Notes from a recession

Andrew Scott suggests we take a moment to examine what we’ve really learned.


These are strange times for macroeconomists. Our subject has been catapulted to the forefront of CEO concerns, and we have emerged from our backroom status to find ourselves blinking in the spotlight. Topics that previously were discussed only among the cognoscenti at earnest conferences are now debated enthusiastically in the media. Macro has gone mainstream among the business community.

Participating in this process as a macroeconomist has been fascinating. Rather than provide another article explaining why the crisis happened, suggesting what we need to do to ensure sustainable recovery, or rashly provide a forecast for the future, I want to think about what business, governments and economists have learned so far from this crisis. What do we really know? What lessons should we take from this experience?

Learning to live with fluctuations

At the time of writing, there has been a noticeable mood shift among the business community. Six months ago, when the banking crisis was at its peak, the mood was bleak. There was a widespread belief that the economy was in meltdown, and horror and fear for survival were apparent in every conversation with CEOs. Now there is a more positive and focused approach. Panic is not a helpful preparation for adversity.

Business feels that some of the very worst-case scenarios are unlikely and, whether the future is a surprisingly strong recovery or continued unremitting gloom, being flexible and focused on opportunities is critical for success. This is reassuring. I try to point out to firms that are they are used to dealing with fluctuations. Every evening the economy collapses into an enormous recession, only to bounce back strongly the next morning when rush hour starts. Every weekend the economy suffers a precipitous two-day downturn. The scale of these fluctuations is enormous compared to what we are likely to experience during this downturn.

Firms know how to deal with these fluctuations, how to manage their costs appropriately and how to make sure that cost control doesn’t come at the expense of impaired productivity. In fact, firms are beginning to realize that recessions, like weekends, are a time to focus on improving productivity. If you don’t use the weekend to refresh yourself, replenish your energy and think of the week to come, you are unlikely to have a successful week ahead. Like a pit stop in Formula 1 racing, a recession needs to be used to reorganize, refocus and place bets on future strategy. A successful pit stop will lay the seeds for future success.

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