In an unprecedented shift for global capitalism, economic recessions have transformed from frequent occurrences to ultra-rare events. While this extended period of stability appears positive on surface, economists warn it's storing up significant trouble for the future.
The Disappearing Act of Economic Downturns
Historical data reveals a dramatic decline in recession frequency over centuries. From 1300 to 1800, England and Britain experienced economic contractions almost half the time, characterized by volatile cycles of crashing downturns followed by storming recoveries. As capitalism matured throughout the 19th century, recession frequency dropped to approximately quarter of the time, declining further in 20th century rich nations.
Today's economic landscape appears remarkably placid. Despite facing extraordinary challenges including higher interest rates, banking crises, trade wars, and actual conflicts from 2022 to 2024, global real GDP growth maintained 3% annual average. The current year appears set to deliver another 3% expansion.
Supporting evidence of this unusual stability includes OECD unemployment rates hovering near historical lows and global company profits surging 11% in the third quarter, representing the strongest growth in three years. Aside from the COVID-19 lockdown contraction, the world economy has avoided synchronized recession for over 15 years, meaning approximately one-third of America's workforce has never experienced prolonged economic downturn.
The Hidden Costs of Economic Stability
While avoiding human suffering caused by recessions represents undeniable progress, economists identify significant drawbacks to extended stability. Austrian economist Joseph Schumpeter's concept of "creative destruction" suggests occasional downturns serve vital economic functions by eliminating failing firms, redirecting capital toward promising technologies, and moving workers to more productive employment.
Recent research supports this theory. A 1994 landmark paper by Ricardo Caballero and Mohamed Hammour demonstrated recessions can purge outdated techniques and products. The Great Depression accelerated the demise of small, unproductive automobile factories, paving way for mass production efficiency. More recently, Daniel Bias and Alexander Ljungqvist discovered startups born during recessions outperform those launched during stable periods, with higher likelihood of achieving public listings.
The pandemic response provided natural experiment testing this theory. Europe prioritized job protection through furlough schemes, limiting unemployment peak to 8.6%. America adopted opposite approach, allowing job destruction (unemployment reached 15%) while providing substantial stimulus payments. This strategy encouraged labor reallocation that increased twice as much in America compared to Europe during 2020-22, contributing to America's 10% labor productivity growth since 2019 versus merely 2% in EU.
Mounting Risks of Interventionist Policies
Governments worldwide have aggressively implemented policies to prevent economic contractions. Emerging markets adopted flexible exchange rates, with inflation-targeting central banks expanding from five to thirty-four between 2000 and 2022. Developed nations embraced "bail-outs for everyone" political settlement, deploying massive fiscal support at any sign of trouble.
European governments allocated support worth 3% of GDP during 2022 energy shock, while America guaranteed deposits after Silicon Valley Bank collapse. Despite solid economic conditions, America's fiscal deficit exceeds 5% of GDP, reflecting ongoing interventionist approach.
This extended "recession recession" period generates three accumulating risks:
Financial Risk: Extended stability fosters "disaster myopia" where investors forget negative possibilities. Households across rich nations allocated $3 trillion to global equity markets in recent years, the largest inflow recorded. With 30% of American household assets now stockmarket-exposed (all-time high), proper correction would cause substantial pain.
Fiscal Risk: Rich-world public debt reached highest levels since Napoleonic wars. America's contingent liabilities exceed $130 trillion—nearly five times GDP—including bank deposit guarantees, mortgage protections, and unfunded Medicare promises. As bail-out expectations grow across industries, simultaneous requests for government assistance could overwhelm capacity.
Allocative Risk: Extended stability enables survival of unproductive "zombie firms." The share of listed companies classified as zombies globally increased from 6% in 2000 to 9% in 2021. Contrary to expectations, zombie prevalence continues growing despite rising interest rates. These firms hinder healthy creative destruction, reduce industry productivity, and contribute to declining job-to-job mobility across rich nations.
The world economy's impressive avoidance of prolonged downturn creates underlying vulnerabilities. If governments remain determined to prevent contractions, they must equally commit to facilitating continuous company and job turnover that healthy economic growth requires. Otherwise, the system demands ever-increasing fiscal support to maintain steadily deteriorating economic state, risking either gradual stagnation or accumulation of enormous fiscal and financial dangers.
