Growing pains: a recession in recessions

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1:11The Economist

1:18Hello and welcome to The Intelligence from The Economist. I'm your host, Rosie Bloor. Every weekday, we provide a fresh perspective on the event shaping your world.

1:32I bet you've used an online review recently, maybe to pick where to eat on holiday, what to watch or which toaster to buy. Question is who writes them, why and should we trust them? Amazingly, people have actually done academic research on this. And we gobble millions of turkeys at Christmas. And apparently some of us like to get to know a bird before we devour it. Or at least get to know the farmer who reared it. our correspondent assures us that no foul play was involved.

2:10First up, though.

2:18To say that there's been quite a lot going on in the past four years is a bit of an understatement. The World Health Organization officially announced that this is a global pandemic. In a televised address at around 6 a.m. in Moscow, President Putin announced what he called a special military operation in the eastern Donbass region. And he said... ...on that subject. President Trump, by the way, now saying we are in a trade war with Beijing. How does that differ from previous... Wars, trade wars, banking crises, pandemic. These are normally a few of our favorite things to spark a downturn. And yet the global economy has kept growing.

3:02Unemployment in most rich countries is near historic lows and company profits are increasing fast. But there are people who still find something to worry about. Is it a problem if there's a recession in recessions? So from 1300 to 1800, economic historians reckon that England and then Britain was in recession for about half the time. The economy was enormously volatile with big recoveries and crashing downturns. Callum Williams is our senior economics writer. As capitalism matured, recessions became less frequent. Britain was in recession only about a quarter of the time in the 19th century, and then even less by the 20th.

3:45And in the 21st, both in Britain and elsewhere in the world, recessions are now practically an endangered species. That's good, isn't it? Recessions are bad. Recessions are bad. Recessions cause enormous economic damage sometimes. They cause enormous emotional damage and sometimes damage to people's health. So excluding the recession of 2020, which was essentially deliberately engineered by politicians to try and slow the spread of COVID, the world hasn't had a synchronized recession in about 15 years, so since the 2008 crash. And there's a bit of a catch here. And the catch is that when you go a very long period without recession, costs do begin to mount.

4:29So you're saying recession can actually be a good thing? So there is a body of research going back in particular to Joseph Schumpeter, which basically says that recessions are good because they involve creative destruction. And this is the idea that when you have a recession, unproductive firms go under and people move from those unproductive firms to more productive firms, and therefore the economy gets more efficient. And it is kind of an intuitive idea. If you think, for example, about the human body, some people might say benefits from the occasional detox. So why not an economy? And if you look at the contemporary economy, there's some suggestion that it has grown rather flabby.

5:09There's lots of management consultants, there's lots of social media influencers, lots of crypto traders, providing perhaps questionable societal value. And so the idea from the Schumpeterians is that a recession would be able to thin out those jobs and redirect capital and talent to more useful ends. But not all recessions work out, do they? I mean, what about Japan? No, absolutely. So the bursting of the Japanese property bubble in the early 90s was one of the best examples of a recession that did not lead to the kind of Schumpeterian created destruction that some people hoped for. You had this problem where banks were just rolling over credit to very weak firms, and it actually caused productivity to go down quite considerably.

5:51But there are other examples of recessions that do result in reallocation. The early 2000s recession in the US is one example. And in fact, during COVID itself, what you had in the US was an effort by the government not exactly to prevent the recession happening, but to prevent people's incomes from falling too much via stimulus checks and unemployment insurance. And so what that meant was that the economy was able to reallocate very quickly to the new COVID reality. And that, I think, is one reason why productivity growth in the US in recent years has actually been pretty strong. Surely even if you get long-term efficiencies, it's a huge amount of pain that no one really wants to go through.

6:27Absolutely. And so there is now a strong consensus, I would say, among politicians that they need to avoid recessions at all costs. Now, this can result in governments pursuing better policies. So, for example, in the case of emerging market governments, they've clearly done this. Fiscal policy is more credible. Exchange rates are more likely to be flexible. Inflation targeting is more common among central banks, which themselves are more independent. So that's a good thing, and that's helped emerging markets to avoid recessions. I would call that an unequivocal good. Rich world governments, on the other hand, I would say have gone further.

7:04They already had reasonably good policies in place. And what they've done really is to offer enormous fiscal support, both ex ante and ex post, in a desire to either avoid recessions or make them much less damaging than they would otherwise be. So just look at the US now, for example. The economy is doing fine. Unemployment is low. Corporate profitability is high. And yet the US is still running a fiscal deficit of over 5 % of GDP. But if interventions can stave off recession, can't you just keep on making them? No, I think this is the crucial question. I don't think you can. I think there are three big risks that you get when you decide as a polity that you're going to do everything you can to avoid recession, which is where we are now.

7:52So one thing is that you get these financial risks that build. Basically, people forget that bad stuff can happen. And so they load up on risky assets. Now, this is very clearly happening in financial markets at the moment, where there's this idea of buying the dip. Anytime the stock market goes down a bit, you get a huge influx of money into the stock market, in particular from retail investors, who believe that it's a kind of law of nature that the stock market is going to get back up again. Now, of course, that is not an accurate description at all of how financial markets have worked over the long course of history.

8:22It's only a description of how they've worked during the time when governments have done everything they can to stop the economy falling into recession. So if there was a correction, a genuine correction in the stock market, a lot of people would be hugely exposed to that. So that's one big risk. Another risk is the fiscal risk, which is kind of more obvious. Governments running 5-6 % of GDP budget deficits indefinitely results in government debt ballooning, and that is indeed happening in the US. Now it's very hard to predict. Will there be a time at which bondholders say, I'm not going to fund the US government anymore.

8:54Maybe. Certainly debt is rising very rapidly. And then the third big risk, which is in a sense the most subtle, but in a way the most important, is this idea of allocation going wrong, where you get capital and workers being trapped in these low productivity firms. And that is definitely happening across the West. So there is this idea of zombie firms. Recent research on the IMF basically looks at firms that are highly unprofitable. again and again and again, and finds that the share of all firms that can be classed in this way has been increasing steadily over time. So in other words, you've got these big allocative risks building up in the economy, which results in the economy being less productive than it would otherwise be.

9:35Callum, are you actually calling for a recession? No, I think the Schumpeterian view of recession is not that you want to deliberately engineer them, but it's to say when they happen, you want to allow the reallocation to take place. I think a slightly harder argument is when you are in a period where you're not having a recession, governments need to do everything they can to make sure that reallocation can take place and that fiscal risks don't build. So for example, making it easier for firms to hire workers and also to get rid of them if necessary is one thing. Making it easier for workers to move between jobs and also not running massive deficits.

10:13So I would say that it's a question of trying not to compound the problem rather than deliberately engineering a recession. Callum, thank you very much. Thanks, Rosie.

10:48Yep, even on weekends, it's pretty much all he talks about. In a good way. What's in your wallet? Terms apply. See CapitalOne.com slash bank. Capital One N.A. Member FDIC. Thank you for calling the Bombas Comfort Line. Bombas make socks, slippers, tees, and underwear made with the highest quality materials. Press 1 for comfort, 2 for style, 3 for donation. You chose style. Bombas is styles for whatever you enjoy. You can run in Bombas, lounge in Bombas, dress them up, dress them down, but always give back in Bombas. Because with every item purchased, another is donated. Bombas, comfort worth calling for.

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11:40I'm in the studio with Andrew Palmer, who presents Boss Class, our podcast on the world of work. And Andrew, I've got a question for you. What's the most recent online review that you've used? So I spent two weeks in Canada, a glorious time, but just was very heavily reliant on online reviews. You know, we stayed in Airbnbs, we're constantly eating out, finding places to whitewater, raft and kayak, all the rest of it. So using them a lot and sort of aware as I went, like, am I really in a position to trust them? How am I filtering them when I leave my own reviews on Airbnb? Am I being honest or am I somehow responding to norms?

12:21So what's the answer? Can you trust an online review? Well, it's better than the alternative. So that's where you have to start, right? An absence of information is definitely worse than the situation we have now. They are more useful than nothing. There is informativeness there, but they're also flawed in very many ways. So the most obvious problem is that it is subjective opinion. So a nice little example of this is if you look at Goodreads, which is a community of online book lovers, and you try to find the single most highly rated book on that community, it's The Hunger Games by Suzanne Collins.

13:00Now, you may agree. I suspect you probably don't. I didn't. But it's just a little window on, you know, what happens when you get a bunch of subjective opinions aggregating. And then there are other problems to which the researchers have surfaced. So researchers have actually looked at how reliable online reviews are? Yeah, this is like a mini industry. I mean, there's a huge amount of research into this. I guess, you know, as more and more commerce has migrated online, it becomes more and more important. People do use this. It really does matter. People rely on it. There's an uptick in sales, etc, etc.

13:33So whether they are informative is a subject of rich interest. So one problem is this subjectivity problem. So if you look at products which can be rated in more objective ways, like do they break? Do they do the thing that they're supposed to do? You find that there's a big gap between what the online customer reviews say and what product testing experts might say or what resale values might indicate. So there is this gap between aggregating a bunch of opinions and objective measures of product quality. But then there are other problems too. So the types of people who are going online in order to review and leaving an opinion are kind of different from a normal distribution of reviews.

14:18So are there particular types of review that we should be able to rely on? Yeah. So basically, what you should do is look for people who are reviewing a lot. So it's actually in the reviewer rather than the average rating. And the reason for that, to step back a bit, is the real problem with the way that ratings are distributed is it's not a normal bell curve. It's not like a hump of things in the middle. It's people saying like, I hate it, one out of five stars, or I absolutely love it, five out of five. So the shape of a kind of ratings distribution curve is like a J shape rather than the bell curve.

14:58So what is it that's going on there? It's that lots of people are self-selecting to review. You only review if you've had a really good or a really bad experience. And actually that effect gets attenuated if you review a lot. And the way to think about this is if I forced you to review the last book you read, you probably would be two, three, four. If I told you review the book that you want to, you'd probably pick something you love and go for a five. So you can kind of get to that better distribution if you find people who review a lot, who don't self-select. I would have thought they were people who didn't have a life and had nothing better to do.

15:38That's very ungenerous of you. But that is the way to do it. Basically, you just get rid of the extremes if you find that. And you can normally see who's left lots and lots of reviews by just looking through sites. And are there particular platforms that are more reliable than others? Platforms have different norms. So you have to kind of filter for those. So the research suggests that sharing economy platforms tend to have more generous reviews. So that's the Ubers or the Airbnbs. And there's some kind of reciprocity going on where in Airbnb's case, right, you know the host, you form a kind of relationship, you've been in their house, it's all slightly grey area.

16:20and you don't want to necessarily ruin their future business. So they tend to get higher reviews. So there is research which shows that Airbnb properties have higher reviews on average than hotels on TripAdvisor, for example. Isn't that also because they're reviewing you as the user? Yes, exactly. So there is a risk of retaliation and Airbnb tries to get rid of that risk. They have ways to try and get rid of that. So, you know, you don't see each other's reviews before it goes up, but it still exists. It's in your head and that drives up the average review. Andrew, final question. How would you rate our conversation today?

16:55Are you going to rate me back? I'm not going to tell you that. Then a five. Excellent. Thank you very much. Great to talk to you, Andrew. Thanks, Rosie. And of course, I should remind our listeners that if they'd like to leave a review about their favourite daily news show on their favourite podcasting app, we'd very much appreciate it.

17:24It's about 7.30 in the morning. It's a gray, sleety kind of morning. I'm in Johnson, Rhode Island at the Baphoni Poultry Farm, about 20 minutes outside of Providence. The first thing you hear at the farm when you get out of the car, I think you can hear it now, that's the sound of hundreds of chickens packed in crates. It's a poultry farm that has chickens and turkeys. What struck me is the sound of their fingernails in the plastic crates. They're packed in pretty tight, and they're on their way to slaughter. John Fasman is The Economist's senior culture correspondent. The second thing you notice is the smell.

18:02It's indescribable, but anyone who's spent time on a poultry farm will know what I'm talking about. Trust me, you should be grateful as you're listening that this is an auditory medium, not an olfactory one. Again, you can see they have all this space in here. I'm meeting Adam Baffoni, and he's going to show me his family farm. Our groups are old and they're weird, and we like that. His great-grandfather Giuseppe came to America from Abruzzo in Italy and started raising chickens in 1935 in what was then rural Rhode Island. A suburb has since grown up around the farm. It's just a few minutes' drive from the state capital of Providence.

18:38The farm's age and single-family ownership means it has some quirky architecture from a bygone era. It's just an old, old chicken coop. This coop was built in the 1950s. Cannot build a two-story chicken coop anymore just because of biosecurity. I spent time at the farm because I wanted to see what goes into raising the centerpiece of so many Christmas feasts. This little guy's pecking at my shoes. And the little chicken sees a human. We're gigantic. Turkeys are a little bit more robust. Even as babies, when they're tiny, tiny, they have no fear. I don't know. I don't think turkeys are very smart.

19:20Americans will devour around 22 million of them over Christmas. Britons will eat around half of that. And turkeys anchor Christmas dinners across Francophone Europe. And there's a trend among urbanites like me, who love the idea of knowing the farmer who produced their turkey. But for the Baphonis, there's a lot at stake and a lot that can go wrong. With the bird flu, if you get it on your property, you have to eradicate everything on the property, and you cannot raise birds for, I think it's 150 days. So we don't have, you know, tons of money to wait that out and to restart all of our flocks.

19:55So it could potentially be a death sentence for us. But we're pretty serious about our biosecurity. I mean, the nice thing is we do everything indoors, which helps. On an average day, Baphones slaughters and processes around 2 ,000 chickens, as well as 200-odd turkeys in the run-up to Thanksgiving and Christmas. Now that may sound like a lot, but a big farm can do around 8 ,400 chickens and 4 ,700 turkeys per hour. Truth is, you can do everything absolutely right, and the wrong goose comes along and shits over your chicken coop and you get the bird flu. Because we do everything indoors, we're a little smaller of a risk.

20:38at least in theory. Do you want me to take you into the back, show you the whole process? Yeah, so tell me where we are. All right, we're at Baphoni's poultry farm, the greatest place in the world. So come on back. This is where we do most of our processing. When a bird's number is up, its throat is cut, and it's put into an inverted cone to bleed out. Then it's plunged into scalding water, which loosens its feathers. It then goes into an agitator, which kind of looks like a clothes dryer with little rubber fingers on the sides, and that removes most of the feathers. Then the bird is hung on hooks above a steel trough.

21:17An assembly line of workers sets about eviscerating it, removing the heads and feet, pulling out the pin feathers, and if needed, cutting it into parts. Christmas. Christmas. Yep, we do quite a bit for Christmas as well, and then the ones that are left after that, we will keep and they sort of settle out. They don't keep growing too much. And we will slaughter two or three every week and people come in and they want parts, turkey parts and things like that. The workers use slim, sharp knives that can slice through bones. Baphonis has the only federally inspected slaughterhouse for miles, which means every morning, crates holding live chickens from smaller nearby farms are stacked outside, cooing and clacking their nails nervously on the plastic.

22:00This provides an extra revenue stream, which the farm needs. Some people want an 8 to 12-pound turkey if they're only having a few people, and some people want something that they can't fit in their oven for some reason, and we cater to them as well. For generations, Adam explains, chickens and eggs kept the farm going, but the farm didn't go into the black until year's end. Turkeys put them there. It's important to us not just to produce high-quality food, but we're more concerned with producing fresh food that is accessible and available to our community. Now, I'm not going to try to tell you to take your next vacation on a poultry farm.

22:43It's messy and smelly, and the work is backbreaking, unglamorous and poorly paid. But if you're lucky enough to sit down to a beautifully roasted or fried or grilled or smoked turkey at your holiday table, just spare a thought for all the people who did all that work to help get it to you

23:14that's all for this episode of the intelligence see you back here tomorrow