Cathartic recessions

Governments and their agents in central banks are pulling feverishly on the policy levers in a bid to lessen the impact of the downturn. Interest rates are being slashed, temporary tax cuts seem to be all the rage and governments spending on capital projects are being fast-forwarded in an attempt to pump prime demand and stabilize confidence, output and jobs. Within a year we may find that such measures have been effective in moderating the depth of the recession, or that the impacts of asset-price deflation in property and shares together with a closing of the arteries of credit caused by the crunch have made traditional macroeconomic policy instruments impotent.

But should there be this manic policy response in the first place? Painful as recessions are, they do serve a purpose. Hamish McRae writes in the Independent today about some of the benefits that can flow from a period of retrenchment and reflection.

“Recessions, slowdowns, squeezes, however you describe them, do serve a purpose. They force efficiency. They force our whole society to figure out simpler and more effective ways of doing things. Increasing efficiency is the only way our whole society – not just a few talented or cunning individuals – gets richer. Why is Germany the world’s largest goods exporter? Because its companies have lived through the fire, first of a high deutschemark and then joining the euro at too high a rate. Again and again the pressure on them has forced them to lift their game.”

It is inevitable that many good businesses go under during a recession whilst shadier rivals unearth a strategy to survive. But we shouldn’t automatically try every trick in the book to prevent recessions. They are part of macroeconomic cycles; they can sort out some of the wheat from the chaff. And they serve as a sober reminder of the need to avoid excessive borrowing and irrational confidence in the first place. The danger is that short term palliatives serve only to delay the inevitable. Britain is not alone in having an unbalanced economy with too little saving, a dependence on highly priced debt and not enough investment in creaking infrastructure. A recession can help to rebalance and its benefits should not be underestimated.

Investment in Energy Infrastructure [23 May 2012]
Unit 2 Macro: Cyclical and Structural Economic Issues Facing the UK [23 May 2012]
Unit 2 Macro: Evaluation on Supply-Side Policies [21 May 2012]
Unit 2 Macro: The Current Account of the Balance of Payments [20 May 2012]
Unit 2 Macro: Migration and the UK Economy [20 May 2012]
Unit 2 Macro: Positive and Negative Multiplier Effects [20 May 2012]
Unit 2 Macro: The Importance of Productivity [20 May 2012]
Unit 2 Macro: Measuring Inflation in the UK [20 May 2012]
Unit 2 Macro: Real Interest Rates [20 May 2012]
Q&A: What do we need to know about output gaps? [20 May 2012]
Unit 2 Macro: The Output Gap [20 May 2012]
Revision notes on unemployment [20 May 2012]
Unit 2 Macro: Bank Cuts UK growth Forecast for 2012 [16 May 2012]
Unit 1 Micro: Revision Presentation on Elasticity of Demand [16 May 2012]
Grexit - Andrew Balls on Greece and the Euro [16 May 2012]
Unit 1 Micro: Income Elasticity of Demand [13 May 2012]
Unit 1 Micro: Price Elasticity of Demand [13 May 2012]
Unit 2 Macro: Revision Notes on Supply-side Policies [10 May 2012]
Unit 2 Macro: Model answer for revision data question [9 May 2012]
Unit 2 Macro: Growth and Development Glossary [5 May 2012]
Unit 2 Macro: Monetary Policy and Inflation Glossary [5 May 2012]
Unit 2 Macro: Trade and Balance of Payments Glossary [5 May 2012]
Unit 2 Macro: Unemployment Glossary [5 May 2012]
Unit 2 Macro: Fiscal Policy Glossary [5 May 2012]
Unit 2 Macro: Economic Cycle Glossary [5 May 2012]
Unit 2 Macro: Aggregate Demand Glossary [5 May 2012]
Macro Revision - Key Statistics on the UK Economy [4 May 2012]
Robert Schiller - Finance and the Good Society [1 May 2012]
Unit 1 Micro: Using the Cost-Benefit Principle [30 Apr 2012]
Macro Revision: Putting Things in Context [29 Apr 2012]
Unit 2 Macro: Britain back in Recession [29 Apr 2012]
Tullow Oil and African Development [25 Apr 2012]
Unit 4 Macro: The Euro Zone Crisis (Revision) [22 Apr 2012]
Unit 2 Macro: Heathow’s Capacity and Connectivity Crunch [22 Apr 2012]
Ukraine Hotel ‘Bandits’? [12 Apr 2012]
Unit 2 Macro: Skills Shortages Hold Back Recovery [12 Apr 2012]
Unit 2 Macro: Globalisation and the Growth of Ports [10 Apr 2012]
Unit 3 Micro: Revision on Contestable Markets [8 Apr 2012]
Unit 2 Macro: How the Economic Cycle affects Businesses [6 Apr 2012]
Unit 1 Micro: Revision on Elasticity of Demand (for Rice) [3 Apr 2012]
Unit 2 Macro: Revision on Interest Rates and the Exchange Rate [3 Apr 2012]
Unit 1 Micro: The Collapsing Price of Carbon [3 Apr 2012]
Unit 4 Macro: Pain in Spain as Fiscal Austerity Bites [1 Apr 2012]
Unit 1 Micro: Revision on Maximum Rents in Housing [1 Apr 2012]
Unit 1 Micro: Revision on Producer Cartels [31 Mar 2012]
Unit 2 Macro: Revision on Capital Investment [30 Mar 2012]
Intergenerational Equity - Fairness and the Slump [28 Mar 2012]
Life in the Slow Lane - UK Growth in 2011 Lags the Euro Area [28 Mar 2012]
George Buckley at the Millfield Economics Society [28 Mar 2012]
Unit 4 Macro: Evaluating 3 Years of Quantitative Easing [27 Mar 2012]
Unit 1 Micro: The Tax on Beer [16 Mar 2012]
Unit 1 Micro: Inequality - The Rise of Fuel Poverty [15 Mar 2012]
Unit 1 Micro: Government launches New Buy Loan Guarantee Scheme [12 Mar 2012]
Unit 4 Macro: Video Resources on the Euro Crisis [10 Mar 2012]
Unit 2 Macro: Policies to Drive Economic Recovery [9 Mar 2012]
Unit 4 Macro: Sovereign Wealth Funds [4 Mar 2012]
Unit 2 Macro: Might Oil Prices Bring another Recession? [4 Mar 2012]
Economies hooked on central bank stimulants? [4 Mar 2012]
Unit 2 Macro: The Dash for Gas in Mozambique [17 Feb 2012]
A return to Glass-Steagall to prevent another crash? A lesson from economic history. [17 Feb 2012]
Unit 2 Macro: Is the UK Economy Turning a Corner? [15 Feb 2012]
Unit 4 Macro: King on the UK Economy [15 Feb 2012]
Martin Wolf on Global Shocks [10 Feb 2012]
Russia’s monopoly power over gas supplies [5 Feb 2012]
Trucks are the new way of measuring debt [1 Feb 2012]
Unit 2 Macro: Growth and Development - Some Indicators [30 Jan 2012]
Unit 4 Macro: Focus on India - Comparative Advantage [27 Jan 2012]
Unit 2 Macro: Focus on China - Trade and Growth [27 Jan 2012]
Unit 2 Macro: Focus on China - Inflation [26 Jan 2012]
Unit 2 Macro: Focus on China - Per Capita Incomes [26 Jan 2012]
Unit 4 Macro: Focus on India - Supply Side Issues [25 Jan 2012]
Unit 1 Micro: Can the UK Computer Games Industry Grow [24 Jan 2012]
Unit 4 Macro: Money, Debt and the New World Order [22 Jan 2012]
Unit 4 Macro: Russia Joins the WTO [22 Jan 2012]
Unit 2 Macro: Videos on Productivity [17 Jan 2012]
Unit 3 Micro: World’s Largest Solar Plant Opens [15 Jan 2012]
Unit 4 Macro: France loses her AAA credit rating [15 Jan 2012]
Unit 2 Macro: Frontier Markets - the New BRICS? [15 Jan 2012]
Beyond the Bike - The Importance of Remittances [15 Jan 2012]
Unit 4 Macro: Time to Re-Boot the British Economy [14 Jan 2012]
Unit 4 Macro: Economics of Fiscal Deficit Reduction [12 Jan 2012]
Unit 4 Macro: Competitive Advantage in Trade (Some Videos) [12 Jan 2012]
Unit 4 Macro: UK Bond Yields Reach Record Lows [11 Jan 2012]
Unit 2 Macro: Factors Driving Business Investment [10 Jan 2012]
Hopes and Fears 2012 [10 Jan 2012]
Unit 4 Macro: Natural Disasters and their Economic Impact [7 Jan 2012]
2011 in Review - The US Economy [27 Dec 2011]
Unit 2 Macro: The UK Housing Market in 2011 [26 Dec 2011]
Unit 2 Macro: Brazil Overtakes UK in Economic Size [26 Dec 2011]
The Eurozone Crisis Explained (again!) [22 Dec 2011]
Unit 3 Micro: Sub Normal Profits - BP Leaves the Solar Industry [21 Dec 2011]
Economic Corruption - Global Rankings for 2011 [19 Dec 2011]
Unit 4 Macro: The Rise in Self Employment [17 Dec 2011]
Unit 4 Macro: India - the Road Ahead [7 Dec 2011]
Unit 4 Macro: Does UK Manufacturing have a Future? [30 Nov 2011]
Unit 3 Micro: Brand Loyalty in Mobile Phones [27 Nov 2011]
Where is the UK Economy? National Output [22 Nov 2011]
Unit 2 Macro: Should the EU introduce a Tobin Tax? [14 Nov 2011]
AS Macro: The State of British Business [13 Nov 2011]
Eurozone crisis - a selection of resources [12 Nov 2011]

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