Sunday, September 28, 2008

Why Recessions Are a Good Thing

One of the things that bothers me a lot when I hear people speak of the need to do something immediately is the fear of recession.  Recessions are not bad things.  In fact they are pretty necessary in a well running capitalistic economy.  Granted, you don't want to have a Great Depression sized recession, but it is absolutely needed if we wish to have the benefits of a boom cycle.

Think of it this way.  The economy has some average growth path.  But like any average, it is a combination of highs and lows.  The economy does just that, it has highs and lows.  There are going to be times when the economy is going strong.  This is a cycle that feeds on itself, growth begets growth.  But growth can also beget excess.  Economic growth, like a rising tide, raises all boats.  Some of these "boats" really don't deserve to be raised.  They ride the tide of economic growth but really need to sink to the bottom.  These are the people who get rich by adding very little of real economic value.  These are the idiots who made a fortune buying houses with no money down, sitting on them for a month, and then flipping it for instant profits.  There is no real economic value in that and these are the type of people who shouldn't be successful.

That is where recessions come in.  They are the great equalizer.  Recessions seperate winners from the losers.  Those who really do add value, continue to survive.  People who were prudent and realize that there is always a bust following any boom, are the ones who make it on to the next boom.  These are the people who realize that a long term outlook is the only outlook.  These are people like Warren Buffet who don't ride the volatile cycle of boom and bust, but keep a level and even head amidst all the calamity.

In any well functioning society, there need to be winners and losers.  Sometimes in the short term, the winners and losers end up in the wrong bucket, and that is unfortunate.  This is when an average Joe loses his job despite doing nothing wrong.  But in the long run, it always works out.   If he is truly a winner, he will come out ahead before the race is over.

As a personal note, my family was destroyed during the recession in the 1990's.  My father's business went under and he subsequently deserted my family.  It wasn't an easy thing to get over.  At the time it seemed like the end of the world.  But in retrospect, it was absolutely necessary and the best thing for everyone.  My father, although a good cook, probably wasn't the best business man.  It wouldn't be in anybody's best interest, even my own family, to have propped him up and let his business continue.  My family survived it all and came out stronger for it.  I like to think that is because I really do belong on the "winners" side.


  1. sorry to hear about your father. He should have stuck it out with the family. I am just glad that Bush has admitted that we are in a recession. Like you, I hope it's not a huge prolonged one. I am in grad school right now and hope the economy and job prospects will pick up when I graduate in about 2 years. Maybe in a later post, I would like to hear your opinion as to who had a better economic plan in the recent presidential debate.

  2. I agree with you that all booms need to be equalized. Only real economic increases lead to true growth and wealth.

    I don't necessarily agree that there need to be booms at all. The goal should be steady consistent growth. Remove the extreme highs and lows. What do you mean by the benefits of a boom cycle?

    The scenario you speak where people try to make money without adding real economic value is the typical symptom of a high inflation economy. If you look at the numbers put out by the Feds over the last decade, they'll claim that inflation has been under control in that target 1-3% range. I was listening to an economist talk about how the definition of these numbers has changed over time. He said that the inflation numbers that ar tracked remove energy, housing and a few other common things we need to survive from the equation because they are unstable (I'm most likely incorrect on the full details here). Had inflating housing prices been part of the inflation cacluation, I wonder how the Fed's monetary policy would have changed.

  3. No worries about the father. Like I said, it worked out for the best.

    As for which presidential candidate has the better economic plan, I'm definitely going to have a post about it before the election. As of right now, I haven't made up my mind yet, so I've deliberately not posted about it yet.

  4. I think booms and recessions are a natural part of a capitalistic society. While the ideal would be constant and steady growth, i don't think it is possible to do in practice. Humans, by their nature overreact. When times are good, they think they will never end. Same goes when times are bad.

    The only way to smooth it out, would be for government to try. They do try today, that's what the Fed does when it is raising and cutting rates, but if they tried anything more, it would probably cause more havoc than it would help. I also fear that if this were the true goal, that we would have over-regulation.

    I also think it is a good thing during booms that some people do really really well. It acts as an incentive to others to strive for the same thing.

  5. During this time of turmoil, the last thing we need is inflation. The government should NOT print more money. Like you said, people who have been more prudent about their finances are responsible citizens. We should not punish them by devaluing their hard saved money!