ColombiaLink.com – RECESSION – MACROECONOMICS

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also: List of Economic Topics

RECESSION
– macroeconomics

A
recession is usually defined in macroeconomics
as a fall of a country’s Gross National Product in two successive quarters. (This
is a simplified version of that of the business-cycle dating committee of the
National Bureau for Economic Research, a U.S.-based think tank.) Combined with
inflation this process is known as stagflation.

A
sustained recession is known as an economic depression. (Alternatively, a depression
is a situation where the economy “has fallen and can’t get up.”) A short-lived
recession is often 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.

That
said, there is little challenge to the idea that GNP (or GDP) are related to job
availability in a wage-employment economy, nor to the idea that business confidence
and consumer spending tend to decrease during a recession, which is usually a
crisis of trust.

Recessions
are mostly caused by economic shocks. 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.

It
can be difficult to understand the seeming decrease in available money during
a recession when no money is physically destroyed. Suppose you have 250 million
people living in a huge hall and there is a recession in the hall, no money went
into or left the hall. Where did all the money go? In fact money actually can
be destroyed, but it’s hard to see where and when.

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.

While
the amount of “hard” money (also referred to as Central Bank Money)
can only be changed within certain restrictions, this is not the total amount
of money that an economy relies on. The latter is a multiple of the former, determined
by factors like the speed of exchange and the reserve policy of a central bank,
or of other banks who borrow from that central bank.

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. So it all depends
on what you mean by ‘normal’, and whether you think the definition is relevant
to it.

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.

An
example of the importance of this is the Great Depression itself. 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.

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

List
of recessions
Business cycle
Central bank
Job cut
Job exportation
Measuring well-being
Money supply
Reserve
policy
Political economy