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Recession

From Academic Kids

A recession is usually defined in macroeconomics as a fall of a country's Gross National Product in three successive quarters. A recession may involve falling prices, which can lead to a depression; alternatively it may involve sharply rising prices (inflation), in which case this process is known as stagflation.

In a developed capitalist / free market economy, recessions come and go at fairly regular intervals - often 5-10 years - in what is known as the business cycle. Government intervention can smooth the cycle (see also Keynesianism), and especially cushion its effects on its citizens (see welfare state), but has proven unable to eliminate the cycle completely.

Contents

Terminology

A sustained recession is known as a depression. (Alternatively, a depression is a situation where the economy "has fallen and can't get up.") A short-lived recession may be euphemistically called an economic correction. However, many theorists including John Kenneth Galbraith believe that there is no reasonable distinction between the three types of recesssion, other than a desire to downplay risk of a panic. In the nineteenth century, such theorists point out, business cycle events of the same magnitude were typically called "crises" or "panics".

To avoid all these politically loaded terms, the more neutral term 'recession' is to be preferred, despite the overly-specific technical economics definition. The politics implied by the current definition, including the assumption of relevance of Gross National Product to human well-being, or the desirability/necessity of reporting by quarter-years, are challenged in some theories of a larger political economy consisting of voting, market, and other activities.

The fact that parties and theories compete to set policies, and have the power to set definitions on such terms as 'recession' or 'depression', and explain their meaning to the public as authority figures, leads to larger questions in political economy, specifically those explored in political choice theory.

The business-cycle dating committee of the National Bureau of Economic Research, a U.S.-based nongovernmental think tank, looks at monthly measures of production, employment, sales, and income, all corrected for inflation, in determining recession.

Causes

Recessions are mostly caused by external economic shocks, or the unwinding of major imbalances in the economy. The latter mechanism is based substantially on the role of consumer confidence and business confidence, which are important for example for individuals and organisations to decide whether their current investment or debt levels are excessive (or sufficient). A wave of bad news (eg job losses at a big company) may lead enough people to worry about the future, increase their saving and reduce their spending, so that further bad news is caused (as sales and investment goes down). On a large enough scale, this can cause a recession. (See also accelerator effect and multiplier.)

The greatest, worldwide recession that humanity has ever experienced was the beginning of the Great Depression (late 1920s and 1930s); other notable recessions include the two Oil Crises in the 1970s and the Long Depression of the late nineteenth century. The sharpest recession on record is that following the First World War when hyperinflation hit much of Europe; this recession did not last very long, however.

There is some debate as to whether or not a recession is a normal part of the business cycle. The definition is set where it is (reduction in GNP for two successive quarters) because this is supposed to be an unusual event, outside the normally-expected cycles in which no more than one quarter should go by without some kind of growth. An alternative view of this is that of Karl Marx for whom economic "crisis" is symptomatic of a dysfunctional society, capitalism, forcing valuable social resources to be destroyed in order to return the system to profitability. Another alternative view is that the GNP and GDP are relevant only to waged jobs, and that the expansion of money supply to support certain activities, e.g. chronic hospital care, political lobbying, advertising, can encourage those activities even though they actually represent declines in quality of life. Some argue it all depends on what one means by 'normal', and whether one thinks the definition is relevant to it.

Depression

Main articles: Depression, Great Depression

Prior to the Great Depression a huge wave of investing in the stock market had taken place which created artificially high prices of stock. This process was driven by the fact that shares were being used as a collateral for loans in order to buy more stocks. When the economy showed signs of slowing and share prices plummeted, this caused an extensive domino effect. The investments lost their face value and the loans on them "went bad", which, among other things, triggered a crisis of the banking system. In consequence, there was the famous rush on banks, with people not being able to access their deposits. They had disappeared. After this, people grew extremely wary of investment which resulted in extreme deflation.

When President Franklin D. Roosevelt entered office in 1933, he was intending to continue a relatively conservative fiscal policy to placate his business critics (Herbert Hoover in particular had warned him that any controversial early action would affect business confidence very adversely). However, after Black Monday Roosevelt was forced to change his mind, and instituted the "New Deal" economic reforms to stave off any future depressions. Contrary to myth, Roosevelt did not engage in sustained deficit spending until World War II neared, so that the Depression continued.

To date no repetitions of the Great Depression have happened in the United States. At least, none politicians and the media call "depressions", regardless of their impact on actual human lives. However, Japan suffered from a depression during the 1990s, while this word may be used to describe the situation of many poorer countries (although in many cases these countries never achieved sustained economic development in the first place).

It is an open question whether a "depression" can even be noticed at all under the terminology in use among technical economists today. Galbraith among others thought it could not, and that the terminology was merely exercise in concealment - a potent criticism from an economist who was a central part of that Administration during the war years.

See also

External links

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