Why is a recession so bad?

[AL_DA_GREAT]

Do to the subprime thing there has been a lot about recessions lately. I have heard people say that our GNP might fall 3%. My question is why is this so bad? Our GNP rose that much last year. SO why was a GNP that size wonderfull in 2006 but in 2008 people panic when some one mentions it?

 

[bathsheba666]

Because the slave class have their lives disrupted or shattered.

Some people think that's a bad thing.

What can be even worse, is when someone suddenly gets to realise that they are slave class after all.

 

[Narz]

The modern economy requires constant growth. Without constant growth things start to break down. Which is why collapse is the inevitable conclusion.

Now an economy that can survive, even thrive during periods of flat growth (that is to say no growth) and even slight decline. That's an economy that might be able to weather the storm.

 

[BasketCase]

That's not the problem, Narz. The U.S. economy doesn't require constant growth at all.

The people living in that economy want growth. They want it all the time. Because they want more stuff.

Everybody, all over the world, is like that. Humans are instinctively greedy. They Want More. That's all there is to it.

 

[JerichoHill]

Yeah, umm, the modern economy DOESN'T require constant positive growth.

Instead of GDP, turn to looking at GDP per capita. If you have a falling population and no growth, folks are actually getting better off.

Growth occurs because we are a species that is curious, and a species that makes tools.

 

[Verbose]

Recession is bad because the current system of politics and economy is based on capitalism's ability to provide seemingly endless growth. Upset that, and modern societies tend to go a bit nutty.

Essentially we expect to be able to increase resources and means to fix things in society sometime in the future, meaning our societies and politics are based on an idea of a form of secular salvation, where we will eventually be able to afford whatever it is we would like today. Remove that from the equation, and some other formula for where our societies are going and why needs to be found. A temporary recession isn't too much of a big deal, if it doesn't get too deep and lasts too long and start hurting a fundamental public trust in things soon returning to "normal", i.e. growth.

That said, different societies can be assumed to be better or worse at operating under conditions of (temporary) restriction. And there's a strong suspiscion that the US might be relatively bad at handling restriction, from a relative lack of experience so far (bully for the US). Europeans and Asians are expected to do better.

I mean, if enough of the American public wakes up one day and find they no longer believe in the American dream of everybody being able to better himself through his own efforts, what can they be expected to do under the circumstances? I'm not saying that dream is a "lie" exactly, only that the US so far being fantastically economically successful has provided conditions for maintaining faith in it. Change that, and all bets are off.

 

[Defiant47]

Recession is very bad. With recession comes high unemployment and low inflation. The issue is that while on average people are getting poorer by a small amount, it's not an even distribution. It's not "everyone gets 1 less dollar per hour". It's some people don't have any jobs at all, and are completely screwed.

For example, in the great depression, unemployment was somewhere around 25%! This is a bad state of affairs, obviously, and we need to prevent this. Thankfully, the central bank has methods of stopping a recession nowadays by controlling the amount of money in the market. The U.S. central bank is most likely employing counter-measures as we speak.

[/ECON102]

 

[Brighteye]

Recession means that what little money I have becomes worth less. This means that the savings I've worked so hard to preserve were a waste of my time. Those who managed to grow up at just the right time may have earned enough to invest their savings in something of physical value. Those who are still young, like you, might not have much in the way of savings.
So a recession enhances the rich/poor divide, and decreases social mobility, which upsets a lot of people.

 

[Defiant47]

Recession means that what little money I have becomes worth less. This means that the savings I've worked so hard to preserve were a waste of my time. Those who managed to grow up at just the right time may have earned enough to invest their savings in something of physical value. Those who are still young, like you, might not have much in the way of savings.
So a recession enhances the rich/poor divide, and decreases social mobility, which upsets a lot of people.

Maybe you're thinking of hyperinflation instead?

 

[Winner]

Well, high unemployment and lower earnings leading to lower living standard are generally considered as a bad thing.

What kind of question is that?

EDIT: Another reason is the relative weakening of the country. If your GDP stagnates or decrease, countries which are growing fast are catching up more quickly.

That's why the Czech GDP per capita is now 75% of EU's average, despite it was about 50% a decade ago. Western European economic stagnation is making it easier for us to catch up.

 

[Bamspeedy]

A recession is of course bad news, but I think the OP is wondering if it is worth all the doom and gloom speak.

Based on some of the sensational news stories lately you'd think this was a major depression.

 

[Paul in Saudi]

In a recession, prices collapse. (We see this in the sinking of home prices and the value of corporate paper.) "Great!" you say, twinkies will cost less.

True, the price you can get for a hour's work decreases too. So if you have a contract to pay money (think a car loan or a mortgage), you are screwed, blued and tattooed. You must work more hours to get the same number of dollars you promised pay when money was easier to earn.

"But wait!" you cry. The price of gas is going up. True. The value of dollars (like the ones in your savings account) are also collapsing. This effect is more noticeable on imported goods like oil. (If you cay the price of oil went up by 100 since 2000, the price only went up by 66 when expressed in euros. The dollar sucks that much.)

So people who owe money are screwed. People to whom the money are owed are sitting in high cotton.

Now think back. Who has been lending us all that money for all those years? Yep, foreigners. So now we will have to sell stuff to the Chinese and whoever else to pay for the spending spree we have had for the past few decades.

Did I mention that in a recession, you have to work harder for each dollar?

 

[Brighteye]

Maybe you're thinking of hyperinflation instead?

Any inflation will do, and the two go together quite nicely.

 

[JerichoHill]

Recession means that what little money I have becomes worth less. This means that the savings I've worked so hard to preserve were a waste of my time. Those who managed to grow up at just the right time may have earned enough to invest their savings in something of physical value. Those who are still young, like you, might not have much in the way of savings.
So a recession enhances the rich/poor divide, and decreases social mobility, which upsets a lot of people.

Umm, Brighteye, you're talking about INFLATION, not recession. Recessions does not always correlate with higher inflation

 

[JerichoHill]

And furthermore, there is an abject misunderstanding of just what a recession is. In most recessions, the impact on the average worker is negligible, as they're mostly sector-based and hitting a slice of the labor force (that finds themselves unemployed or underemployed relative to their standing prior, or find their wages less).

I mean, seriously, I'm going to whack-a-mole on posts now.

 

[JerichoHill]

Recession is very bad. With recession comes high unemployment and low inflation. The issue is that while on average people are getting poorer by a small amount, it's not an even distribution. It's not "everyone gets 1 less dollar per hour". It's some people don't have any jobs at all, and are completely screwed.

For example, in the great depression, unemployment was somewhere around 25%! This is a bad state of affairs, obviously, and we need to prevent this. Thankfully, the central bank has methods of stopping a recession nowadays by controlling the amount of money in the market. The U.S. central bank is most likely employing counter-measures as we speak.

First, if you think you can wipe the business cycle off the face of the economic landscape, I really want what you're smoking. A recession is a downturn, and expansions are upturns in the cycle. That's the definition. Period.

In a recession, typically, the effect lands on a segment of the populace. So using "average" is a bad statistis. Sorry.

Thirdly, a recession doesn't need to cause very high unemployment. If we're in a recession now, unemployment is between 5-7%, neither of which is an egregiously high number historically.

Fourthly, a recession doesn't necessarily cause inflation. Sometimes it can cause deflation. Sometimes inflation stays as a non-factor.

Fifthly, business cycles happen. Unless you want to go to a completely centrally planned economy (wait, those dont work out so well...) then itll happen.

Recession means that what little money I have becomes worth less. This means that the savings I've worked so hard to preserve were a waste of my time. Those who managed to grow up at just the right time may have earned enough to invest their savings in something of physical value. Those who are still young, like you, might not have much in the way of savings.
So a recession enhances the rich/poor divide, and decreases social mobility, which upsets a lot of people.

I already address the inaccuracy of recession = inflation.
A recession does decrease social mobility. It also increases the relative value of further education by decreasing the opportunity cost of school (debt) vs. work (undebt?) and the increased education attendance serves to reduce the labor supply (thus bringing about an equilibrium faster) and may help us grow faster and more egalitarian in the future (more higher skilled workers). Brighteye, I'm kind of disappointed that you didn't see this.

Well, high unemployment and lower earnings leading to lower living standard are generally considered as a bad thing.

What kind of question is that?

EDIT: Another reason is the relative weakening of the country. If your GDP stagnates or decrease, countries which are growing fast are catching up more quickly.

That's why the Czech GDP per capita is now 75% of EU's average, despite it was about 50% a decade ago. Western European economic stagnation is making it easier for us to catch up.

Its a bad question Winner. Good catch.

In a recession, prices collapse. (We see this in the sinking of home prices and the value of corporate paper.) "Great!" you say, twinkies will cost less.

True, the price you can get for a hour's work decreases too. So if you have a contract to pay money (think a car loan or a mortgage), you are screwed, blued and tattooed. You must work more hours to get the same number of dollars you promised pay when money was easier to earn.

"But wait!" you cry. The price of gas is going up. True. The value of dollars (like the ones in your savings account) are also collapsing. This effect is more noticeable on imported goods like oil. (If you cay the price of oil went up by 100 since 2000, the price only went up by 66 when expressed in euros. The dollar sucks that much.)

So people who owe money are screwed. People to whom the money are owed are sitting in high cotton.

Now think back. Who has been lending us all that money for all those years? Yep, foreigners. So now we will have to sell stuff to the Chinese and whoever else to pay for the spending spree we have had for the past few decades.

Did I mention that in a recession, you have to work harder for each dollar?

Prices do not collapse in a recession.
If a recession causes inflation, that makes debt cheaper, which helps people who owe money, and doesn't help people who are owed money. Your logic is blatantly flawed.

As far as working harder for each dollar, I'd ask you to leave your opinions out of it, because that's unsupported by facts.

Wages are typically sticky. They don't typically fall in a recession. Employment falls.

Come on dude. Learn some econ.

 

[Brighteye]

Alright. The last time I studied any economics I was 11 and my father was explaining to me what private equity was.
But... we've been over that recession and inflation are not the same. Is debt only cheaper in a recession because of lower interest rates? Because that hardly seems like a big draw to (further) education when the government provides students loans at artificially low interest rates anyway.

Of course, increased unemployment might make people look for teaching courses to pass the time, but not because of the interest rates specifically.

Furthermore, more higher education takes a long time to hit the economy (I'd imagine) and isn't really what someone who is in higher education wants, since it means more competition. Is it better to be in a country where one's abilities are truly exceptional and in demand, or in one where employers may have trouble distinguishing (initially) between candidates?
I can imagine that having too few people with similar qualifications would send employers elsewhere, but I don't think that Britain's in that position.

 

[Defiant47]

Any inflation will do, and the two go together quite nicely.

Actually, recession leads to lower inflation. Expansion (economic boom) leads to higher inflation.

First, if you think you can wipe the business cycle off the face of the economic landscape, I really want what you're smoking. A recession is a downturn, and expansions are upturns in the cycle. That's the definition. Period.

But the effects of a recession are undeniable. I was more addressing the question of why it's a bad thing.

In a recession, typically, the effect lands on a segment of the populace. So using "average" is a bad statistis. Sorry.

Read my post again, that's basically what I said. On average, the GDP per capita doesn't decrease that much. The issue is that this decrease is not uniform.

Thirdly, a recession doesn't need to cause very high unemployment. If we're in a recession now, unemployment is between 5-7%, neither of which is an egregiously high number historically.

The degree of unemployment depends on the degree of the recession. They motsly go hand-in-hand. And yes, by "higher unemployment", I mean "higher than normal unemployment".

Fourthly, a recession doesn't necessarily cause inflation. Sometimes it can cause deflation. Sometimes inflation stays as a non-factor.

Though I said nothing on this matter until now, this is true. Recession reduces inflation.

[/ECON102]

Fifthly, business cycles happen. Unless you want to go to a completely centrally planned economy (wait, those dont work out so well...) then itll happen.

Sure they do. But let's not go there.

 

[JerichoHill]

@Brighteye

But... we've been over that recession and inflation are not the same. But do they go together generally?
Inflation is pro-cyclical. It rises in expansions and declines in downturns. So it's actually quite the opposite of what you thought (barring changes to money supply) More here: http://economics.about.com/cs/money/a/recession_price.htm

Is debt only cheaper in a recession because of lower interest rates?
Yes. Interest rates heavily influence the cost of borrowing. That is why the fed is lowering their fed fund rates now. They're trying to lower rates across the board, make borrowing cheap, and encourage investment.


Because that hardly seems like a big draw to (further) education when the government provides students loans at artificially low interest rates anyway.
Not everyone qualifies for those loans. Additionally, if an economy is stagnant, then the opportunity cost of going to school versus going into the work force is less than if when the economy is a hoppin' Opportunity costs matter.


Furthermore, more higher education takes a long time to hit the economy (I'd imagine) and isn't really what someone who is in higher education wants, since it means more competition. I think you're thinking too much here. Most professors want to train new professors.

Is it better to be in a country where one's abilities are truly exceptional and in demand, or in one where employers may have trouble distinguishing (initially) between candidates?
For the individual, you want to be where you're in demand. That seems...obvious.

 

[JerichoHill]

@Defiant47]
But the effects of a recession are undeniable. I was more addressing the question of why it's a bad thing.
Is it a bad thing to reduce excess inventory and refocus capital and labor to the sectors they are more productive towards? That's another way of looking at a downturn in the business cycle.