Question from a reader email: I have come to believe that a recession is good for an economy because it culls away weak businesses and teaches the strong to survive by cutting the fat that is not needed. I was wondering, though, do you think a depression is good for an economy and why?
It is a question a lot of people have been asking this week. In Are recessions good for the economy? I suggest why a recession would not be a good thing.
It is a question a lot of people have been asking this week. In Are recessions good for the economy? I suggest why a recession would not be a good thing.
Comments
Nothing is good when low income people suffers. We are not only face with recession but also inflation. The problems far more greater for low income people than middle income people. all govt. gesture only a bandage for sick problems.
Why are people so concerned about low income people? Not that I am heartless but what do low income people have to lose. Hillary made the comment that by the government paying for low income peoples heating that would stimulate the economy. Can anyone tell me how that stimulates the economy? Also why are democrats so hung up on not giving tax breaks to the wealthy and only to middle income and low income families? The wealthy pay taxes as well. Has anyone been offered a job by someone in low income? I doubt it. Inflation does not only affect low income it affects everyone. Raising minimum wage does nothing but raise prices for products. The answer is that if you are in the low income bracket work to bring yourself out of it just like I did.
The Schumpeterian argument about recessions is that inefficiencies are done away with – in other words, businesses and their too costly practices go Chapter 11, and those that survive reflect a leaner cost structure and hence more efficient method of generating profits.
In reality, a recession isn’t necessary. An economic boom covers up a multitude of business sins, but ultimately some streamlining must come in, regardless of whether a recession takes place.
If we were to look at NBER data on a regional level, we would find a restructuring of economic sectors over time as inefficiencies are discovered and remedied via termination of employment. When enough of these sectors go through downturns simultaneously, we technically have a recession. But regardless, assuming that the cause of the downturn is at least partially due to reorganization for greater efficiency and leaner cost structure, it is not necessary that a recession take place.
Point is, a recession is an arbitrary statistical construct that is useful for making a definitive judgment so that a politician can say “Yep, the economy’s in the tank right now.” In all truth, you and I will feel very little difference between two consecutive quarters of 0.01% economic growth and of negative 0.01% growth. But one is a recession while the other is, technically, an expansion.
Maybe the answer could be more accurately rephrased as “recessions are good for the economy in the long-run so long as they are brought about by the desire to cut costs in order to make operations more efficient.”