The US isn't necessarily in a recession right now, and may not end up in one. However, the range of possible outcomes is wider than usual, with the introduction of labor-saving technologies, a touch of foreign policy chaos, restrictive fiscal policy, and a potential end in the war in Ukraine. So, call it a 40% chance ($, WSJ) of a recession.

There are a few varieties of recessions, and thinking about them means thinking about economic growth at a very high level. At its most abstract, growth is some combination of "more" multiplied by "better," for any given category of inputs. More people, or more person-hours, will naturally produce growth. Better person-hours produce it, too, and there are many mechanisms to achieve that: people vary in what kinds of job or organization they're most productive in (Harrison Ford was a part-time carpenter/weed dealer before switching careers—same person, much higher GDP creation per person-hour! Ray Kroc wasn't all that great at selling milkshake mixers, but he did just fine running McDonald's). More physical capital, and better physical capital, will also make a difference: economies grow when there's more manufacturing equipment, and facilities to put it in. The specific measurements get messy over time, and it's easy to double-count: in one sense, for example, a dishwasher or a washer/dryer is a machine that, when you plug it in and apply the correct detergent, produces a steady stream of time, which you can then apply to tasks that are more interesting and more lucrative than laboriously cleaning dishes and clothes. Some parts of the economy even seem to embody a formula that you might call "more and better multiplied by worse": the purity of copper ore has declined by over an order of magnitude in the last few centuries but we've gotten so much better at extracting it that global copper production has risen by more than three orders of magnitude over the same period.

Lubricating all this activity is a financial system, whose goal is to shift some consumption from the present to the future (through savings), shift some consumption from the future to the present (buying a home with a mortgage), and allocate capital, ideally the right kind of capital, to productive activities. These financial intermediaries are necessarily forward-looking: they want to lend against collateral that will be worth something in the future, and produce cash flow in the meantime; they want to own equity in things that will get more valuable over time. That financial system isn't entirely private: it includes central banks, and government transfer programs (social security, for example, is a mandatory annuity program). Fiscal and monetary policy affect the value of money, which functions as a universal denominator, and also adds some stickiness to the economy: it's easy to give raises and hard to give pay cuts, and it's easy to service debts when the value of money is declining and quite difficult to do so when the value of money is rising.

With these, we have our ingredients for various kinds of recessions:

• Supply shocks are the most obvious driver—a spike in the price of energy or food amounts functions as a tax on everyone, and the poorer the country the higher the share of income that goes to this tax. At a given country level, these shocks can also show up in the form of higher demand from somewhere else: the US economy started getting wobbly ahead of the 2008 crisis in part because there was voracious Chinese demand for oil, and China was essentially getting a high enough marginal return on oil consumption that it could keep bidding it up and still come out ahead.

• Tax-driven recessions are a possibility, but that's one side of an equation; they're really deflationary recessions, where the value of a currency rises, putting pressure on anyone who has fixed obligations—whether that's a renter or homeowner trying to pay a fixed monthly amount for their home despite losing their income, or a business that's paying workers the same amount it used to while earning less from those workers' output. Higher interest rates rather than higher taxes can cause the same aggregate impact, just distributed differently—hitting floating-rate borrowers (or new fixed-rate borrowers) rather than taxpayers.

• As economies grow, their financial systems tend to grow faster. And that makes sense: the more they produce—both in total volume and in number of discrete kinds of goods and intermediate inputs—the more pressing the problem of allocating capital becomes. (This is also why it's a good sign when more of a country's GDP gets spent on ads: it means that they face so much abundance that one of their pressing problems is finding the right match between people and the goods they want.) But financial systems can easily overshoot. A finance-driven crisis almost always happens on the credit side, rather than through equities, both because equities are naturally more speculative and because underperformance in existing loans constrains the supply of new loans.

• And finally, recessions can happen, and end, due to mysterious changes in sentiment. Sometimes, against all odds, people keep spending well beyond their means. Sometimes, they close their wallets despite being flush. This, too, can be driven by other factors: savings rates rise during recessions, and fall during booms; the expiration of Bush-era tax cuts in 2012 led to a twenty-year high in savings. But there are hard-to-explain ebbs and flows in how much people spend, and the end of a recession is usually demand-driven: people buy more, that leads to more hiring, the newly-hired people buy more, too, and the fact that the economy is operating at below its previous steady-state (and has shuffled ownership of some assets to more competent owners) means that inflation takes a while to pick up.

Over very long periods, economic growth since industrialization has been surprisingly steady. But there's always some category that's undershooting and some category that's overshooting, and sometimes these lags and heterogeneities are big enough to impose a drag on the overall economy. But the long-term driver of growth is the accumulation of knowledge and trust; in purely natural resource terms, the planet has been getting poorer since the first time anyone converted a tree into a house or a fire, and certainly since the first time anyone mixed together tin and copper into bronze. But in terms of the standard of living an average person can produce, we keep getting richer than ever, albeit with the occasional wobble on the chart.

The Diff has written about long-term economic growth, and downturns, in a number of pieces:

• Early in the pandemic, we talked about the V/L theory of recovery: some people would be permanently worse-off (which did not end up happening) and some would be richer than ever (this very much did).

• The Diff reviewed Ray Dalio's Big Debt Crises.

• The 2010s as the Great Depression in a major key ($).

• And tech funding as a Keynesian dynamic restricted to a single industry ($).

• The Covid economy partly skipped a step in the usual cycle ($).

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