issues bunds at negative interest rates.

    Swiss banks have negative interest rates on large deposits.

    Money today is global, copious, liquid and fungible.

    Make policy accordingly.

  8. Gravatar of Todd Ramsey Todd Ramsey
    30. October 2020 at 05:11

    Help wanted signs and help wanted radio ads are common, at least in Seattle.

    This is the strangest recession of all time.

  9. Gravatar of ssumner ssumner
    30. October 2020 at 08:50

    Todd, Good point. The closure of schools has forced some parents (mostly women) out of the labor force.

  10. Gravatar of Thomas Hutcheson Thomas Hutcheson
    30. October 2020 at 08:53

    This is the first recession in memory that has ANY supply constraint component. But still MOST of the downturn and subsequent recovery has been due to changes in demand, demand that has NOT been adequately supported by Fed policy, which allowed inflation expectation to fall and has still not restored them to 2% PCE.

  11. Gravatar of Michael Rulle Michael Rulle
    30. October 2020 at 10:10

    I recall your assertion that Tyler Cowen’s idea of left tail collapse due to supply side crisis was incorrect. So far, so good!

  12. Gravatar of Justin Justin
    31. October 2020 at 09:36

    I’ve been playing around with different analogies.

    My favorite is “Amputation Recession”. Essentially you outlaw certain sectors, in certain states, while at the same time keeping medium term NGDP expectations north of 3%. Normal economic activity is outlawed (for better or worse) in NY/CA/NJ maybe some other states too, but other sectors partially step in to fill the gap. Perhaps also similar to a weak country having parts of it’s territory annexed, while the core continues to function more or less normally, maybe like Czechoslovakia after it lost the Sudetenland, or Syria circa 2015.

    Statistically, it’s similar to a 19th century recession or the post-Great-War/Spanish Flu recession. Appalling drop in activity for a quarter or two, followed by a jarring return to trend.

    Garrett Jones, in maybe July, compared it to a one-time seasonal drop off; prescient.

    Powell has not got enough credit. He could easily have stepped on the shoe strings of the recovery.

  13. Gravatar of Spencer B Hall Spencer B Hall
    1. November 2020 at 07:51

    re: “Powell has not got enough credit”

    Agreed. And People should listen: “FEDERAL RESERVE
    Fed Chair Powell calls for more help from Congress, says there’s a low risk of ‘overdoing it’

    Link Jeffrey Snider: “So, the amount of overall subsidies subtracted from the tax line on GDI is an indicator of how much artificial payments have been buried in those other places – primarily NOS.”

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