Trying to predict a recession is a fool’s game. Expansions don’t die of old age. Various hard-to-predict accidents can put an end to them. A trade war — like the Smoot-Hawley tariff spiral in the 1930s — could be one such accident. The question is not when, but how, a recession plays out. And the policy response is key to the answer.
The most consequential policy mistake in economic history was the lack of a proper response to the financial crash of 1929. Central banks failed to recognise the impact of bank failures and debt-deflation dynamics, and monetary policy was too tight. So what could have been just a recession became a fully fledged depression. The lessons of this episode clearly guided the response to the global financial crisis of 2008.
Time will tell whether unleashing a trade war will turn out to be another historic mistake. But one thing is certain: policymakers no longer have the ammunition that has been required to respond properly to past recessions, let alone to full-blown crises.