The Vanishing Recession: A Modern Economic Paradox
Global recessions have become exceptionally rare in today's economic landscape. This represents a dramatic shift from historical patterns where economic downturns were frequent occurrences. From 1300 to 1800, England and later Britain experienced recessions nearly half the time, with volatile cycles of crashing downturns followed by storming recoveries.
The Historical Decline of Economic Downturns
As capitalism matured and policymaking improved, recessions became less frequent throughout the 19th and 20th centuries. Today, we face an unprecedented period of economic calm. Despite facing significant challenges over the past four years including higher interest rates, banking crises, trade wars, and actual conflicts, the global economy has demonstrated remarkable resilience.
From 2022 to 2024, global real GDP growth averaged 3% annually, with similar growth projected for this year. Unemployment in OECD countries remains near historical lows, while global company profits surged by 11% in the third quarter of 2025. Aside from the COVID-19 contraction, the world economy has avoided a synchronized recession for over fifteen years.
The Hidden Costs of Economic Stability
While prolonged stability seems beneficial on the surface, economists warn about mounting hidden costs. Austrian economist Joseph Schumpeter famously argued that recessions provoke "creative destruction" where failing firms exit markets, capital moves to promising technologies, and workers transition to more productive jobs. This process creates short-term pain but delivers long-term gains for economic health.
Contemporary capitalism may have grown complacent without these periodic corrections. Many observers note the proliferation of roles producing little lasting value, including armies of consultants, social-media influencers, and crypto traders. A recession could potentially redirect talent and capital toward more productive ends.
Evidence Supporting Creative Destruction
Research consistently shows that recessions can accelerate positive economic transformations. A landmark 1994 paper found that downturns purge outdated techniques and products. Studies indicate that the Great Depression helped eliminate small, unproductive car factories, paving the way for mass production. More recently, research from 2022 discovered that startups born during recessions outperform those emerging in stable periods.
The pandemic response highlighted different approaches to economic management. European politicians protected jobs through furlough schemes, while America allowed job losses but provided substantial cash support. This American approach encouraged creative destruction, with workers moving toward growing demand areas like suburbs and away from shrinking city centers.
When Recessions Fail to Cleanse
Not all recessions produce positive outcomes. After Japan's bubble burst in the early 1990s, weak banks continued supporting distressed borrowers, keeping unproductive firms alive. Similarly, the 2007-09 financial crisis ushered in a prolonged period of exceptionally low economic reallocation rather than accelerating positive changes.
Most politicians understandably seek to avoid recessions altogether. Emerging-market governments have adopted better policies including flexible exchange rates and inflation targeting. Rich-world governments have implemented aggressive intervention strategies, opening their wallets at the first sign of trouble.
Three Growing Economic Risks
The prolonged "recession recession" creates three significant vulnerabilities:
Financial Risk: Extended periods without downturns foster "disaster myopia," where people forget that bad economic events can occur. Investors load up on risky assets that struggle during troubled times. Today's dealmakers invest vast sums in artificial-intelligence companies with uncertain prospects, while households pour unprecedented amounts into equity markets.
Fiscal Risk: Government efforts to insure against recession are increasingly expensive. Rich-world public debt has reached its highest level since the Napoleonic wars. The American government's contingent liabilities now exceed $130 trillion, nearly five times the country's GDP. As bail-out expectations grow, more industries anticipate government support during difficulties.
Allocative Risk: Capital and labor are increasingly trapped in low-productivity uses. The share of "zombie firms"—persistently unprofitable companies—has grown globally from 6% in 2000 to 9% in 2021. These firms survive partly because of benign economic conditions where managers don't prioritize cost-cutting and banks continue supporting marginal businesses.
The Zombie Firm Phenomenon
Zombie firms create multiple problems for healthy economic functioning. They directly hurt other businesses by crowding out healthier competitors and reducing market entry rates. These firms keep workers in poorly matched positions, depriving better companies of talent and reducing overall productivity. Consistent with rising zombie firm numbers, job-to-job mobility across rich countries shows steady decline.
The world economy has achieved an impressively long stretch without prolonged downturn. Yet the very success of stabilization policies creates vulnerabilities that could threaten future growth. If governments remain determined to prevent downturns, they must equally support the continual turnover of companies and jobs that healthy economies require.
Otherwise, the economic system will demand ever larger doses of fiscal support to maintain a steady state that delivers diminishing returns. At best, this leads to economic stagnation. At worst, it creates enormous fiscal and financial risks that could trigger more severe problems than the occasional recession they seek to avoid.
