Are Recessions a Good Thing?
Thursday November 13, 2008
In Are recessions good for the economy? I argue that they are not. A reader disagrees with my conclusion, but I have to admit I do not full understand his objection:
I disagree with your answer to somebody who asked whether or not recession was a good thing for the economy. Most of the rationale for your answer of "no" was in your chart showing companies going belly up. But I would argue that your data is inherently flawed, we do not live in a capitalistic society, but a mixed one, and one that is leaning ever more towards the socailistic side. To take some data from 18 years ago and call it the end all on recession is not prudent. In a situation where the government did not help companies who were going under, or throw money at the market things would be quite different. Take the current slowdown for example. Many of the largest and most respected financials on the street are teetering at the edge. The big three, which for years have been just asking for bankruptcy by making an inferior product and then billing it as American made, are hemmoraging capital. Recession is both needed and urgently nessisary for an economy, and the sooner the Government figures that out the better. If it wasn't why hasn't Government intervention worked yet?I would love to hear your thoughts - please see: Are recessions good for the economy?
Comments
Mike, this “positive” view of recessions is an essential element in the Austrian (Mises-Hayek) theory of the business cycle. You can find many references online. But the argument has to be stated carefully. It isn’t that recessions are, in some general sense, “good.” It’s this: Given the existence of inefficient investment (the Austrians call it “malinvestment”) during the previous inflationary boom, it is better to liquidate those inefficient investments through bankruptcy and redeploy the assets to more productive uses than to continue the patterns of inefficient investment (e.g., by propping up failed institutions, by further credit expansion, etc.). See some discussion here:
http://organizationsandmarkets.com/2008/10/14/krugman-on-the-hangover-theory/