The Great Vibes Depression

What is a recession: One woman's journey to answer the question of a generation

note the barbenheimer nukes in the background

There’s been a lot of talk about recessions lately: are we in one? Is there going to be one? Why do people think we’re in one? Unfortunately, the level of discussion has not been very good. So what is a recession?

Babysitter’s club

Let’s start with a simple parable. Imagine a club of parents who babysit for each other. The club works thusly: every parent has a number of tokens they can trade with each other for hours of babysitting. Parents with more tokens are the ones who either babysit more, or demand less babysitting, and those with fewer either babysit less, or need their kids looked after more. Under normal circumstances, the number of tokens would even out - parents who have fewer tokens would look for opportunities to babysit, and parents with more would go out more often.

But imagine if there were too few tokens going around: then it wouldn’t really be possible for parents to build up too many tokens, so many more parents would be interested in babysitting than those who would be interested in asking for those services. In other words, there would be too many parents who aren’t “working”, and too few that are “hiring”. If the number of tokens were to magically go down, then a lot of parents would cancel their plans to not lose out on an important resource, and a therefore people who want to build up their token stockpile would be out of opportunities to do so.

This analogy is pretty close to the real world. In the economy, businesses (or the government, but acting “business-like”) hire people to do things. This depends, crucially, on the amount of spending in the economy - if people didn’t have enough money to spend, then they would cut back, impacting businesses and forcing them to cut back on future hiring, and perhaps to fire workers. A decline in spending, known as a recession, is usually accompanied by layoffs, because businesses are unable to cut wages - sometimes it’s illegal, and usually employees won’t like it.

Something that’s pretty important is that, because prices or wages can’t go down, then recessions can’t work themselves out: back in the 1920s, what approximated economists thought that businesses would simply cut prices and workers would accept lower wages instead of no wages at all, which would jump-start the economy again. Exactly why wages and prices can’t go back up is somewhat contested, but it’s pretty much agreed upon by everyone that they can’t, so downturns simply prolong themselves further without any intervention.

Since it’s important to not have recessions, and recessions happens when there’s not enough money, then who controls the amount of money? The central bank, which in the US is called the Federal Reserve. What they do is, they print more money (and give it to banks so the banks can loan it out to people) during recessions, and print less when there’s inflation. Are they good at it? You betcha:

… the Federal Reserve Board actively manages interest rates, pushing them down when it thinks employment is too low and raising them when it thinks the economy is overheating. You may quarrel with the Fed chairman's judgment (…) but you can hardly dispute his power. Indeed, if you want a simple model for predicting the unemployment rate in the United States over the next few years, here it is: It will be what Greenspan wants it to be, plus or minus a random error reflecting the fact that he is not quite God.

Similar to a recession, there’s later an expansion, which is one it gets to where it was when the recession started, because the economy is adding more growth, not just gaining it back. Together, they’re called the business cycle, and, even though it’s called a cycle, very few normal and well-adjusted people believe that recessions and expansions cause each other.

There are also some important facts about recessions that should be noted before attempting any sort of discussion:

1. Recessions happen to the whole economy at once, not to like one sector. It can be that one sector goes down so much it drags down everything else, but it can’t be that it’s just the one sector.

2. A recession can happen at intervals but those intervals don’t have much significance - there’s no “recession every 20 years” like with fashion trends.

3. There’s one set of variables that tend to usually go down all together before a recession, and some always go up when a recession ends, so they can be useful predictors - which is important because, once a recession starts, it continues for a while, and the same for when it ends.

4. Recessions are shorter, but deeper, than expansions.

5. A controversial one: “the economy spends more time below potential than above it” - this means it’s more common that there’s too much unemployment than there is too little, for example.

6. A new one: “contractions in employment are as deep as contractions in GDP, but they’re shorter and happen later” - because it’s expensive to hire and train workers, as well as firing them, companies tend to not want to lay them off when it seems like there might be a recession, but lays off as many as “needed” when there is one.

Now, we pair these facts with the fact that “the government” can stop recessions (see above), then it stands to ask: can you tell when a recession will happen ahead of time? Usually not, because if you adhere to a view of the economy where people act somewhat reasonably, then they can’t be making massive mistakes constantly, which is how recessions would start reliably - otherwise people would catch on. Fool me once, shame on you. Fool me twice, can’t get fooled again.

But this doesn’t mean you can’t still kinda play God, lowkey. An analogy here is a forest fire: forest fires are often seen as random, and because they’re very destructive, the government usually tries to prevent them. But the ways the government attempts to stop fires is by preventing any fires as soon as possible. The problem is that this allows for very dense forests full of dry leaves and dead trees, that are incredibly flammable. As a result, the longer a forest goes without fires, the worse the subsequent fire. It has been argued that the economy does the same thing: even if recessions start perfectly randomly and are relatively rare, then companies would hire a lot of people between recessions, and the longer between them, the more bad employees there are - which means that you need to stop expansions before they get too big, because then the next recession would be worse.

Contrary, you can also say that how much the economy grows before a recession is completely unrelated to how bad the recession gets. The idea here is something called potential output: there’s only so much that can feasibly be made, given the amount of resources available and the technology to use them. Those aren’t especially related to how long it’s been since the economy was in a recession, and if they are, it’s negatively - having worse recessions makes future expansions smaller. As a result, recessions just push the economy down, and it can get up back again: and some people propose that the more it goes down, the faster it gets back up, like an elastic. Why would it be like this? Firstly, because companies try to avoid firing people because they don’t want to rehire when the recession ends, but can invest in new techologies or in expanding business later, which makes the business cycle very assymetric. Secondly, if potential output is a cap (not the Ice Spice kind), then the economy goes down by not using resources, but can go back up by just reusing them, instead of having to build them back. Lastly, it’s possible that prices and wages can’t be cut easily, but can be increased with comparative ease, meaning that companies can just pay people more later, which means that business goes back to normal sooner.

The evidence, meanwhile, is on the side of the latter claim: there is no evidence that stronger economies have worse recessions, and some evidence that worse recessions end faster. It’s also the topic of my undergrad thesis, which used 2020 data to show that countries with worse pandemic-related recessions had faster growth in the same timeframes (i.e. recovered more quickly).

The Vibe Check

ECONOMIC VIBE CHECK: is the economy doing well, or is it doing badly? Well, inflation is going down, GDP is going up, wages are doing fine, and unemployment is very low - the economy passes the vibe check. Like the US economy has problems (poverty inequality housing etc) but overall it doesn’t have them more than it did in say, 2019 - well except for housing costs. In fact, after spending the most money of any developed nation (before and after 2021), the US is getting the best economic recovery and the lowest inflation rate of all its peers.

Problem is: people rate the economy as “very bad”, and have for a while - the vibecession. People rate the economy is worse than at any time since 2008, including 2020, and any other time than 2008 (a massive recession) or 1980 (a massive recession + massive inflation). The real issue here, then, is that it’s possible than a vibecession is as bad as a real recession: if people think there’s a recession, they’ll behave as if in a recession, and will therefore cause a recession. But this doesn’t seem to have happened: the vibes got better, rather than the economy getting worse. So recession averted AND vibecession + recession averted. Nice.

This hasn’t stopped the discourse: people are still rating the economy very badly. If you look at how consumer ratings of the economy correlate with a variety of “hard” indicators, like inflation and wages, then you see that perceptions of the economy are completely unmoored from actual economic conditions - based on how good indicators are, you’d expect people to say things were as good as in 2019, objectively a very good year. The problem here isn’t that hur hur people dumb, is that this is a legitimately interesting question. So what gives?

A bunch of smaller reasons, like gas prices or interest rates, or rents and mortgages, or inflation, or whatever, has been proposed, but those problems got better and the vibes did not. So the first actual real meaty reason is real wages, obviously: wages went up more slowly than inflation for most people, though notably not the poorest people, which means that people can afford less than they did. Unlike basically all previous US recessions, the poor have come out on top, which results in a lot of people (who aren’t poor) being really unhappy - the “richcession”, so to speak. The problem for this explanation is that real wages, by less lagged measures, stopped falling for most people at some point roughly equivalent to the pre-2020 level, so it stops explaining why consumer sentiment didn’t get better.

There’s also another big stinky problematic fact: people don’t actually think their economy got any worse, they just think the economy did, which means that something weird is afoot - and it’s not politics, because everyone is saying that the economy is bad, not just conservatives. That economic perceptions are completely detached from reality is nothing new or spectacular, giving that people absorb information in really crazy ways, which is why people tend to believe in a variety of stupid things - like how people think that 69% of Americans are non-white, versus the actual proportion being closer to 35%. But what is truly interesting is that people’s perception of the economy is completely unmoored from their perception of their own economy, since both should be affected by the same things: gas prices, inflation, interest rates, real wages. People think jobs are easy to find, which is true, but they also think the economy is bad, so I don’t even know.

Since COVID, the economy got different too. The job market is very tight, which means that finding a job is easy - but that hiring is hard. Because unemployment is not super intuitive, which is why “unemployment is low because people have multiple jobs” is a convincing argument, then people just think that it must be hard to get a job if employers are having such a hard time finding employees, when in reality it’s the opposite. Labor isn’t going unutilized, it’s being used better than before. This means that a lot of things got really weird: restaurants are understaffed, amenities are worse, etc., which factor into “the economy”. Likewise, people are seeing that streaming is getting very expensive and that social media companies are doing some crazy stuff, which makes them wonder “huh, the economy must be bad huh”.

I think that a big part of the blame is who is doing the discussing and how: the media has been covering the economy astonishingly negatively, which makes people think the economy is worse than it actually is. This comes from many things, but one could be that the media industry itself is doing quite badly, which makes journalists experience some sort of collective sociological phenomenon of a vibecession localized entirely within the newsroom. The take economy is structured so that doomerism and pessimissm gets more engagement, which means that there’s an incentive to turn that into a story - and if you’re the doomee, the easier it is to find a story.

I also think that social media discourse in particular is increasingly unhelpful for reasons entirely circumscribed to who is participating. Recent college graduates, who face much higher rents and not that much higher wages without much net worth to fall back on, are overwhelmingly likely to post on social media, so they might understand that their hardships are part of a recession and not just bad luck (and NIMBYism). Fewer people in the US rent than are homeowners, but more social media people are renters than homeowners because homeowners are older, so while recent developments have juiced up home prices, they’ve also juiced up rents, which means that the people doing the thinking are living in a different economy than the people doing the listening. Are you a member of the precariat type stuff is going on.

Conclusion

What is a recession? See above. Is there a recession going on? No. Is there going to be a recession? No. Why do people think there’s a recession going on? Unclear.

The truth is, the economy is very complicated, so people’s opinions of it can be complicated too - gas prices, housing, wages, eggs, milk, the news. People are mad, so people get mad, so other people get mad. But it seems that people are making decisions based on like, actual reality, and not on angry tweets on the website formerly known as Twitter, which means that the vibecession is a problem for political scientists and sociologists and not economists. It’s not popular, but it is accurate, to say that there isn’t a recession going on, and whether or not it’s popular to say that unemployment is low when it’s low is completely besides the point of whether it’s good that unemployment is low.

Occam’s razor is one of the best known concepts in logic: if you have to explain something, use the explanation that needs fewest assumptions. Anything about the economy being substantially different needs a lot of assumptions; people are forming their opinions on some vague amorphous things in really unusually stupid ways does not. The economy needs a vibe check but honestly the general feeling I get on TikTok is “there’s a recession, so why not splurge” which is exactly what you’d expect with a good economy but using ass-backwards reasoning. Which, honestly, is not the end of the world - people, despite their best intentions, are still acting rationally.