What Defines a Recession? How They Happen and How the Economy Recovers
This story is published as part of Teen Vogue’s 2021 Economic Security Project fellowship.
There are a few words and phrases that we’ve all heard too many times since the beginning of the pandemic: Examples include but are not limited to “unprecedented”; “the new normal”; and “now more than ever.” Another word that has come up again and again since the spring of 2020: “recession.” But what exactly is a recession? How can we know if we’ve entered one, or when it’s over? What usually triggers a recession?
To get clarity on some of these questions, Teen Vogue speaks with Heidi Shierholz, senior economist and director of policy at the Economic Policy Institute.
What defines a recession?
Economists typically define a recession as a significant, steady economic decline that impacts a country’s GDP, or gross domestic product — the total market value of goods and services within a given country’s borders — unemployment rates, income numbers, wholesale-retail sales, and more. There’s no agreed-upon official threshold those metrics must reach to qualify as a recession, but generally speaking, when that kind of economic downturn happens over several months, experts call it a recession.
A “depression” is, essentially, a much more severe and much longer recession. Part of the reason last year’s COVID-driven recession was compared to the Great Depression was because the metrics were the closest we've seen to — and in some instances surpassed — Great Depression-level numbers. Though the highest pandemic-era unemployment rates mirror that period, the good news is that most economists doubt this recession’s length and overall impact will be anywhere near that economic dark period of the 1930s.
“We lost 22 million jobs in March and April of 2020, and it was because we just shut down huge swaths of the economy,” Shierholz says. “We've gotten a ton of those back.”
What are some major recessions over the past few decades?
We’ve had one depression in U.S. history — the Great Depression — and it lasted for 10 years. Recessions, in comparison, happen more frequently, with the most recent occurring in the early 1980s, the early 1990s, and the early and late 2000s.
The early-2000s recession, sometimes called the “dot-com bust,” happened after massive investments in internet-based companies — all expected to cash in on the start of the internet era — unexpectedly crashed. This economic downturn lasted only eight months, but it was worsened by accounting scandals, such as the Enron debacle, and the September 11 attacks in New York City and Washington, DC.
The late-2000s recession, often called “the Great Recession,” happened after major banks knowingly offered a massive number of subprime mortgages to everyday borrowers who couldn’t afford their payments. As a result, the housing market crashed in 2008, the U.S. economy tanked, and the government spent hundreds of billions of dollars bailing out the financial industry while an estimated 10 million homeowners were forced to suddenly foreclose on their houses.
“You can group those [recessions] together as being similar in nature,” says Shierholz. “They were very, very different in severity, but as far as what caused them, they were both a bursting of a big asset bubble.”
Indeed, the early- and late-2000s recessions are often paired together because of similar characteristics. The former surrounded the rise of the internet and the resulting dot-com bubble, while the latter surrounded predatory bank-approved mortgages and the resulting housing bubble. The sudden loss of wealth meant that people stopped spending money — and when millions of people stop spending money, the economy as a whole falters.
“Workers lose their jobs when that happens en masse, and then they [also] have less income to spend,” Shierholz explains. “So they're then cutting back on their purchases of goods and services. And that means more people lose their jobs, and on and on and on. That's the vicious recessionary cycle that causes more unemployment, more income loss — just more human suffering. That's what it looks like when you have the bursting of an asset bubble.”
What makes the COVID recession unique?
Well, for one, the market was brought to a standstill because of a global health crisis rather than an economic failure. As with past recessions, Shierholz explains, the economic slump was caused by people not spending money and businesses responding to that sudden drop in demand by laying off workers, temporarily shutting down, or closing entirely. But this time, unlike past recessions, people largely stopped spending money because of lockdown requirements that kept them indoors.
“Things have been very, very hard, but people aren’t losing their jobs because people don't have the money to spend,” Shierholz says. “By and large, people have the money to spend, but it's been the virus that's been keeping people from spending. And that's why as the vaccine is coming [out], we're getting fast job growth.”
As COVID restrictions lift and consumerism picks up again, Shierholz says, the economy will likely have an easier time recovering than it did with past recessions, which is remarkable given how dire things looked at the beginning of the pandemic. But, she cautions, the positive outlook doesn’t mean we’re out of the woods: Shierholz estimates the country won’t be back to pre-pandemic unemployment rates until the end of next year.
Who gets hurt the most by recessions?
Predictably, people who are already marginalized by the current economic system stand to lose the most during recessions and have the hardest time recovering. For example, Shierholz says, because Black and brown people are overrepresented in lower-wage jobs, and lower-wage jobs are more likely to be cut or reduced during a recession, Black and brown workers end up bearing the weight of unemployment crises. And because of existing wealth and income disparities, those same workers of color are less likely to have the funds to bounce back quickly.
“There’s a very intense racial component to recessions,” Shierholz says. “Recessions exacerbate inequality based on income because low- and middle-wage income workers are more likely to lose their jobs, and it also exacerbates inequality based on race. Both of those things really point to the incredible importance of macroeconomic policymakers getting things right to get us out of the recession as quickly as possible and limit the amount the recession exacerbates existing inequalities.”
What are some common policy fixes?
There are two major federal policy solutions to address economically driven recessions, according to Shierholz. The first, monetary policy, is carried out by the Federal Reserve with the goal of stimulating the economy by lowering interest rates, ideally encouraging businesses to invest, hire workers, and grow their companies. But that’s an unlikely option for the COVID recession because interest rates are already near 0% since they were lowered to help the economy after the Great Recession.
The second option, fiscal policy, falls under the purview of federal lawmakers. “The responsibility for getting us out of recession falls largely to fiscal policymakers. That's Congress doing stimulus, period,” says Shierholz. “That means that even if people don't have a job, their spending doesn't drop. So you start to reverse that vicious cycle. You can keep spending, demand for goods and services goes up, and more workers get [hired].”
Federal support programs like the CARES Act weren’t at all perfect, Shierholz says, but providing aid such as stimulus checks and unemployment insurance will help mitigate the longer-term impacts of a recession. Reducing or completely eliminating pandemic relief so early in the recovery from the recession could hurt people who need those benefits to cover their immediate needs and stretch the recovery timeline longer than necessary. Republican governors in more than a dozen states, including Arizona, West Virginia, Texas, Ohio, and Mississippi, are in the process of cutting off the federal unemployment aid millions of families — and the U.S. economy — are relying on to stay afloat.
“The Fed[eral Reserve] can pull on a string to slow the economy down, but trying to speed the economy [up] is like pushing on a string,” explains Shierholz. The recession might not have been as bad as it could’ve been, and the U.S. may have a better chance for a quicker recovery than was previously expected, but it’s undeniable that policymakers play a critical role in supporting everyday people trying to make ends meet at the tail end of the biggest global health crisis of our lifetime.
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Originally Appeared on Teen Vogue
