Economics, Banking & Finance


See 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


