Recessions Can Start on a Dime

Our country has suffered 48 recessions since its birth — one, on average, every five years. The key lesson of these downturns is that if enough people believe a recession is coming, they will make it happen. Economists call this multiple equilibrium — more than one place the economy can land based on self-fulfilling expectations. And many of the potential landing spots are miserable.

What explains multiple equilibrium? It’s as simple as Jane lays off her workers because she thinks Sam is laying off his, and vice-versa, where Jane’s customers are Sam’s workers and Sam’s customers are Jane’s workers. As President Roosevelt put it, at the height of the Great Depression, “The only thing to fear is fear itself.” No macroeconomist has strung together eight words of such profundity.

Coordinated confidence is a public good — one that intelligent policymakers (remember them?) don’t take for granted. Declaring economic war with the entire planet and thermo nuclear economic war with China, the world’s second largest economy, is far beyond what’s needed for Jane and Sam to panic and shed their immediately extinguishable liabilities — their employees. It’s also plenty to trigger financial collapse.