What Can We Learn From Recessions Past?

Look, the economy has been weird for a while now. I can’t pretend to know exactly what’s going on or, more important, what will happen in the future, but I do know it’s unsettling to leave the grocery store wondering how the hell you just spent $40 on mediocre salad ingredients and some chicken. These are mysterious and confusing times, and I don’t have all the answers.

Based on history, things will probably get worse before they stabilize. The Fed is trying to fight inflation by raising interest rates — part of its job — which has had the unfortunate side effect of triggering recessions in the past. Of course, there are other ominous forces at play, too, like supply-chain problems and COVID and the war in Ukraine. No one can predict a recession for sure, but the odds are pretty high.

That’s scary to think about, especially considering that the last big recession (i.e., the Great one) cost millions of people their jobs and their homes. But the lessons from previous recessions can make the next one a little easier to handle, whenever it hits. (And not just “save more money,” although that undeniably helps those who can afford to do it.) I spoke to several financial experts about putting this moment in context, what to remind yourself of when things look hairy, and the mistakes to avoid.

Resist the urge to take drastic action.

When things feel precarious or a recession actually happens, it’s natural to want to do something — liquidate your 401(k), hoard beans, buy random stocks you read about online. Things are urgently bad, and you can’t just sit there! But actually, you probably should: “People tend to want to make big moves when they’re anxious, but it’s almost always better not to,” says Megan McCoy, a financial counselor and professor of financial planning at Kansas State University.

“No one makes great choices when they’re panicking, and economic scarcity is known for triggering irrational actions that don’t serve you best in the long run.” One example of this is the rush to buy homes, which started during the earliest days of the pandemic (technically, the last recession). “I spend a lot of time telling my clients, ‘No, don’t buy a house. Don’t buy an apartment. Stay put if you can — real estate is crazy right now,’” says Georgia Lee Hussey, a certified financial advisor and founder of Modernist Financial.

“They’re trying to anchor themselves to deal with their anxiety, which is completely understandable, but that doesn’t mean you should act on it.” A better way to channel that stress is to take stock of your spending. “The only thing you can really control right now is your cash flow from day to day,” she adds. “If you’re feeling pressured to act, get one of those tracking apps and gamify it for yourself. Knowing where all your money is going and seeing where you can save are good uses of that impulse.”

You may have to improvise.

I’ve written before about how to prepare for a recession, and it certainly helps to have an emergency fund to fall back on. But the truth is that most people don’t. If that’s you, now isn’t the time to beat yourself up about it.

“If job loss does occur, be ready to make adjustments and remember that they are temporary,” says Dr. Preston Cherry, a certified financial planner and head of the financial-planning program at the University of Wisconsin. “You can take an alternative job you may not be thrilled about or sell some belongings. You’re just filling the gap and managing the moment.”

I don’t want to minimize how difficult those things can be. During the Great Recession, I lost my job and, after doing some depressing temp work, eventually found a new position that wasn’t a great fit (I stayed for over a year because health insurance!). I don’t want to do that again, but there’s some comfort in knowing I could if I had to.

Beware the get-rich-quick schemes.

When people are nervous and desperate, they turn to the internet — where bizarre scams proliferate. “Especially at the beginning of the pandemic, when emotions were running high, I saw a lot of things online that were too good to be true,” says Dr. Cherry. “Some are more legitimate than others, but the important thing is that there’s no magic wand for making money.”

Some obvious examples: random cryptocurrencies and meme stocks, which, well, you know how that went. A similar thing happened in 2008, especially with scammers posing as government officers requesting financial information as a precondition for receiving tax refunds — and then opening credit cards in their names.

Even if you come across an “investment opportunity” that sounds aboveboard (and may be, technically), it’s usually not good to experiment with your money during a volatile time. You’re better off putting any funds you’ll need in the near future somewhere boring and safe where you can access them, Dr. Cherry adds.

Don’t be afraid to seize the moment.

No one wants to profit off widespread misfortune and economic suffering. But if you’re one of the lucky ones who can afford it, investing your long-term savings (read: not your emergency fund) in the market during a downturn can be extremely smart. “Putting money into mutual funds when the market is down — that’s the dream,” says McCoy. “It’s not sexy to buy stocks now, but during every recession, some people have made a ton of money by thinking big picture.”

Remember that the economy will recover.

When the economy takes a dive, it can seem as if our entire financial system is crumbling and we’ll be burning our worthless dollar bills to cook our food. And hey, maybe that will happen someday — but in the near future, it’s much more likely that things will bounce back.

That’s because recessions are, unfortunately, a normal part of how our economy functions. They have occurred about once or twice a decade for the past 70 years. And there’s no reason to think the next downturn will be an exceptionally painful one — like, say, 2008’s, which was the worst in almost a century.

“It’s easy to anchor our minds to the Great Recession and worry that things will get that bad again, but the economy is very different now, and there are a lot of promising signals,” says Dr. Cherry. “Not all recessions are created equal.”

This may not be a ton of comfort if you’re stressed about losing your job and taking care of yourself and your loved ones. But it is important to keep an eye on the bigger picture, which is that these downturns do pass.

Source: Lessons From Past Recessions

Critics:

Policymakers should take the lesson from the past two years that vigorous fiscal and monetary policy can boost income for most households and disproportionately for lower-income households and can speed economic recoveries. However, doing too much can have serious downsides that might be difficult to mitigate.

Macroeconomic support for an economy deep in recession with many underused resources can increase output and employment with little effect on inflation. But as the economy gets closer to its capacity, additional macroeconomic support will feed increasingly into inflation instead of improvements in output and employment. Going forward, the magnitude and timing of the response should be improved through more automatic stabilizers, and the targeting of the response should be as well. The good news is such responses can be implemented efficiently if policies are developed in advance of a crisis.

It is important to draw lessons not just from what happened, but also from what did not happen during the COVID-19 recession: for example, there was no financial crisis in the United States or worldwide. The initial, robust response by monetary policy-makers was critical to keeping the financial sector on an even keel. Better preparation in the form of more robust and stress-tested balance sheets for banks prior to the recession also helped.

The preexisting social safety net is inadequate in the face of recessions: it is not generous enough and has too many gaps, which is why it needed to be supplemented by policy action both in the Great Recession and to a much greater degree in the COVID-19 recession. Additional automatic stabilizers are likely part of the answer but are unlikely to be sufficient to avoid the need for well-timed and wise discretionary fiscal responses in the future.

It is still not clear what policies would work better in the United States to lessen the impact of a GDP decline on employment and preserve worker attachment to their employers. Job retention schemes were heavily utilized in European countries compared to state-based work sharing programs in the U.S.—these programs should be explored in greater detail for future downturns.

Related contents:

Economy Is at Risk of Recession by a Force Hiding in Plain Sight The New York Times

12:25
12:21
U.S. Retail Sales up 1% in June, easing fears of a recession Newsy

21:30 Fri, 15 JulUS Economy Business (US) Economy
20:34 Fri, 15 JulNasdaq US Economy Business (US)

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MLMs Could Be In FTC Trouble With a Business Opportunity Rule Change

Say I’ve got a business selling bananas, and I want you to sell bananas, too. Presumably, you’d want to know some details about this banana business opportunity, such as whether I’ve ever been sued for lying about my business, whether the amount of money I say you would earn is accurate, and what happens if, after selling for a while, you want to quit. Perhaps you’d want to take a week to think about it before signing on.

For most business opportunities in the United States, that’s the legal standard I would have to follow to get you on board. It doesn’t apply to multilevel marketing companies (MLMs), though. They’re exempt — at least for now.

A decade ago, the Federal Trade Commission (FTC) put in place the “business opportunity rule,” which basically describes a set of requirements for people trying to get others involved in a business opportunity, such as a work-from-home job (some of which are scams). The rule says that people offering such opportunities have to provide support for any income claims — if I tell you that you can make $1 million a year in my banana business, I have to prove it.

They must also disclose whether they’ve been involved in certain legal actions (such as any involving fraud), and list them out if they have; detail their refund and cancellation policy (if they have one); and provide a list of at least 10 other people who have bought in, all seven days before the person they’re recruiting pays any money or signs anything.

There were plenty of people who believed that MLMs should be included in the FTC rule when it was enacted a decade ago, but they were granted an exception following massive pushback from the industry. “That’s the power of lobbying for you,” said Douglas Brooks, an attorney who specializes in MLMs.

That could be about to change. The FTC announced in June that it would review the business opportunity rule as part of a revised 10-year review schedule — and there is hope that, this time around, MLMs might be roped in.

Earlier this year, then-FTC Commissioner Rohit Chopra (who was recently confirmed as director of the Consumer Financial Protection Bureau), put out a statement urging that MLMs and gig-economy platforms be included in the rule. Now that Chopra’s at the CFPB, the other commissioners — including FTC Chair Lina Khan, a protégé of Chopra’s, and Noah Phillips, a Republican-appointed commissioner who has criticized MLMs in the past — are expected to take a look at the issue.

Outside the FTC, anti-MLM sentiment has been on the rise of late as people involved have felt more emboldened to speak out about the pitfalls of the business model and high-profile media projects have called attention to the issue.

MLMs are certain to push back against their inclusion. One lawyer I spoke to, who asked to withhold their name because they have clients in the industry, told me that the rule would be “disastrous” for MLMs and likely “decimate” the industry. Whether the FTC actually makes any changes to the rule is uncertain, and the process could take months or even years. But it’s a start.

MLMs lobbied their way out of regulation a decade ago. It’s not clear whether they’ll be so lucky now.

To back up a bit, multilevel marketing is a business model where sellers derive profits in two ways — by selling a product or service, and by recruiting other people to sell that product or service. Generally, the latter is more lucrative than the former.

It’s a big industry. The Direct Selling Association (DSA), a trade group representing MLMs, says it was worth $40 billion in 2020 and encompasses millions of sellers. It’s also a controversial one: The vast, vast majority of sellers make little, if any, money in MLMs (they often lose money), and consultants and companies have been caught on multiple occasions making misleading claims about earnings potential and product effectiveness.

Critics say MLMs are in essence pyramid schemes, where only people at the top make money, and do so by constantly recruiting new members. MLMs reject this characterization, but at the very least, some MLMs have gotten into trouble with regulators for bad behavior, including Amway, AdvoCare, and Herbalife.

MLMs aren’t completely unregulated — the FTC and Securities Exchange Commission, for example, have some purview over them. But it’s hard not to wonder whether there could be more guardrails, including with something like the business opportunity rule, which MLMs have vociferously opposed.

First proposed in 2006 and finalized in 2011, the business opportunity rule is meant to protect consumers from “bogus business opportunities” by laying out some basic requirements about what potential recruits need to be told and when.

When the rule was first proposed, the MLM industry went into overdrive to try to make sure it wouldn’t apply to them. As The Verge outlined in 2014, the DSA got over 17,000 people to send comment letters to the FTC opposing the then-forming rule being applied to MLMs. (By comparison, MLM critics sent under 200 letters.) MLMs also boosted lobbying expenditures and got dozens of members of Congress to write to the FTC urging it to let MLMs be.

“They just swamped the FTC with things basically saying, ‘If you do this to us, it’ll destroy the industry,’” Brooks said.

MLMs were successful: The FTC decided that they should be exempted from the rule, determining that it “would have imposed greater burdens on the MLM industry than other types of business opportunity sellers without sufficient countervailing benefits to consumers.” An FTC staff report said that some MLMs do engage in bad practices and are pyramid schemes, but that would better be determined on a case-by-case basis and the “record developed was insufficient as a basis for crafting MLM disclosures that would effectively help consumers make an informed decision about the risks of joining a particular MLM.”

Looking at how MLMs operate, critics have questioned whether the FTC’s decision was the right one — and hope they’ll decide differently now. There’s been increased scrutiny by the public on MLMs in recent years, and regulators have continued to take notice of their practices. The FTC has sent out warning letters to MLMs during the pandemic over their earnings and product claims (companies and sellers have taken advantage of the crisis). The regulator is currently enmeshed in a lawsuit against Neora, which sells skin care and wellness products, over allegations that it is a pyramid scheme.

The public has taken more notice of MLMs and the business model as well. For a long time, many people who were involved in MLMs and failed (which most do) didn’t talk about it — they were embarrassed, or they felt guilty over roping their friends and family into it, too. Former sellers and experts say that MLM culture is one where leaders place blame for failure fully on the shoulders of the individual.

Sellers are told that if it doesn’t work out, it’s their fault and their fault alone. But there has been an explosion of growth in anti-MLM communities on the internet, and there seems to be a greater awareness of the drawbacks the business model brings with it.

In other words, the FTC won’t just be flooded with comments from the pro-MLM community this time around, it’s also likely to hear more from the anti-MLM community as well.

“I would expect that there are going to be many comments, and I would expect that the MLM industry will gather its troops,” said Bonnie Patten, executive director of Truth in Advertising, a consumer advocacy nonprofit.

The FTC’s exact timing here is unclear. Patten said she expects action to begin in December, though she acknowledges it’s a bit of an “informed guess.” Even then, there’s a long road ahead, as the FTC will have to solicit public comments, send notices to lawmakers, and could hold arguments regarding changes. “This is a slow and laborious process,” Patten said.

Now that Chopra is at the CFPB, there have been some doubts among MLM critics as to how efforts to include MLMs in the business opportunity rule will proceed at the FTC. Chopra was the commissioner who had explicitly mentioned including MLMs under the rule, and now, the FTC has four commissioners instead of the usual five, so votes could come down to a two-two split.

Still, Patten said she’s relatively optimistic. “If we’re focused on MLM, I think of all the deceptive marketing issues in a deck of cards, MLM is the one that it appears all commissioners agree is an issue,” she said.

The FTC declined to comment on the matter, noting that they generally don’t speak publicly about rule-making processes as they are underway.

People should know what they’re getting into with MLMs

When you watch something like the LuLaRoe documentary or listen to a podcast like The Dream, it’s sometimes hard not to land in the same spot: How in the world can this be legal? Or at the very least, why isn’t more being done to look out for people before they get sucked in?

Most people don’t make money; plenty lose money. Some companies make earnings disclosures available, but they’re generally really difficult to read and understand. Even if it’s relatively clear that eight in 10 consultants make less than $10 a month, recruits are sold on the hope that they’ll be one of the lucky few to make $100,000.

Many MLMs don’t really know where their products go once they arrive at the sellers, who are often encouraged to buy in order to stay active in the company and show their commitment. (Their uplines, the people above them, make money when they buy.) Whether sellers are actually offloading those lotions or essential oils or earrings to other people, or just piling them up in their garage, the corporate office often is unaware.

Including MLMs in the business opportunity rule wouldn’t be a panacea, but at the very least, experts say it could be a good start. “All this rule would have required were some pretty basic disclosures and a seven-day cooling-off period, and you’re saying this is going to destroy the industry?” Brooks, the MLM attorney, said. “What’s going on here? Why would that be so destructive?”

A sample disclosure form on the FTC’s website doesn’t look that complex. Yet, Brooks said he expects it to be a “knock-down, drag-out” fight if it looks to the industry like MLMs will get included in the business opportunity rule. “I don’t doubt that they will go to Congress and try to get a law passed that will sort of preempt that effort,” he said. Indeed, there is a direct selling caucus in Washington, DC, with more than three dozen members, Republican and Democrat alike.

In a statement to Vox, Joseph Mariano, president and CEO of the DSA, said the organization “looks forward to a constructive engagement with the FTC on any prospective rule-making that might apply to direct sellers.” He said the DSA “has a long history of encouraging self-regulation and consumer protection as a complement to appropriate and reasonable government regulation” and pointed to the DSA’s code of ethics, which member companies and sellers must abide by, and the DSA’s self-regulatory council.

Brooks thinks efforts to curb MLM activity should go further than the business opportunity rule and other tools currently in the FTC’s toolbox. (Earlier this year, the Supreme Court curbed some of the FTC’s ability to seek monetary relief, which has prompted some of the conversation around the business opportunity rule.) In his view, regulators need to have harder lines around what MLMs can and can’t do in the first place.

“The FTC should prohibit certain types or aspects of MLM compensation plans, because the real problem with these companies is in the compensation plans, it’s the whole structure of the thing,” Brooks said. “People end up spending thousands and tens of thousands of dollars having thought that this was originally a $50 investment.”

So back to my banana business. At the very least, many experts say, I should have to tell you if the banana sellers under me are making $1 or $1 million a month. If I promise you that you’ll be a banana billionaire, I should have proof, and also tell you if there was a banana-related fraud lawsuit in my past, and give you a few days to decide if you want to get in on the bananas — whether I’m an MLM or not.

The harder question — and one the FTC isn’t looking at now, but perhaps should — is whether I should be able to get you in on the banana business at all if I know you’re almost sure to fail. If 99 of 100 sellers are in banana bankruptcy, just how hard can I sell you on the 1 in 100 dream of being a banana billionaire? That’s a question for another day.

Emily Stewart

Source: MLMs could be in FTC trouble with a business opportunity rule change – Vox

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