Recessions

4 Key excerpts on "Recessions"

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  eBook - ePub

  Doomed to Repeat

  • Bill Fawcett(Author)
  • 2013(Publication Date)
  • William Morrow Paperbacks

    (Publisher)

  CHAPTER TEN Depressions and Recessions But with the slow menace of a glacier, depression came on. No one had any measure of its progress; no one had any plan for stopping it. Everyone tried to get out of its way.

  — FRANCES PERKINS (1880–1965),U.S. SECRETARY OF LABOR , 1933–1945

  S imply put, discussing the topics of economic depression and recession is painful at any time. It is, well, depressing emotionally. More so at this writing, since the entire world is not recovering from the last recession caused by the housing bubble, and it seems constantly poised to begin another plunge. There are many definitions of a recession and of a depression. Most involve the size of the gross domestic product (GDP), which is an esoteric economic term that means the value of just about everything that is made, bought, or done in a nation. Perhaps the simplest and most obvious way to define a recession is when this GDP, the total wealth of the nation, “recedes”—when the total amount of wealth, money, and the value of everything else in the nation becomes smaller. Negative growth affects everything, from jobs to interest rates. And if the recession continues for too long, the cumulative negative effects of a loss in wealth create a “depression.” Some say two years of recession defines a depression. Politicians, many of whose policies create the problems, try hard not to use either word.

  It is good to remember that even when the economy remains unchanged, it is already losing ground. Every day, more people are born and more enter the workplace needing a job. The number of people is growing, and if the amount of wealth does not expand to match this population growth, then the result is, quite simply, that there is less for each person to live on. So when there is a recession and the amount of wealth decreases, that smaller amount of wealth is also constantly being divided by more and more people, a double whammy. Economic growth is needed in every country of the world just to stay even. As in Lewis Carroll’s Red Queen’s race, “it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” In a recession, the entire structure of jobs, business, manufacturing, and banking is losing the race with population growth. In a depression, it keeps losing ground for a long time.

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  eBook - ePub

  The History of Economic Ideas

  Economic Thought in Contemporary Context

  • Brandon Dupont(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  Some of the deepest Recessions have been the result of speculation in a variety of assets. The resulting asset price bubbles sometimes suddenly and catastrophically burst. For example, the global financial crisis of 2007–2008 occurred after a number of years in which rising amounts of debt fueled home purchases, which led to rapidly increasing home prices. But the object of speculation varies from one crisis to the next: housing in the 2007–2008 crisis, tulip bulbs in the “Tulipmania” of the 1630s, and Internet company stocks in the “Dot-Com” bubble of 2001. Despite differences in the objects of speculation, the general patterns are old and familiar.

  The Great Depression was the most severe global economic crash in history. At the depth of the depression, the unemployment rate reached 25 percent in the United States and rose sharply throughout Europe (although the severity of the Depression varied considerably across countries). Industrial production also fell precipitously from peak to trough: by 47 percent in the United States, 42 percent in Germany, and 31 percent in France (Pells and Romer n.d.).

  Economists use a variety of measures to determine when an economy has fallen into a recession, but the most basic definition is that a recession occurs when the value of goods and services produced in an economy falls for an extended period of time. In terms of the business cycle, a recession (or, a depression if it is severe enough) occurs when real gross domestic product (GDP) falls from a peak to a trough (see Figure 7.1 ). The recovery or expansion phase occurs when the economy climbs from its trough back up to a peak.

  This stylized pattern is evident in actual data. In Figure 7.2 , we see the cyclical movements of real GDP around its upward long-term trend for the United Kingdom, from 1820 to 2015. The economics of the trend is the subject of Chapter 8 ; here, we focus on explanations that have been offered for the cyclical movements around the trend.

  Figure 7.1 Phases of the Business Cycle

  Figure 7.2 Cycles in Real GDP: The United Kingdom 1820 to 2015

  Source: Samuel H. Williamson, “What Was the U.K. GDP Then?” MeasuringWorth, 2016. URL: http://www.measuri­ngworth.com/ukgdp/

   

  Another simple but more specific definition is that a recession occurs when real GDP falls for two consecutive quarters or more. Real GDP is the inflation-adjusted value of all final goods and services produced in the economy in a given year. Inflation adjustments are necessary because when we attach dollar values to the goods and services produced in a given year and compare those dollar values over time, we do not want to be deceived into believing we have seen an actual increase in the production of goods and services when we have only seen an increase in the prices that are used to value the goods and services.

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  Macroeconomics

  (With Study Guide CD-ROM)

  • Jagdish Handa(Author)
  • 2010(Publication Date)
  • WSPC

    (Publisher)

  Following a period of high economic growth, Thailand and Malaysia as well as several other East-Asian countries, entered into a deep financial crisis. When high, unsustainable asset prices fell and borrowers started defaulting on their debt payments, a mass pull-out of lenders occurred, which created a massive credit crunch. The massive withdrawal of foreign investments in the countries created large deficits in capital inflows and the balance of payments, and resulted in rapid exchange rate depreciations. To stimulate domestic investment and consumption, and through them, aggregate demand, countries lowered interest rates, but, given the prevailing degree of pessimism, did not succeed fast enough in restoring the investment and aggregate demand to their former levels. To stop the precipitous depreciation of their currencies, Thailand took large IMF loans and Malaysia pegged its exchange rate. All countries affected underwent widespread restructuring. Most of the East-Asian countries, including Thailand and Malaysia, eventually succeeded in stabilizing their exchange rates and economies by 2001, though the latter ending up with lower GDP growth rates.

  16.11 Long-Term Effects of Recessions and Booms

  There is definitely a link from growth to business cycles. One of the major determinants of economic growth is technical change (see Chapters 14 and 15 ), whose variability over time is a major cause of the cyclical fluctuations in economic activity, as emphasized in the RBC theory. Conversely, the fluctuations over the business cycles can alter economic growth. This affect can occur for a variety of reasons, of which the most important are related to the accumulation of physical and human capital and their fixity. The impact of the shorter-term cyclical activity on the longer-term growth of the economy is an aspect of hysteresis — defined as the impact of short-term economic events on the long-term output levels. Some economists — especially among supporters of the classical paradigm — believe that such effects are insignificant enough to be ignored, while others — especially among the Keynesians — believe that drawn-out Recessions and booms can affect the long-term output level and/or its growth rate. The factors that can cause hysteresis are discussed in the following.

  16.11.1 The accumulation of human capital

  Recessions are periods in which jobs are relatively scarce. There are two results of this scarcity: relatively more workers are unemployed and, of those who get jobs, many workers have to accept jobs that do not fully utilize their abilities and knowledge. The unemployed workers do not acquire the skills they would have acquired through on-the-job learning. Further, there is a deterioration of their prior skills through not getting the opportunity to use them. Among those who find jobs, the mismatched workers do not get to fully utilize their education and abilities, or learn the skills they would have acquired in more appropriate jobs. As a consequence, Recessions leave behind relatively less human capital and some mismatch of workers and jobs. The mismatch of workers may not be fully corrected during the following boom because of the very long number of years in which workers usually stay in their jobs. If the recession was brief and mild, the subsequent correction is more likely to occur than if the recession was drawn out and deep. In the latter case, the future productivity of the affected workers would remain less because of the recession’s reduction of human capital accumulation. However, note that this reduction may not significantly affect the future unemployment rate: as jobs increase after the end of the recession, the workers with the lessened skills do get employed, though in less skilled jobs than otherwise. Further, while the post-recession period will start with a smaller human capital base, the further growth of human capital (from this smaller base) need not be affected. This implies that while the smaller post-recession human capital will mean a lower post-recession starting base level for output per capita, the post-recession growth rate of output per capita need not be affected: the latter will depend upon technical change and capital accumulation in the post-recession period.

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  Businomics From The Headlines To Your Bottom Line

  How to Profit in Any Economic Cycle

  • William B Conerly(Author)
  • 2007(Publication Date)
  • Platinum Press

    (Publisher)

  One problem may remove the economy's “cushion” or margin for error, allowing a second or third problem to be the straw that breaks the economy's back. Here, in this chapter, I'll present the leading straws, in their order of importance.

  WHAT REALLY CAUSES Recessions?

  To anticipate a recession or downturn, a business leader must understand the causes of Recessions and downturns. However, the knowledge about causes that you need as a business manager is somewhat different from the knowledge needed by an economic theorist or a policymaker. A business leader needs to know the signals of impending Recessions and downturns. Academic theorists can look for elegant theories, and policymakers can study how to prevent or mitigate Recessions. For a business, though, the crucial knowledge is what signals are given off by an economy nearing recession.

  This chapter might be titled “Causes of Recession,” were it not for two elements. First, we will relentlessly focus on observable signs of future changes. Second, when discussing various causes, we will also discuss which causes come up most often and which are rare. This means that you can make sure to put on your radar screen the signals that most commonly predict future Recessions and downturns.

  “Simple theories of recession don't work very well because multiple strains on an economy often trigger the actual recession.”

  Simple theories of recession don't work very well because multiple strains on an economy often trigger the actual recession. One strain may not be enough to push the economy a downturn, but the addition of other strains pushes the economy over the brink. The 1990–1991 recession was a good case in point.

  Monetary policy is the most common cause of recession, with supply shocks (sudden increases in the price of oil or other key goods) a distant second. In addition to these two, there are numerous other problems that can add strain to a weakening economy and help trigger an actual recession.

  In the 1960s, controversy raged within the economics profession between the Keynesians and the monetarists. I take a generally monetarist point of view, but with a strong appreciation for many of Keynes's insights. The following section takes up the nuts and bolts of the causes of recession, but first we need a short explanation of how we got to this viewpoint.

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