A Necessary Evil

Olivia Wagner

There is no doubt that past recessions have hurt the economy in many ways, all making coming back from the shock much harder on society than it would have been otherwise. As noted in the first chapter of Naked Economics, people often act in their own self-interest when it comes to making decisions in their everyday lives.[1] As Wheelan states, we seek to maximize are utility, or our usefulness. Therefore, it makes sense why, when consumers endure a shock to their income, they naturally spend less of their money. This directly affects their personal account, however the decision to stop spending as much of their money affects the people whose salary cannot be paid due to the companies decrease in profits. Of course, this is a mild example, but it helps me introduce the idea of my article. In Naked Economics, Wheelan points out the extreme damage done to our economy by the recession and how the reverse of development can spread quickly across international borders, affecting economies abroad.[1] However, he also raises a point that recessions can also be helpful to the economy looking at long term growth.

You may be thinking, well, how can we weigh the benefits and costs of a recession? According to, National Bureau of Economic Research (NBER), recession is defined as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production and wholesale-retail sales”. To be more specific, recession is defined as when businesses cease to expand, the GDP diminishes for two consecutive quarters, the rate of unemployment rises and housing prices decline.[2] Both producers and consumers suffer from recessions. Going back to my first example, when consumers do not have the purchasing power, then production suffers. When production suffers, there are less profits for producers who will find it difficult to run their business houses. If there’s a slump in the market, the stock prices will go down, causing an increase in unemployment which leads to depression within families. Since the public isn’t spending or investing money, there is an increase in national debts which means less money can be spent by the government on development. This seems like pretty scary stuff, however, a recession can benefit the economy as well.

Other than the nice but depressing thought that you will have more time to spend with your family because you have either been laid off or your hours have been reduced, recession is good for long term economic growth. There are often many underlying issues that need improvement and a recession can purge the economy of less productive ventures and promote efficiency in the economy overall. Part of the reason our economy is hit so hard by a recession is because we are not educated in how to react to the reverse in development. We do what we can to avoid recession, government cuts taxes or places regulations, but if recession is a threat, it will be unavoidable. With fewer recessions however, mismatches in the economy (underlying issues) have more time to grow, and when the recession does happen, it tends to be much more severe. Recessions are a necessary evil because they allow issues to be corrected and educates consumers and producers on how to react. But by allowing huge gaps in between recessions by putting all efforts into avoiding them, we are creating a more severe threat on our economy when a recession does in fact become unavoidable.

[1] Charles Wheelan, Naked Economics (New York: Norton, 2010), 100.

[2] “What Causes a Recession? | Investopedia.” Investopedia. 2008. Accessed June 15, 2016. http://www.investopedia.com/ask/answers/08/cause-of-recession.asp

 

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