Dems want an election recession. Should we expect one?

The Democrats are hoping recession will topple Donald Trump in 2020.  Will that happen?  The answer requires some history.

For two centuries, the long-term economic growth of the United States has been nearly 2% per capita, per year. 

The total economic growth rate includes the growth in population.  For much of our history, the population growth rate averaged about 1.5% per year, giving a total GDP growth rate of 3.5% per year. 

In this figure, note the disturbance caused by the Great Depression.  What happened is instructive: the dip in the curve is followed by a high growth rebound of increased slope, which brings the GDP back up to the long-term growth line by 1940. 

The modern definition of recession is at least two successive quarters of negative growth.  Technically, as soon as positive growth starts again, we are no longer in recession, but are in recovery.  By this modern standard, the Great Depression ended after only two years.  However, high unemployment continued until 1940. 

The smaller dip, in 1937–8, is called the "recession within the depression."  It was triggered by the re-election of FDR.  This caused a short-lived panic among investors.  One message from this panic is that mass psychology can cause a recession. 

Starting in 1941, after our recovery from the Depression, the Second World War created an anomalous GDP bump.  Immediately postwar, the wartime industry shut down, thus inducing a short depression, which brought the GDP back onto to the long-term growth curve. 

The following figure is the first derivative of the previous one.  In this figure, the time sequence runs from 1930 on the left to 2015 on the right.  The large oscillations on the left are the Great Depression and World War Two, followed by the demobilization of the war industry. 

On the right is the 2008–9 Subprime Crisis.  During this crisis, the total GDP actually decreased as the money supply shrank!  This was so unusual that the subprime event is now called the Great Recession.

Normally, each recession or depression is followed by a much higher than average rate of GDP growth.  This rebounding overshoot is easy to explain:  during recessions, expenditures are often deferred.  This leads to pent up demand that is filled when jobs come back.  Pent up demand causes recovery overshoot, wherein economic growth temporarily exceeds the long-term growth of the economy.

Note that the postwar GDP growth hovers around 3% per year.  This includes population growth of about 1%, so the per capita growth is 2%.  The dips correspond with recessions.  The peaks are the rebounds from these recessions.  It is important to recognize that almost all the rebound peaks exceed 5% GDP growth, and many are above 6%. 

Recovery from the subprime event has not yet produced this normal rebound.  The Obama subprime recovery doesn't even bring us back to the long-term growth curve.  During the Obama years, the population growth rate averaged about 0.8%.  As a consequence, the per capita growth was only about 1.2% during this period — about half of long-term normal, and without the usual recovery overshoot.  

The net result of Obama's management is that the U.S. economy has been artificially suppressed while government expenses have continued to increase.  Our GDP is now about a trillion dollars a year less than it would have been with a normal recovery from the subprime fiasco!  The resulting loss in tax revenues has badly hurt our deficit and debt.

Under President Trump, we are doing much better, but we still are not out of the woods.  Likely we are still suffering from Obama-era policies.  Our per capita growth has been above 2% and unemployment is at unusually low levels.  However, there is yet to be a significant recovery overshoot.  Such an overshoot would probably have to be on the order of the typical 5 to 6%, or even more, to bring our economy back to the long-term 2% per capita growth curve.  Getting back on the long-term curve would mostly solve our deficit and debt problems.

So what are the prospects for the immediate future? 

First, we are not yet out of the subprime recession, although we are somewhat recovered.  This suggests that there must be great pent up demand driving the economy.  Strong consumer confidence says so. 

Second, we are in great shape with respect to exports versus imports.  Our imports and exports are relatively small compared to the economy as a whole.  Exports are about 12%, while imports are about 15%.  This means that our economy is relatively insensitive to overseas recessions.  Contrast this with Germany, where 47% of the GDP is based on exports.

Furthermore, our exports are increasing, and our imports are decreasing because of fracking and the resulting energy independence — and because we are bringing home manufacturing.  Thus, the world's economy will likely not cause a domestic recession even if there is a world recession.

Of concern is monetary policy.  Lack of money and credit can cause recession.  The market debacle of 1929 is the result of people buying on the margin for resale in an up market.  When the market turned down, the money wasn't there, and the market crashed.  Credit disappeared.  Recession followed. 

Worse, after the market crash, an incompetent Federal Reserve undercut overdrawn banks, thereby collapsing the available money supply.  Recession became deep depression.

Thus, the Fed has the power to create a recession — a danger if the Fed has become politicized.

The "recession within the depression" says the mood of the buying public can also cause a recession.  That mood can be influenced.  We already see a badmouthing of economic prospects.  Expect to see recessionist propaganda increasing to a full-force hurricane.  Maybe it will work, and we will actually get a recession by late 2020.

Will we have an election recession?  I think it unlikely — the election is only four quarters away, and there is a great deal of momentum in the economy.

The Democrats are hoping recession will topple Donald Trump in 2020.  Will that happen?  The answer requires some history.

For two centuries, the long-term economic growth of the United States has been nearly 2% per capita, per year. 

The total economic growth rate includes the growth in population.  For much of our history, the population growth rate averaged about 1.5% per year, giving a total GDP growth rate of 3.5% per year. 

In this figure, note the disturbance caused by the Great Depression.  What happened is instructive: the dip in the curve is followed by a high growth rebound of increased slope, which brings the GDP back up to the long-term growth line by 1940. 

The modern definition of recession is at least two successive quarters of negative growth.  Technically, as soon as positive growth starts again, we are no longer in recession, but are in recovery.  By this modern standard, the Great Depression ended after only two years.  However, high unemployment continued until 1940. 

The smaller dip, in 1937–8, is called the "recession within the depression."  It was triggered by the re-election of FDR.  This caused a short-lived panic among investors.  One message from this panic is that mass psychology can cause a recession. 

Starting in 1941, after our recovery from the Depression, the Second World War created an anomalous GDP bump.  Immediately postwar, the wartime industry shut down, thus inducing a short depression, which brought the GDP back onto to the long-term growth curve. 

The following figure is the first derivative of the previous one.  In this figure, the time sequence runs from 1930 on the left to 2015 on the right.  The large oscillations on the left are the Great Depression and World War Two, followed by the demobilization of the war industry. 

On the right is the 2008–9 Subprime Crisis.  During this crisis, the total GDP actually decreased as the money supply shrank!  This was so unusual that the subprime event is now called the Great Recession.

Normally, each recession or depression is followed by a much higher than average rate of GDP growth.  This rebounding overshoot is easy to explain:  during recessions, expenditures are often deferred.  This leads to pent up demand that is filled when jobs come back.  Pent up demand causes recovery overshoot, wherein economic growth temporarily exceeds the long-term growth of the economy.

Note that the postwar GDP growth hovers around 3% per year.  This includes population growth of about 1%, so the per capita growth is 2%.  The dips correspond with recessions.  The peaks are the rebounds from these recessions.  It is important to recognize that almost all the rebound peaks exceed 5% GDP growth, and many are above 6%. 

Recovery from the subprime event has not yet produced this normal rebound.  The Obama subprime recovery doesn't even bring us back to the long-term growth curve.  During the Obama years, the population growth rate averaged about 0.8%.  As a consequence, the per capita growth was only about 1.2% during this period — about half of long-term normal, and without the usual recovery overshoot.  

The net result of Obama's management is that the U.S. economy has been artificially suppressed while government expenses have continued to increase.  Our GDP is now about a trillion dollars a year less than it would have been with a normal recovery from the subprime fiasco!  The resulting loss in tax revenues has badly hurt our deficit and debt.

Under President Trump, we are doing much better, but we still are not out of the woods.  Likely we are still suffering from Obama-era policies.  Our per capita growth has been above 2% and unemployment is at unusually low levels.  However, there is yet to be a significant recovery overshoot.  Such an overshoot would probably have to be on the order of the typical 5 to 6%, or even more, to bring our economy back to the long-term 2% per capita growth curve.  Getting back on the long-term curve would mostly solve our deficit and debt problems.

So what are the prospects for the immediate future? 

First, we are not yet out of the subprime recession, although we are somewhat recovered.  This suggests that there must be great pent up demand driving the economy.  Strong consumer confidence says so. 

Second, we are in great shape with respect to exports versus imports.  Our imports and exports are relatively small compared to the economy as a whole.  Exports are about 12%, while imports are about 15%.  This means that our economy is relatively insensitive to overseas recessions.  Contrast this with Germany, where 47% of the GDP is based on exports.

Furthermore, our exports are increasing, and our imports are decreasing because of fracking and the resulting energy independence — and because we are bringing home manufacturing.  Thus, the world's economy will likely not cause a domestic recession even if there is a world recession.

Of concern is monetary policy.  Lack of money and credit can cause recession.  The market debacle of 1929 is the result of people buying on the margin for resale in an up market.  When the market turned down, the money wasn't there, and the market crashed.  Credit disappeared.  Recession followed. 

Worse, after the market crash, an incompetent Federal Reserve undercut overdrawn banks, thereby collapsing the available money supply.  Recession became deep depression.

Thus, the Fed has the power to create a recession — a danger if the Fed has become politicized.

The "recession within the depression" says the mood of the buying public can also cause a recession.  That mood can be influenced.  We already see a badmouthing of economic prospects.  Expect to see recessionist propaganda increasing to a full-force hurricane.  Maybe it will work, and we will actually get a recession by late 2020.

Will we have an election recession?  I think it unlikely — the election is only four quarters away, and there is a great deal of momentum in the economy.