Tuesday, January 29, 2008

A Note on Recessions

There's been a lot of talk recently about recession. Housing market's down. Stock market's bearish. You didn't get everything you wanted for Christmas. What's going to happen? Will you lose your job?

A recession is nothing to worry about. People hear "recession" and think "depression." Let's define recession. It is the part of the business cycle where growth in output is below the long-run trend. I should also make clear that they are a very natural part of the business cycle. It is also defined as "a significant decline in economic activity spread across the economy, lasting more than a few months" and "negative real economic growth for two (or more) consecutive quarters." What's that mean? It means business is not booming. Is it anything to worry about? Not immediately. Prolonged recession is called "depression."

A funny thing about recessions is that they can be a self-fulfilling prophecy. Start talking about them, then people get scared to spend too much money. They aren't buying stuff...firms cut down on production and violá: something. I don't want to call it a recession because the definition of recession is such that you don't really know that you are in one until a little while later.

Recessions come and go naturally. A federal attempt to end recession can end to amplifying fluctuations in the business cycle, which is generally regarded as undesirable. Nick tells me that the tax refund check stimulus package was approved and we can all expect around $500-600. Not very much when compared to our $13+ Trillion economy (around 1.15% by my calculations). Someone said that this won't be effective because a majority of that money will be spent at Wal-Mart, which gets most of its real goods overseas...therefore, we're not boosting GDP (I'm going to assume that WM doesn't have to hire more people to handle this mild surge in spending which probably won't even generate an extra trip to WM, on average). I'm probably going to save 90% of any federal refund I get...

Recessions can have a positive effect, by putting inefficient companies out of business, thereby stopping those companies from inefficiently using resources. This could be bad for your employment prospects if you work for a sloppy company or you yourself do sloppy work for a good company.

Recessions also present opportunity for people with money to capitalize on the misfortunes of others. Take the housing market for example. If you have the money on hand, you can get great deals on houses right now. It's the time to buy.
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