When this occurs, private businesses often scale back production and tries to limit exposure to systematic risk. Measurable levels of spending and investment are likely to drop, and a natural downward pressure on prices may occur as aggregate demand slumps. GDP declines, and unemployment rates rise because companies lay off workers to reduce costs. At the microeconomic level, firms experience declining margins during a recession.
When revenue, whether from sales or investment, declines, firms look to cut their least-efficient activities. For example, a firm might stop producing low-margin products or reduce employee compensation. It might also renegotiate with creditors to obtain temporary interest relief. Unfortunately, declining margins may force businesses to fire less productive employees. A range of financial, psychological, and real economic factors are at play in any given recession.
The significant economic theories of recession focus on financial, psychological, and fundamental economic factors that can lead to the cascade of business failures that constitute a recession. Some theories look at long-term economic trends that lay the groundwork for a recession in the years leading up to it. Some look only at the immediately visible factors that appear at the onset of a recession.
Many or all of these various factors may be at play in any given recession. Financial factors can contribute to an economy's fall into a recession during the — U. The overextension of credit and debt on risky loans and marginal borrowers can lead to an enormous build-up of risk in the financial sector. The expansion of the supply of money and credit in the economy by the Federal Reserve and the banking sector can drive this process to extremes, stimulating risky asset price bubbles.
Artificially suppressed interest rates during the boom times leading up to a recession can distort the structure of relationships among businesses and consumers. It happens by making business projects, investments, and consumption decisions that are interest rate-sensitive, such as the decision to buy a bigger house or launch a risky long-term business expansion, appear to be much more appealing than they ought to be.
The failure of these decisions when rates rise to reflect reality constitutes a major component of the rash of business failures that make up a recession. Psychological factors are frequently cited by economists for their contribution to recessions also. The excessive exuberance of investors during the boom years brings the economy to its peak.
The reciprocal doom-and-gloom pessimism that sets in after a market crash at a minimum amplifies the effects of real economic and financial factors as the market swings. Moreover, because all economic actions and decisions are always to some degree forward-looking, the subjective expectations of investors, businesses, and consumers are often involved in the inception and spread of an economic downturn.
Interest rates are a key linkage between the purely financial sector and the real economic preferences and decisions of businesses and consumers. Real changes in economic fundamentals, beyond financial accounts and investor psychology, also make critical contributions to a recession.
Some economists explain recessions solely due to fundamental economic shocks , such as disruptions in supply chains, and the damage they can cause to a wide range of businesses.
Shocks that impact vital industries such as energy or transportation can have such widespread effects that they cause many companies across the economy to retrench and cancel investment and hiring plans simultaneously, with ripple effects on workers, consumers, and the stock market.
The Fed raised the fed funds rate to protect the gold standard. Congress cut back on the New Deal too soon. That brought back the depression in We aren't headed for an economic collapse or even a second Great Depression.
The coronavirus pandemic caused a severe recession lasting several months. A depression lasts for years. Bureau of Labor Statistics. Accessed April 28, Treasury Direct. The World Bank. Department of the Treasury. Department of Treasury. Board of Governors of the Federal Reserve System. Center for Strategic and International Studies. International Monetary Fund. Review of Financial Studies. Federal Reserve Bank of St. Consumer Confidence Board.
Bureau of Economic Analysis. A microbe has overthrown all our arrogance. What must we do to manage this disaster? One answer is not to abandon the lockdowns before the death rate is brought under control. It will be impossible to reopen economies with a raging epidemic, increasing numbers of dead and pushing health systems into collapse.
Even if we were allowed to buy or go back to work, many would not do so. But it is essential to prepare for that day, by creating vastly-enhanced capacities to test, trace, quarantine and treat people.
No expense must now be spared on this, or on investment in creating, producing and using a new vaccine. Both the pandemic and the Great Shutdown are global events. Help with the health response is essential, as Maurice Obstfeld, former IMF chief economist, stresses in the report. Yet so too is economic help for poorer countries, via debt relief, grants and cheap loans.
The negative-sum economic nationalism that has driven Donald Trump throughout his term as US president, and has even emerged within the EU, is a serious danger. We need trade to flow freely, especially but not solely in medical equipment and supplies. If the world economy is broken apart, as happened in response to the Depression , the recovery will be blighted, if not slain. We do not know what the pandemic has in store or how the economy will respond. We do know what we must do to get through this terrifying upheaval with the least possible damage.
We must bring the disease under control. We must invest massively in systems for managing it after current lockdowns end. We must spend whatever is needed to protect both our people and our economic potential from the consequences. We must help the billions of people who live in countries that cannot help themselves unaided. Ho, J. Hiam, L. Community Health 72 , — Koltai, J.
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Virchow, R. Public Health 96 , — Download references. You can also search for this author in PubMed Google Scholar. Correspondence to Martin McKee. Reprints and Permissions. If the world fails to protect the economy, COVID will damage health not just now but also in the future. Nat Med 26, — Download citation. Published : 09 April Issue Date : May Anyone you share the following link with will be able to read this content:. Sorry, a shareable link is not currently available for this article.
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An economic crisis will follow this outbreak Today, politicians must make difficult choices, although with imperfect information. How to protect the economy?
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