Wednesday, November 07, 2007

The Gifts Of Recessions

Robert Samuelson writes about them in today's Washington Post. Recessions, those times when the standard of living goes down and people lose their jobs and food is suddenly not that plentiful, are not that bad, really, because recessions have all sorts of hidden virtues:

Of course, no one likes the usual side effects of a recession: higher unemployment, weaker profits, more stress. Still, popular rhetoric exaggerates the damage. By and large, recessions are problems, not tragedies. Since World War II, there have been 10 of them, or one about every six years. On average, they've lasted 10 months (indeed, a common definition of a recession is at least two quarters of declining output). Disregarding two severe recessions -- those of 1973-75 and 1981-82 -- peak monthly unemployment has averaged 7.1 percent.

Recessions also have often-overlooked benefits. They dampen inflation. In weak markets, companies can't easily raise prices or workers' wages. Similarly, recessions punish reckless financial speculation and poor corporate investments. Bad bets don't pay off. These disciplining effects contribute to the economy's long-term strength, but it seems coldhearted to say so because the initial impact is hurtful.

Today, a U.S. recession might also reverse the upward spiral of oil prices and trigger a faster -- and healthier -- drop in home prices. As economist Berner notes, the slow decline in prices prolongs the housing slump, because it induces "would-be buyers [to] wait for more attractive deals." By making homes more affordable, a quick and sharp price drop might revive housing more rapidly.

Samuelson then gives gentle advice to the government not to try to meddle with this health-creating god of recessions. The bitter pill and all that.

On a purely technical level Samuelson has a point. The business cycle has booms and it has recessions, and the recessions are needed to fix the problems of the booms. All this assuming that nobody tries to regulate the booms or the recessions, assuming that the business cycles are some sort of an unavoidable beast with its own rules and morals.

But governments have always tried to influence those cycles. Even George Bush's government has tried to influence them. Now, it is well known that if the government acts too late it might deepen the business fluctuations rather than dampen them. But is Samuelson really suggesting that the government should do nothing?

The problem with these types of articles is something very similar to those psychological pieces I once read which argued that the way we make someone else's death or suffering meaningful is by the message WE learn from it. It's pretty easy for someone earning a nice and stable salary to discuss the negative aspects of recessions as a welcome economic correction. And note that the piece has no discussion about the distributive effects of recessions, nothing about who it is who suffers in them and who it is who does not suffer in them. It is just assumed that the bad people get punished and the good people get encouraged.