What is recession?If it is cyclic then why we weren't prepared for it?Is it any different from depression?How can a country fight recession?
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Recession is a period of significant decline in total output, income, and employment usually lasting from six months to a year and marked by widespread contraction in many section of economy.Depression is a prolonged period characterized by high unemployment, low output and investment, depressed business confidence, falling prices and widespread business failures. - Samuelson & Nordhaus.
Basically recession and depression are similar but depression is more severe and prolonged.
Yes, recession and depression is cyclic in the sense that economies generally face periods of rapid growth followed by relatively slower growth and sometimes negative growth. However there is no fixed period for these cycles to occur. Therefore it is neither possible to predict them with accuracy nor prepare for it in advance. As a matter of fact most recessions occur when they are least expected - that is they start when the economy is booming.
The cycle of economic booms and recessions are the result of excessive public optimism and pessimism about the future of the economy. General public is neither skilled in economic analysis nor do they have access to the information needed for such analysis. In absences of this ability they indulge in some kind of crowd behavior. When the economy is doing well some people believe the economy will continue to do well and in this belief tend to spend more, this improves the economic conditions even better leading to further enthusiasm and further increase in spending. This starts a spiral of economic boom. But there is a limit to this kind of increase in spending. So at some point people are bound to realize that the economy is not going to do as well as they expected and perhaps they have been spending more than they can afford. This sets the process of pessimism cycle in motion leading to the downward spiral of recession.
These cycles of economic boom and recession can be eliminated or at least made less severe by educating general public on real health and prospect of the economy. But, unfortunately, during boom time both business leaders and government find it in their interest to fan the fire of public optimism. And the when recession starts, the public feels cheated, leading to loss of confidence, which adds to the recessionary pressure.
Samuelson, P.A. & Nordhaus, W.D., Economics, Eighteenth Edition, Tata McGraw-Hill, New Delhi.
These are great questions. The post above gives you great insight. I would also suggest that you take a look at the history of recession and depression. The 1929 Depression is a great example, and one my grandmother never let me forget. She buried her money in the backyard and panicked if her checking account ever dipped below a $3000 balance. Nice problem to have, hum?
I don't think the question is "Why weren't we prepared for it?" but rather, "Why didn't we do more to lessen the effects?" Or "Why didn't we do more to actually correct the problem than stick a temporary fix on it?"
Part of the reason, as previously alluded, as to why the cyclical nature of recession is not fully embraced is that the economic boom aspect of capitalism is quite enticing. For example, the housing boom of the early portion of this decade saw a great many individuals turn a great deal of profit. The openness of profit and its lure does not allow itself to be the most receptive to a message of "watch out for this will not last." Individuals genuinely believe that since so many profit that the idea of gaining material growth is limitless. However, it is finite and in the midst of generating more profit, individuals are not comfortable articulating the cyclical nature of such a system. Many in the media and in the government believed that if people were content making money, participating in questionable lending practices, and facilitating mortgages beyond ways and means, that everything would be fine and that things could not get to where they are now. Additionally, politicians risk censure and the inability to be reelected if they deliver news such as needing to place limits and regulation on a system at a moment when so many are "winning." Both the unwillingness to hear and speak messages of restraint might be reasons why individuals seem to not understand the cyclical nature of capitalism.
While blame might be placed on the high profile examples of individuals and businesses who engaged in questionable business practices, the idea that the majority of the American public does not seem to want to hear bad news as long as things are going well. A lot of people tend to live like the grasshopper in "The Grasshopper and the Ant." While many people work hard like the ant, a lot of people like to spend the fruits of their labor. And in all honesty they should be able to do that. However, if more people put stores by for the winter, perhaps the situation would not be so dire for so many.
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