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If the much-anticipated recession occurs, will IP criminality increase? Affordability of fakes continues to drive attitudes, even as social media influencers enter the fray Can counterfeiting activity exist independently of overall economic performance? We may be about to find out if we enter a recession in the next few months. An economic downturn can spawn a wide range of criminal opportunities and impacts, including those from organised international counterfeiting networks, which step in to fill the market with dangerous, lower-priced goods, as many legitimate products and services are pushed out of the normal reach of many consumers. Survey figures tend to support this viewpoint. In June this year, the EUIPO Intellectual Property and Youth Scoreboard 2022 had the disappointing job of announcing that the intentional purchase of counterfeit goods had continued to increase in popularity in the 15-24 age cohort. Some 37% of respondents bought at least one fake product in the last year, comparable to the proportion purchasing unintentionally. Affordability drives all? In the centre of all this, at any given time, the consumer is weighing a set of conflicting drivers. The EUIPO survey reported that 48% of the young people asked still see price as the main driver towards accepting counterfeiting. Even this figure is probably understating comparisons with earlier EUIPO surveys because of a change in question methodology. But it is plausible to suggest in any future recession, affordability will remain important. Other factors cited in the survey suggested product accessibility and logistics of delivery were also significant. Affordability may outstrip all other drivers, but new ones are potentially heading up. In the dissuading corner are fears of cybercrime risks in buying online. Environmental and slave labour issue awareness may also be positive factors in consumer decision making. Against this, the social context is becoming important. In the past, this may have meant attitudes formed by family and friends. The EUIPO survey noted the presence of social media influencers for the first time. A recent Buzzfeed article addressed the heart of the problem in its title: Yes, my designer bag is fake and I don’t care because the economy is collapsing. The message seems clear. Buzzfeed reporter Ade Onibada suggested, “For advocates, who proudly flaunt their fakes, buying a counterfeit is primarily about being financially savvy, especially at a time of economic uncertainty.” Savviness apart, the social media dimension is itself nuanced. Influencers who deal in legitimate high-end luxury goods believe fakes damage everyone, particularly if they are starting to enter the second hand (or preloved) retail chain where they can acquire an air of authenticity. Meanwhile, individual creators can acquire individual cachet from posing with fake luxury goods on their own social media as “fake products basically look the same in photos” suggested Ade Onibada. Other commentators suggest that high end department stores have themselves been called out by social media influencers to battle against counterfeits not merely from upstream supply chains but deliberately exchanged for genuine product purchases. The inevitable spill over No one should doubt the spill over possibilities all this creates. Buzzfeed’s Ade Onibada comments the loss will be borne somewhere: “Creators stripping away the taboo of fakes in the pursuit of a luxury aesthetic will inevitably leave someone at a loss, whether that be the design houses, manufacturers, department stores, or a confused consumer.” The replacement of legitimate goods by counterfeits, at times of crisis, results in growing harms to the economy from lost taxes, which are much needed to provide financial support for public services. Moreover, the impact on legitimate business from lost sales, leads to lost jobs and services as businesses look to reduce costs. Meanwhile, we are still evaluating the effects of the latest disruptor, the Covid-19 pandemic. Even as legitimate trade slumped in worldwide lockdown, illicit activity soared. According to OECD findings, some 100 000 web domains were created specifically alluding to Covid 19 for the purpose of supporting scams. The probable conclusion will be criminal activity could--and probably will--opportunistically flourish in any future downturn especially if we see supply chain difficulties.

A recession impacts the intellectual property (IP) ecosystem in many ways. Some of the major immediate impacts include: I. Reduced budgets allocated: This forces business owners to focus on their core brands markets and makes them less likely to oppose third-party marks or file cancellation actions and possibly even to delay the launch of new brands and/or products. II. Increased spend on technology: It appears that both law firms and the in-house departments increase their spend on technology in times of recession. While law firms tend to do so to increase the efficiency of their work product, the in-house teams appear to do so owing to the budget crisis. III. Changes in staffing: Recessions have an impact on law firm employment and there may be job losses or IP practitioners that leave a firm and may not be replaced. IV. Decline in M&A activity before a recession. However, companies that have the resources to invest may reap benefits as the research shows that companies that make acquisitions during a recession are likely to see better shareholder returns in the long term. In summary, a recession tends to reduce the investment in maintaining and protecting IP assets but leads to greater investment in legal tech to gain efficiency in tough times.

A financial crisis can affect the economy’s long-term trajectory if it alters investment behavior. In Research and/or Development? Financial Frictions and Innovation Investment (NBER Working Paper 31521), Filippo Mezzanotti and Timothy Simcoe investigate the impact of the 2008 financial crisis on domestic research and development (R&D) expenditures by US firms. They find that firms in greater need of refinancing responded to the crisis by cutting back investment in R&D. Scientific research felt the brunt of the cutbacks, while product development was less affected. The study analyzes a sample of around 1,100 large US firms and draws on census surveys for 2002–07 and 2008–12 that make it possible to disaggregate spending on research from that on development. Private firms account for 75 percent of total US domestic investment in R&D. Firms entering 2008 with a higher debt-to-liquid-assets ratio saw less R&D growth than peers within the same North American Industry Classification System category with a lower ratio. A 0.5 unit increase in the ratio was associated with an 8 percent decline in R&D spending. The decline came almost entirely from reduced spending on basic and applied research, and mostly from cutting employment. Cutbacks in corporate R&D spending during the Great Recession fell most heavily on budgets for basic and applied research. The decline was not associated with preexisting trends in the companies’ R&D activities. Moreover, the drop in R&D investment persisted beyond the crisis, perhaps because of the high cost of replacing highly skilled workers. Basic and applied research is more vulnerable to the budget axe than product development or other activities with specific commercial applications. Its goal is to generate new knowledge in the hope of a long-term payoff, in contrast to development research, which offers quicker, less speculative returns. Spending on development often seeks to improve existing products or create new ones. The researchers suggest that development investment may be driven more by competitive considerations than by the financial environment. They conjecture that firms will reduce development investment in a crisis only if their rivals face similar problems, such as accessing credit. The long-term economic impact of the R&D cutbacks can be seen in trends for patents and patent citations among firms with greater exposure to the financial crisis. Patents fell by 6 to 7 percent over a three-to-five-year horizon, but these differences are not statistically different from zero. However, the quality of these patents decreased significantly: patent citations fell by 16 to 19 percent over the same period. To explain these findings, the researchers show that development spending is more strongly tied to patents than research spending is. This evidence may explain why a change in R&D mostly achieved through a reduction in research may have small effects on the raw count of patents, but still deteriorate the quality of this output.

While Winston Churchill was famously supposed to have remarked that we should never waste a crisis, the reality is that during recessions, firms often tighten their belts and reduce the amount they invest in innovation. Of course, Churchill's dictum rests on the way in which crises can prompt us to reassess that which we had previously taken for granted and look for new ways of doing things. Research from Kellogg explores whether that is really the case or not. "We examine innovation following the Great Depression using data on a century’s worth of U.S. patents and a difference-in-differences design that exploits regional variation in the crisis severity," the researchers explain. Innovation during recessions The study found that there was a steep decline in inventors' patents during the depression, with this seemingly driven by reduced levels of funding due to the economic crisis. Bigger firms were generally better equipped to weather this situation, however, and the reduction in competitor's activity may actually have benefitted them. In short, while smaller, independent innovators reduced their activity, the activity of larger firms tended to hold steady, with the authors suggesting that perhaps the independent innovators sought more certainty at larger firms. "It's widely accepted that being innovative today is getting more expensive, but this is generally okay during good times as access to capital is more readily available so smaller firms can still innovate successfully," says Anthony Durkacz, CEO of Nasdaq-listed FSD Pharma, "This generally isn't the case during a recession, however, as investors and lenders tend to take a more safety-first approach, which usually favors bigger firms with a proven track record and income already coming in." A similar outcome was seen via Harvard research, which looked at whether individuals wanted to work for startups or bigger firms during the Covid pandemic. Safer option The researchers tracked job applicants on the AngelList Talent website, which is a leading platform for startups to hire talent. The analysis revealed a distinct shift in job searchers towards larger companies after the national state of emergency was officially declared by federal officials on the 13th of March. This flight towards larger firms was especially pronounced among higher-quality and more experienced talent, thus leaving startups with a smaller and lower-quality pool of talent to pick from. It’s a phenomenon that the researchers believe has profound implications.

Notwithstanding, these studies mix the short- and the long-term implications of financial crises for the environment. For some, despite short-term reductions in emissions in crisis years, economic crises are typically not good for the environment. The main argument is that recessions, by making access to capital more difficult, negatively affect emissions reduction efforts through their discouraging effects on investments (including investments in low-carbon technologies) (Del Río and Labandeira 2009). Both governments and the private sector focus on the recovery and on adapting their respective budgets, are shifted away from climate policies. As a result, crises lead to postponement of environmental projects as surviving the crisis becomes the goal, rather than transitionary at that time to a “green” company or economy. Also, at a time of economic crisis, carbon lock-in is much more likely.6 Additionally, lower energy prices during crises, reduce the economic viability of cleaner technologies. Governments are likely to avoid burdening businesses with extra costs and regulation at a time when the economy is fragile and jobs may be at risk (Wooders and Runnals 2008). Such scenarios also assume a low political will to implement climate policy in the short term and a reduced incentive to participate in international agreements to tackle the issue in the longer term.

These reports may be missing the severe threat to global democracy that emerges from data on the impact of ongoing economic decline. Whatever you have found shocking about Western political developments in recent years is roughly what you’d expect to be happening after a large-scale review of countries facing similar economic experiences.

The real threat today, and the essential problem, stems from a single fact: the health of the world’s democracies turns out to be crucially dependent on their economic growth rate. This is especially true of “consolidated democracies,” countries that have established a stable precedent of peaceful power transfer over several or many electoral cycles. The world’s leading consolidated democracies—wealthy and powerful nations to include the United States, the nations within the European Union, and other large U.S. allies, such as Japan, have seen rates of economic growth consistently and persistently decline over the past forty years. In the United States alone, GDP growth has averaged 1.79 percent per year since the year 2000, after averaging 3.35 percent between 1968 and 2000. Median household income, somewhat infamously, has shown negative net growth between 1999 and the present year, after generally growing between between 1945 and 1999; work by McKinsey & Company generalizes this trend to the majority of high-income liberal democracies.

Commodity price shocks can affect the opportunity costs of engaging in conflict activities. A negative commodity export price shock would lower household income, thus incentivizing households to engage in conflict. Case studies suggest that such a mechanism influenced the outbreak of the First Ivorian Civil War in the 2000s (Woods, 2003; McGuirk and Burke, 2020). In the 1980s and 1990s, Côte d’Ivoire experienced a persistent decline in the price of coffee and cocoa exports – products on which its economy relied heavily. The decline led the state and individual producers to expand their production to compensate for lower revenues. This resulted in competition over land that could be cultivated and the rise of ethnic and religious tensions, which promoted the context for the war. On the other hand, commodity import price increases reduce households’ real income, which also lowers opportunity costs. Schneider (2008) examines news reports and finds that food price increases in 2007 and early 2008 led to the eruption of food riots in more than 20 countries. The effect of a negative commodity ToT shock working through the state capacity channel is also expected to increase conflict intensity. A negative export price shock may lower government revenue, while import price increases may increase the fiscal cost of measures such as subsidies to support the population. And In both cases, the state’s ability to mitigate the economic shock is weakened. For example, Sayne and Hruby (2016) describe that in Nigeria, Africa’s largest oil producer, falling oil revenue due to the oil price slump in 2014 and 2015, compounded by lower investor confidence and exchange rate volatility, constrained the government’s resources to address the expansion of Boko Haram in the northeast regions of the country. Finally, a negative ToT shock resulting from lower export prices would lower the gains to be made through rent capture, thereby decreasing incentives for conflict through the predation channel. Previous studies often report the significance of this channel for the oil and other natural resource sectors (e.g., Ross, 2004). Given the different expected direction of effect, the overall impact of commodity price changes on conflicts is ambiguous ex ante and requires careful regression analysis. How can economic conditions affect the likelihood of conflict? Since conflicts arise from complex political, social, and ethnic contexts, singling out an individual determinant seems infeasible. However, it is plausible to assume that economic factors, such as changes in aggregate income levels, would contribute to the dynamics that foster conflict. For instance, higher inflation would reduce purchasing power, thereby increasing the inclination of individuals to participate in violence. Less opportunities for gainful employment or reductions in salaries and wages may have similar effects. These would be the case especially in situations where governments are lacking the means to effectively mitigate economic hardship as macroeconomic shocks deplete their fiscal coffers. Recent years have seen several major economic shocks on a global scale with a negative effect on output and thus aggregate income, including the Covid-19 pandemic, an increasing number of severe climate events, and Russia’s invasion of Ukraine. The Ukraine war has had a particularly strong impact on households’ purchasing power through its effect on energy, food, and fertilizer prices (Figure 2). Low-Income Countries (LICs) have been hit the most, as they host sizeable populations of poor and vulnerable households while their social safety nets tend to remain underdeveloped (see Rother et al., 2022).

The link between financial crises and a deterioration in democracy, peace and security has been highlighted by several studies. As noted by Matthias Goldmann, 'in recent years, more and more data has become available which reveals a correlation between sovereign debt crises and the outbreak of civil wars. 225 Thomas Piketty and Branko Milanović have stressed the link between financial crisis, inequality and social collapse. 226 In addition to economic recession and falling trade volumes, global economies are strongly affected by chronic deflation. Historically, there is a correlation between inflation-deflation cycles and the debt cycles: deflationary pressure increases during peace years, and inflationary, during war years. 227 Writing for The Economist, Qian Liu has warned that the next economic crisis could cause a 'global conflict'.228 This is concerning, particularly in the context of the current debate on a new 'cold war' brewing between the US and China, in the paradigm of a 'Thucydides's trap'.229

The combination of global social risks, increased international tensions due to rising protectionism and the Covid-19 pandemic, has raised some concerns regarding the risk of a repetition of the 1930s scenario, which eventually led to World War II. 230 The US 'America first' protectionist trade policy developed under former president Donald Trump could reignite under Joe Biden's stimulus package. Under the Biden administration, protectionism may be more targeted and subtle, but it is not going to disappear. Furthermore, high rates of unemployment, and unconventional monetary policy measures, including possible 'modernisation' of the main central banks' legal mandates and their impact on debt cycles and inequality, have all been cited as causes for concern. 231 The dangerous link between the state of the global economy and peace has, once more, come to the fore – this time as a result of the 21st century's gravest health crisis. Massive stimuli by central banks and governments, such as US$120billion in monthly bond purchases by the US Federal Reserve, or the $1.9 trillion stimulus bill adopted by US Congress (American Rescue Plan Act of 2021) awoke, in January 2021, not only hope of economic growth but also fears of rising inflation. The US Treasury yield curve has steepened to four-year high and, as noted by Standard & Poor's Global Market Intelligence Unit, 'A steep yield curve – when there is a large spread in interest rates between shorter-term Treasury bonds to longer-term bonds – often precedes a period of economic expansion, as investors bet that a central bank will be forced to raise rates in the future to tamp down higher inflation'.

This article examines whether and how economic slowdowns lead to military conflict. Although a weak economy (as reflected, for example, by high inflation and unemployment rates) has often been regarded as a cause of interstate conflict, this study proposes that worse economy, that is, a negative trend of growth rates, tends to make political leaders face domestic challenge from dissatisfied public and look for diversionary targets. In addition, it hypothesizes that economically troubled states will target their junior trade partners, which are less likely to retaliate harshly. The results, based on an analysis of directed dyads from 1950 to 2010, show that a state is more likely to initiate military conflict when economic growth slows. When the initiator is an autocracy and the target is a democracy, this aggression is likely directed toward a vulnerable trade partner. However, a potential initiator’s political unrest does not increase the tendency to target a junior economic partner. These findings suggest that an autocracy’s slowing economy can threaten a politically dissimilar and economically dependent state, and that political and economic unrest have different effects on diversionary conflict as these factors interact with the domestic and international environments. Given our globalized economy and the current erosion of democracy worldwide, we could experience more frequent conflicts between economically troubled autocracies and their junior trade partners.

A growth surge in the world’s largest economy could provide a significant boost to global activity. In contrast, uncertainty about the direction of US policies could have the opposite effect. This column investigates spillover channels linking the US and the global economy. An acceleration in US growth would have positive effects for the rest of the world if not counterbalanced by increased trade barriers. However, policy uncertainty could hamper global growth, and could have particularly bad effects on investment growth in emerging and developing economies.

Because of its size and interconnectedness, developments in the US economy are bound to have important effects around the world. The US has the world’s single largest economy, accounting for almost a quarter of global GDP (at market exchange rates), one-fifth of global FDI, and more than a third of stock market capitalisation. It is the most important export destination for one-fifth of countries around the world. The US dollar is the most widely used currency in global trade and financial transactions, and changes in US monetary policy and investor sentiment play a major role in driving global financing conditions (World Bank 2016).

Have you ever wondered why the performance of the US economy has such a massive impact on global markets? It’s a complex issue, but there are a few key factors that contribute to this phenomenon. Let’s explore some of the reasons why the US economy is so influential and what it means for the rest of the world. One reason the US economy has such a large effect on global markets is simply due to its size. The United States is the largest economy in the world and its GDP accounts for approximately one-fifth of the global economy. This means that any changes in the US economy can have a significant ripple effect across the rest of the world. Another important factor is the role of the US dollar as the global reserve currency. This means that many countries hold US dollars as a form of reserve asset, which they can use to settle international transactions or support their own currencies. As a result, fluctuations in the value of the US dollar can have a major impact on the global economy. Furthermore, the US is home to some of the world’s largest and most influential companies, such as Apple, Microsoft and Amazon. These companies have a massive impact on global markets, as they are major players in industries ranging from technology to retail to finance. Changes in their stock prices or business decisions can send shockwaves through global markets. Thus, equity prices or the prices of stocks, are very closely tied to the US Economy. When the economy in America is doing well companies, such as the ones discussed above, will experience an increase in profits and as a result stock prices can be increased. This in turn has an effect on global stock markets, as many global companies have notable exposure to the American market. If US companies are doing well, it can indicate that the global economy is also growing, which then leads to increased investor confidence and higher stock prices globally. So, what does all of this mean for the rest of the world? For starters, it means that changes in US economic policy or performance can have a significant impact on other countries’ economies. For example, if the US Federal Reserve raises interest rates, it can lead to a stronger US dollar, which can make it more expensive for other countries to borrow money. This can have a negative impact on countries that rely heavily on borrowing to fund their own economic growth. Inflation in the USA is a critical factor that impacts the global economy. When inflation occurs, the value of the US dollar declines, which can cause a ripple effect throughout the world’s financial markets. As the value of the US dollar decreases, it affects other countries’ currencies, particularly those that use the US dollar as a reserve currency. Additionally, inflation in the USA can lead to changes in interest rates, which can impact borrowing costs for individuals and businesses around the world. For example, if the US Federal Reserve raises interest rates to combat inflation, it can lead to an increase in borrowing costs for other countries, which can negatively impact their economic growth. It’s essential to monitor inflation in the USA as it can have significant implications on the global economy, financial markets, and individual finances. The raising of US interest rates and the impact that this has on the global market can be seen particularly in the bond market. A bond is a type of investment where investors loan money to governments and or to corporations and in return receive regular interest payments. And so when US interest rates rise the value of pre-existing bonds decreases, due to the fact that investors demand a higher yield to compensate for the added risk that comes with inflation. This has an effect not only in the US, but globally, as investors will seek higher returns elsewhere.

The State Street Investor Confidence Index® (the index) provides an objective, quantitative measure of global risk tolerance of the world’s sophisticated investors. Regional components measure separately the risk appetites of institutional investors in North America, Europe and the Asia-Pacific region. The Index is released at 10 a.m. Eastern Time in the US, on the last Wednesday of each month. The Premise Confidence in the economy and the capital markets is a critical driver of economic and financial fluctuations and of the business cycle. When confidence increases, consumers and investors want to buy consumer goods, durables and invest at prevailing prices. When confidence decreases, spending and risk-taking tend to fall. Investors are said to be confident when the news about the future is good and stock prices are rising. However, rising prices are related both to good fundamentals, such as growth in industrial production and productivity, as well as to the underlying sentiment or mood of investors. A good confidence measure should indicate whether, for a given set of fundamentals, investors have an increased or decreased appetite for risk. Quantitatively measuring shifts in investor sentiment presents a unique set of problems to researchers. Investor surveys are often outdated by the time they are released. On the institutional side, accuracy can be compromised as decision makers are often too busy to fill out surveys. In all cases, survey responses, like prices, tend to obscure the effects of fundamentals and investor sentiment. The Approach State Street’s approach measures confidence directly and quantitatively by assessing the changes in investor holdings of risky assets. The idea is simple: the more of their portfolios that sophisticated investors are willing to devote to riskier as opposed to safer investments, the greater their risk appetite or confidence. When risk appetite increases, investors move to increase, in the same proportion, their holdings of each risky investment. This process may occur when there is good news and prices are up, but could also happen over a period of bad news and falling prices. As a result, the risk appetite of institutional investors is a separate and distinct measure from the behavior of prices. Actual investor holdings and recent purchases provide a solid foundation on which to base a measure of investor confidence.

Stock-market crashes are informative about the prospects for macroeconomic depressions. Long-term data for 30 countries reveal that, conditional on a crash, the probability of a minor depression is 31 percent and of a major depression is 10 percent. The largest depressions are particularly likely to be accompanied by crashes. We allow for flexible timing between crashes and depressions to compute the covariance between stock-returns and an asset-pricing factor, which depends on the decline of consumption during a depression. With a coefficient of relative risk aversion around 3.5, this covariance accounts for the observed average (levered) equity premium of 7 percent.

The Samuelson quote is remarkable because it is simultaneously extremely clever and extremely misleading. We find, for 30 countries with long-term data, that stock-market crashes (cumulated multi-year real returns of –25 percent or less) go along with minor depressions (multi-year declines of consumption or GDP by 10 percent or more) 31 percent of the time and major depressions (declines by 25 percent or more) 10 percent of the time. In reverse, minor depressions feature stock-market crashes 71 percent of the time, whereas major depressions feature these crashes 92 percent of the time. Thus, as the Samuelson quote suggests, stock-market crashes are far more frequent than depressions. Nevertheless, a stock-market crash provides good reason for concern about the macroeconomy—because the conditional 31 percent chance of a minor depression and 10 percent chance of a major depression are far above the typical probabilities. In reverse, the absence of a stock-market crash is reassuring in the sense that a depression is highly unlikely.

The next stock market crash could easily kick-start a recession, and the underlying reason is that stocks are shares of ownership in a corporation. As a result, the stock market reflects investors' confidence in the future earnings of all the companies listed. Corporate earnings are dependent on the health of the U.S. economy, and that sometimes makes the stock market a leading indicator for the U.S. economy as a whole.

Stock market crashes can reduce business financing and consumer confidence, both of which can cause recessions.

The stock market is an excellent economic indicator for the U.S. economy. It reflects how well all listed companies are doing. If investors are confident, they will buy stocks, stock mutual funds, or stock options. Some experts believe markets predict what the savviest investors think the economy will be doing in about six months. What Makes the U.S. Stock Market Attractive U.S. financial markets are very sophisticated and make it easier to take a company public than in other countries. Information on companies is also easy to obtain. That raises the trust of investors from around the world. As a result, the U.S. stock market attracts the most investors. It’s an attractive place for U.S. companies to go when they are ready to grow. 3 Ways That Stock Markets Affect the Economy Stock markets affect the economy in three critical ways: They allow small investors to invest in the economy. They help savers beat inflation. They help businesses fund growth. Allowing Small Investors to Invest in the Economy Stocks allow the individual investor to own part of a successful company. Without stock markets, only large private equity investors and financial institutions could profit from America's free market economy. Helping Savers Beat Inflation Investing in the stock market helps savers beat inflation over time. The rule of thumb is that stock prices increase 7% a year on average after taking inflation into account.1 That's enough to compensate most investors for the additional risk of owning stocks rather than bonds (or keeping the money in a savings account). Note Stocks provide the capital for companies to grow large enough to gain a competitive advantage through economies of scale. Helping Businesses Fund Growth. Growing, successful businesses need capital to fund growth and the stock market is a key source. In order to raise money this way, owners must sell part of the company, and to do so they "take the company public" through an initial public offering (IPO) of the company's shares. An IPO raises a lot of cash. It also signals that the firm is successful enough to afford the IPO process. The drawback is that the founders no longer own the company; the stockholders do. However, founders can retain a controlling interest in the company if they own 51% of the shares. Note Stocks indicate how valuable investors think a company is. When stock prices rise, it means investors believe earnings will improve. Falling stock prices mean investors have lost confidence in the company's ability to profit. How a Stock Market Crash Affects the Economy Stock prices rise in the expansion phase of the business cycle.2 Since the stock market is a vote of confidence, a crash can devastate economic growth. Lower stock prices mean less wealth for businesses, pension funds, and individual investors. Companies can't get as much funding for operations and expansion. Note When retirement fund values fall, it reduces consumer spending. A stock market crash will adversely affect the nation’s gross domestic product as personal consumption and business investment are some of the major components of GDP. If stock prices stay depressed long enough, new businesses can't get funds to grow. Companies that had invested their cash in stocks won't have enough to pay employees, or fund pension plans. Older workers may find that they don't have enough money to retire.

Because of its size and interconnectedness, developments in the US economy are bound to have important effects around the world. The US has the world’s single largest economy, accounting for almost a quarter of global GDP (at market exchange rates), one-fifth of global FDI, and more than a third of stock market capitalisation. It is the most important export destination for one-fifth of countries around the world. The US dollar is the most widely used currency in global trade and financial transactions, and changes in US monetary policy and investor sentiment play a major role in driving global financing conditions (World Bank 2016). At the same time, the global economy is important for the US as well. Affiliates of US multinationals operating abroad, and affiliates of foreign companies located in the US account for a large share of US output, employment, cross-border trade and financial flows, and stock market capitalisation. Recent studies have examined the importance of global growth for the US economy (Shambaugh 2016), the global impact of changes in US monetary policy (Rey 2013), or the global effect of changing US trade policies (Furman et al. 2017, Crowley et al. 2017). It is likely that there will be shifts in US growth, monetary and fiscal policies, as well as uncertainty in US financial markets. What will be the global spillovers? Our recent work (Kose et al. 2017) attempts to answer these questions: How synchronised are US and global business cycles?How large are global spillovers from US growth and policy shocks?How important is the global economy for the US?How synchronised are US and global business cycles? Business cycles in the US, other advanced economies (AEs), and emerging market and developing economies (EMDEs) have been highly synchronous (Figure 1.A). This partly reflects the strength of global trade and financial linkages of the US economy with the rest of the world, but also that global shocks drive common cyclical fluctuations. This was particularly the case at the time of the 2008-09 Global Crisis. It is not a new phenomenon, however. Although the four recessions the global economy experienced since 1960 (1975, 1982, 1991, and 2009) were driven by many problems in many places, they all overlapped with severe recessions in the US (Kose and Terrones 2015). Other countries tend to be in the same business cycle phase as the US roughly 80% of the time (Figure 1.B). The degree of synchronisation with US financial cycles is slightly lower, but still significant – credit, housing, and equity price cycles are in the same phase about 60% of the time. Although it is difficult to establish empirically whether the US economy leads business and financial cycle turning points in other economies, recent research indicates that the US appears to influence the timing and duration of recessions in many major economies (Francis et al. 2015). Figure 1 Synchronisation of business cycles A. Correlations with US business cycles Image: Haver Analytics; World Bank; Kose and Terrones (2015); IMF. B. Concordance with US business and financial cycles Image: Haver Analytics; World Bank; Kose and Terrones (2015); IMF. How large are global spillovers from US growth and policy shocks? A surge in US growth – whether due to expansionary fiscal policies or other reasons – could provide a significant boost to the global economy. Shocks to the US economy transmit to the rest of the world through three main channels. An acceleration in US activity can lift growth in trading partners directly through an increase in import demand, and indirectly by strengthening productivity spillovers embedded in trade. Financial market developments in the US may have even wider global implications. US bond and equity markets are the largest and most liquid in the world and the US dollar is the currency mostly widely used in trade and financial transactions. This makes US monetary policy and investor confidence important drivers of global financial conditions (Arteta et al. 2015, IMF2015). Given its role in global commodity markets (the US is both the world’s largest gas and oil consumer and producer), changes in US growth prospects can affect global commodity prices. This affects activity, fiscal and balance of payment developments in commodity exporters. Estimates indicate that a percentage-point increase in US growth could boost growth in advanced economies by 0.8 of a percentage point, and in emerging market and developing economies by 0.6 of a percentage point after one year (Figure 2.A). Investment could respond even more strongly. A boost to investment could come for instance from fiscal stimulus measures – but the effect would largely depend on the circumstances of the implementation of these measures, including the amount of remaining economic slack, the response of monetary policy, and the adjustment of household and business expectations to the prospect of higher deficit and debt levels. A faster tightening of US monetary policy than previously expected could, for instance, lead to sudden increases in borrowing costs, currency pressures, financial market volatility, and capital outflows for more vulnerable emerging market and developing economies. Even in the absence of actual policy changes, heightened uncertainty driven by financial market volatility or ambiguity about the direction and scope of US policies could discourage investment both in the US and in the rest of the world. Empirical estimates suggest that a sustained 10% increase in US stock market volatility (specifically, the VIX) could, after one year, reduce investment growth in the US by about 0.6 of a percentage point, in other advanced economies by around 0.5 of a percentage point, and in emerging market and developing economies by 0.6 of a percentage point (Figure 2.B). Figure 2 US growth and uncertainty spillovers A. Growth spillovers Image: Haver, Bloomberg, World Bank estimates. B. Uncertainty spillovers on investment growth Image: Haver, Bloomberg, World Bank estimates. How important is the global economy for the US? Important as the US is to the global economy, the US economy is also affected by its trade and financial linkages with the rest of the world. Global economic developments play an important role in driving activity and financial markets in the US. US multinationals account for a large share of US output and labour productivity growth, and their presence in financial markets is large. In turn, foreign multinationals operating in the US provide a large share of US employment and exports (Figure 3.A). Much of the global value chain activity is conducted through US multinational corporations and their affiliates abroad. Overall, one-quarter of US exports represents US value added embedded in other countries' exports. This ‘forward participation’ is particularly high in chemicals, business services, and electronics, and with China, Canada, and Mexico. ‘Backward participation’ is more limited: the average import content of US exports was 13% in 2014, well below the average for other advanced economies (27%). This interconnectedness is an important source of spillovers between the US and the global economy. As a result, growth setbacks originating in other economies, or policy changes affecting market access of US companies, can have detrimental effects on the US. These effects are particularly noticeable in the more globally integrated manufacturing sector (Figure 3.B). Figure 3 Importance of the global economy for the US economy A. Role of foreign multinational corporations in the US Image: Bureau of Economic Analysis, World Bank estimates. B. Spillover to US from 1 percentage point increase in global, advanced economy, and emerging market and developing economy growth Image: Bureau of Economic Analysis, World Bank estimates. Acceleration or uncertainty? Given its size and the strength of its ties with the global economy, shocks to the US economy are transmitted globally through many channels. On the one hand, an acceleration in US growth could be expected to have positive effects for the rest of the world, if not counterbalanced by increased trade barriers or an unexpected tightening of global financing conditions. On the other hand, persistent policy uncertainty could hamper growth throughout the global economy, and could have particularly adverse effects on investment growth in emerging market and developing economies, which have already showed weakness in recent years (World Bank 2017).

Young firms' up-or-out dynamics are important for an economy's growth. To perfect novel business concepts, a lot of experimentation is required. Success results in improvements in technology (which promote economic growth), but failure is inherent to the experimentation process to which startups disproportionately contribute. The 2018 paper "Growth Through Heterogeneous Innovations" quantifies that 25.7 percent of aggregate growth that comes through innovation is accounted for by entering firms alone.

But since 2020, there has been an increase in entrepreneurial activity.

According to data from the Small Business Administration (SBA), small businesses create two-thirds of new jobs, increased competition among businesses, and are often the forces behind innovation and positive adjustments in efficiency.

While economic uncertainty, mass redundancies, and the changes in priorities people experienced post-pandemic led to many people setting up on their own in recent years, digital transformation has also supported the rise in small businesses. Digital marketing, online shopping, remote working, and continued digital transformation have helped self-employed people and small businesses to operate successfully. 

So, how important are small businesses to the economy?

Just as enough tiny droplets of water slowly fill a bucket, the growth of small businesses fills the U.S. economy. Big corporations might get a lot of attention when it comes to creating jobs, but small businesses employ more people and are more resilient when times get tough. Before coming up with something innovative that propelled them into growth, all big businesses once started out small. Not only are small businesses driving the U.S. economy, but they also keep the American dream alive. According to the U.S. Small Business Association (SBA), small businesses of 500 employees or fewer make up 99.9% of all U.S. businesses and 99.7% of firms with paid employees. Of the new jobs created between 1995 and 2020, small businesses accounted for 62%—12.7 million compared to 7.9 million by large enterprises. A 2019 SBA report found that small businesses accounted for 44% of U.S. economic activity. Without small businesses, the American economy and workforce would be a pretty wild landscape to imagine. Not only do small businesses provide more jobs, they also bring careers and opportunities. Successful small businesses put money back into their local community through paychecks and taxes, which can support the creation of new small businesses and improve local public services. No matter how small it starts—one, two, five, 10 employees—within that town, the city or the county, your small business creates new economies where once there was nothing. Small businesses are also better able to focus more energy on their customers and their needs, which can make them more adaptable to change in times of economic uncertainty. A global health crisis may have rocked the economy, but the formation of new U.S. businesses intending to hire employees rose to historic peaks in 2021, with nearly 1.4 million applications by September and over 400,000 more than at the same point in 2019. When tough times for big businesses lead to layoffs, small businesses become an opportunity. To become big, all businesses once started out small. In 1978, when the track-and-field coach and his former student who founded Blue Ribbon Sports by making running shoes with a waffle iron changed their company name to Nike, they never imagined it would become the massive multinational corporation that it is today. The two high school friends and devoted computer tinkerers who ended up founding their own software company in 1975 under the name Microsoft could never have expected how large their once small business venture would soon become. Small businesses grow because they draw innovation, attracting talent that brings inventions or new solutions to old ways of doing business that larger corporations have less flexibility to incorporate. This is why big companies today want to acquire small businesses, for their innovators. Apple and Google may be known for their innovation, but they also buy up small startups with innovative new technology to boost this development. Big businesses and even big government projects depend on small businesses as subcontractors, vendors and customers. Federal bills focusing on new jobs to come out of a recession talk a lot about building bridges and freeways, but less about the small businesses across the country that bid for these contracts and carry them out. No matter where you find significant economic development, small businesses are behind it. The opportunity for people to found, run or work for small businesses is the pathway to achieving the American dream. It creates an environment of mythical energy where desires are fulfilled and innovation is at its peak. Creating small businesses, becoming profitable and hiring people to share in those economic gains is what makes this country free. Foreigners who lack those same opportunities in their own country come to America seeking their own dream—and I should know: I’m one of them. Because of their importance, big business campaigns should consider their ability to support small businesses, therefore encouraging thriving economies. A strong economy supports both big and small businesses, but no society can thrive without the presence of small businesses. Corporations are reliant on small businesses to allow them to continue to succeed. By helping your neighbor, you ultimately are helping yourself (and your business). Businesses, in particular, should consider supporting small businesses by, for example: Sourcing ingredients for your restaurant from local farmers. Selling small businesses' products in your storefront. Sharing social media posts from small businesses. Small businesses are everywhere, but everyone in the U.S. has the right to create their own from the ground up, as well as the necessary access to the technology, investors, loans and government support to help out. This well-developed support system attracts a huge pool of dreamers: immigrants with the hopes of achieving their lifelong goals, creating something new and finding success. For them, arriving here is like diving into a crystal-clear pool of opportunity—they can see it and go after it. Small businesses make this possible. While government aid is necessary to continue supporting small business growth, so is consumer support. Inexpensive products delivered to your home from Amazon are nice, but also consider supporting small businesses. Don’t be so quick to judge and leave negative reviews because of one bad day. Instead, make an effort to put money back into the main drivers of our economy and look to them for employment opportunities to help them keep their doors open. The more we encourage small businesses, the longer we keep the American dream alive.