Recently, small models with latent recursion have obtained promising results on complex reasoning tasks. These results are typically explained by the theory that such recursion increases a networks depth, allowing it to compactly emulate the capacity of larger models. However, the performance of recursively added layers remains behind the capabilities of one pass models with the same feed-forward depth. This means that in the looped version, not every recursive step effectively contributes to depth. This raises the question: when and why does latent reasoning improve performance, and when does it result in dead compute? In our work, we demonstrate that latent recursive reasoning provides answer to this question. We show that latent recursive reasoning can be formalized as a policy improvement algorithm. Building on these insights, we propose to use a training schemes from reinforcement learning and diffusion methods for latent reasoning models. Using the Tiny Recursive Model as our testbed, we show that with our modifications we can avoid dead compute steps and reduce the total number of forward passes by 18x while maintaining performance. Broadly speaking, we show how a policy improvement perspective on recursive steps can explain model behavior and provide insights for further improvements.