Question on Economy & Recession

[Tim R]

I'm not very schooled in economy, but I just had this thought and I'd like to know whether it's a reasonable idea or not:

 

If our economy wouldn't be so heavily capitalistic and our society less fond of mass consumption in the spirit of commodity fetishism, the (ensuing) recession caused by the pandemic wouldn't be as severe.

 

(contrasted with say a more socialistic and less consumption-oriented society)

[snowyowl]

This may be true, I don't really know. But what's your reasoning why a socialistic economy would be less prone to a severe recession? 

[Heart of Space]

I am pretty schooled on this, so I can tell you what's up.  I'm on my phone at work so I'm a bit limited in post length.

So, one of the major factors in modern recessions is debt and institutions leveraging themselves to create a competitive edge.

On a household level, people rely on credit cards and loans for cars, homes, higher education, and more.  When you take on debt instead of paying cash you make yourself more vulnerable financially in an emergency situation.  Someone who utilizes less or no debt will generally be more financially secure, but they will have less capacity to live a higher income lifestyle then someone who uses maximum debt.   

On an institution level, it's actually quite shocking what our financial institutions do to increase their competitive edge.  Pre-2008 banks in the US were leveraged up to 36 to 1.  This is why you heard of banks going bankrupt 5 times over.  The advantage of a leveraged system is that if you are an institution you can make more money.  For example, if you wanted to start a restaurant business and you have a successful business model you would prefer to open two locations instead of one because you can double your profit, however opening two locations increases your chances of going tits up.  It's a double edged sword.

There's more, but my finger is tired typing on my phone.

[Giancarlo]

I have 2 thoughts on this.

The short answer: Yes, because consumption is the largest part of the GDP. So if you reduce consumption, you would reduce the severity of the crisis.

The long answer: It is not as simple as reducing consumption. If you try to purposefully reduce consumption, demand decreases, unemployment skyrockets, prices fall, and we're heading for something worse than the Great Depression. The problem is way deeper and more complex than just "consuming less". 

This brings up an interesting point. The economy is structured such that we have to maintain economic growth (and thus consumption) because the alternative is so much worse. But this may be getting beyond the scope of this discussion.

Final thought: I don't know where you got the idea that socialistic economies consume less. They rely just as heavily on consumption for GDP as any other country.