This morning I was in my usual routine, listening to ‘Wake Up To Money,” and the first guest came on the show from the British Chambers of Commerce. He was alarmed at the sudden slowdown in the UK. Consumer confidence is down ad shoppers are tightening their belts. He said he didn’t want to be alarmist because “a major recession can in fact be avoided.”
I thought to myself, “But should it be avoided?”
That’s the question I pose here with this post:
Why should governments, central banks, business, and individuals look to avoid recession?
The conventional wisdom comes out of Keynesian analysis. This says that the business cycle can be smoothed by adding anti-cyclical stimulus to the economy when it slows.
For example, say the economy shows a slowdown in growth. The government could give everyone a temporary tax rebate of $300 as they did in the US. Although this may seem like robbing Peter to pay Paul, the argument is that the monies are better spent during the slowdown than during the next upswing so as to cushion the recession. It helps that this kind of thing wins votes too!
Government can get into the act itself by spending more during a slowdown in order to temporarily goose GDP and, thus, cushion the fall during the slowdown.
Now, the reason for all this is because we are talking about people. Our lives are affected by the business cycle. People lose their jobs, their homes, and their families all because of the economic and psychological stress of recession. So, on the face of it, it does make sense to avoid that type of pain if possible. You can liken it to non-invasive surgery — going under the knife, yes, but less painful.
On the other hand, I would argue Keynesians do not consider basic human psychology when making these proposals. In fact, the reason for recessions has much to do with the psychology of credit. As the upturn lengthens, human beings become acclimated to the good times. As a result, credit becomes easier, leading to unexpected bad debts and an economic downturn.
Therefore, recessions are the painful, but necessary, way of reminding both borrowers and lenders what types of lending arrangements are actually judicious. I would argue that recessions are endemic to the business cycle and should not be avoided.
Moreover, I would argue much of the bloodletting of recession has to do with short-sighted poor decisions made by owners of capital being foisted upon labor in the downturn. In the past twenty-odd years, business owners who make poor decisions in the upturn by hiring too many people, have looked at these people as just another widget. Thus, when the downturn inevitably comes, they cast aside workers like so much old, used equipment.
People are not equipment and treating them as such during an economic downturn shows a true failing in modern Western capitalism. Responsible companies staff appropriately during the upswing in order to weather the storm during the downturn. It seems to me short-term incentives in the form of large amounts of bonus and option pay skew managers’ judgment toward short-term results, making these types of actions all the more likely.
So there’s my argument against avoiding recessions: people need recessions as a reminder of what constitutes good decision-making in lending, borrowing and business.
What’s your opinion?