Dismiss Notice
Join Physics Forums Today!
The friendliest, high quality science and math community on the planet! Everyone who loves science is here!

Operational Definition for Recession

  1. Jul 19, 2010 #1
    Why should recession be measured in growth of GDP or money at all for that matter? Doesn't the problem with recession have to do with the subjective gap between economic expectations and what is actually achieved? This is the only reason why inflation or deflation should cause problems, technically. People get stressed by higher prices, or their money not stretching as far during inflation; even though their income should be growing proportionately. With deflation, people get stressed from the supply-side and worry that decreasing prices will generate less revenue and they will fall behind in terms of wealth, not realizing that wealth is relative to the value of money.

    So measuring recession in monetary terms seems to promote the idea that economic well-being should always be measured in flows of money relative to some previous rate of flow. If average debt was a fraction of what it was when GDP growth was high, and people had more economic freedom of choice as a result, GDP-growth measures would still claim that the economy wasn't going as well as when GDP-growth was higher. Then, if government would promote debt as a means of stimulating GDP-growth, people could end up back in debt only to be told that the economy has "recovered." Is economics sane?
     
  2. jcsd
  3. Jul 19, 2010 #2
    The definition you originally criticized originated from the new york times:

    http://en.wikipedia.org/wiki/Recession

    as can be scene economists do not necessarily agree with this definition. A recession is simply a slow down:

    http://en.wikipedia.org/wiki/Recession

    but of course we need some metric to determine weather we are in a recession or not and if we were to use GDP then real GDP would seem more applicable. However, the fact that most prices fall does not help people with the fact that the interest they pay on their debt may not fall and even if the interest on their debt falls the principle wont.
     
  4. Jul 19, 2010 #3

    russ_watters

    User Avatar

    Staff: Mentor

    I can't imagine why someone would prefer a subjective measure to an objective one. Such a thing would make it impossible to compare one recession to the next. No - the point of tracking the economic cylce and applying names like "recession" is to objectively assess economic health.
    The effect that inflation and deflation have on the economy is very real, though - it isn't just psychological. Inflation is a measure of the loss of value of money, which saps GDP growth. Deflation causes peopel to not spend their money (because prices are dropping), which makes the GDP drop.
    Well, I'll agree with that - debt is one factor in measuring economic health that has a seemingly positive effect on others. The main problem is that debt provides a temporary boost and a long term drag.
     
  5. Jul 19, 2010 #4
    I've heard this many times and it seems like the catch-22 of deflation. It's almost like saying as long as people have debts to pay, it is better to keep GDP growth high and prevent deflation - yet in order to pay off their debt, people have to spend and invest which keeps them borrowing more money with the hope of winning big by doing so and paying off their debts. Meanwhile, others are doing the same - which drives the consumption/investment-spending driven economy, so when lots of people start paying off their debts, the result is recession which necessitates fiscal stimulus in the form of more borrowing and spending. So how is it ever possible, in this cycle, to ever create a prosperous economy that doesn't keep people mired people in debt?
     
  6. Jul 20, 2010 #5
    I have a quote for you:

    "The misguided response of our policy makers has been to defend bondholders at all costs, using public funds to make sure that lenders get 100 cents on the dollar, plus interest, while at the same time desperately trying to prod consumers back to their former patterns of overconsumption. These policies are designed to preserve exactly the reckless and unsustainable behavior that caused the recent downturn. They are likely to fail because the strategy is absurd. The ultimate outcome, which will be forced upon us eventually if we do not pursue it deliberately, will be the eventual restructuring of debt obligations and a gradual shift in the profile of U.S. economic activity toward greater saving – either to finance exploding government deficits, or preferably, to finance an expansion in productive investment, research and development, and capital accumulation.

    From my perspective, bolder approaches are required. Debt that cannot be serviced should be restructured, rather than socializing the losses of reckless private decision-making. We will inevitably have a large "stimulus" package, but it will be essential to craft it in a way that emphasizes incentives to create and accumulate productive capital, both private and public."
    http://www.creditwritedowns.com/2010/07/john-hussman-on-taxes-and-tobins-q-ratio.html#ixzz0uA5bi3uS

    There are several things in our system which help to encourage market cycles.

    1) Bank Reserve requirements encourage and finical institution leverage rules allow an expansion and contraction of the money supply. Demand is the spending of consumers which is dependent on the money they have available.

    2) Low Interest Rates encourage borrowing and over investment which means a growth in debt. The debt will grow until it becomes unserviceable.

    3) Asset inflation encourages people to not hold onto cash

    4) Over Investment triggers a surplus of production which inevitable leads to deflation.

    Something you may want to look at is

    "According to the Austrian School business cycle theory, the business cycle unfolds in the following way. Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money, through the money creation process in a fractional reserve banking system. This in turn leads to an unsustainable "credit-fuelled boom" during which the "artificially stimulated" borrowing seeks out diminishing investment opportunities. This boom results in widespread malinvestments, causing capital resources to be misallocated into areas which would not attract investment if the money supply remained stable.

    Economist Steve H. Hanke identifies the financial crisis of 2007–2010 as the direct outcome of the Federal Reserve Bank's interest rate policies as is predicted by Austrian school economic theory.[94] Some analysts such as Jerry Tempelman have also argued that the predictive and explanatory power of ABCT in relation to the recent Global Financial Crisis has reaffirmed its status and, perhaps, cast into question the utility of mainstream theories and critiques.[95]

    Austrian School economists argue that a correction or "credit crunch" – commonly called a "recession" or "bust" – occurs when credit creation cannot be sustained. They claim that the money supply suddenly and sharply contracts when markets finally "clear", causing resources to be reallocated back toward more efficient uses."
    http://en.wikipedia.org/wiki/Austrian_School#Business_cycles

    The solution in conventional monetary theory to stimulate demand is to lower the interest rate but not only does this help to maintain debt levels it subsidizes the industries which have over invested by allowing them to sell their inventory in the future where they can obtain a higher price (See my post: Illiquid Assets and Real Estate). Consequently, rather then the population reaping the benefit of over production, monetary policy helps to reduce the supply available to consumers.

    I have suggested in another tread that the supply of money should match production and this is difficult to do in a fait money system because of the inherent instability of the money supply:

    http://en.wikipedia.org/wiki/Endogenous_money#Comparing_to_exogenous_theories_of_money
     
  7. Jul 20, 2010 #6
    That was a good post explaining the Austrian school ideas and ways that more disciplined spending could be stimulated at various levels. These are major causes of liquidity-driven inflation which, if stabilized, would probably afford people more freedom in pursuing economic activities for other reasons than "keeping up with a rat race."

    I think there are also other qualitative factors that are not necessarily the product of debt-driven investment/spending and market trends. Specifically, automation and other forms of labor-efficiency has made it increasingly possible to achieve a lot of production with less labor. This could result in over-production, as you mentioned, since the capacity allows for it - but through under-producing to maintain scarcity and price-levels, it allows for larger ratios of revenue to labor hours worked.

    This, in turn, leads to the problem of how to distribute the means of consuming the goods produced. Job-creationists promote the idea that businesses should invest in a variety of jobs in order to stimulate consumerism while maintaining as much social control over consumers as possible. Competition, however, provides an impetus to eliminate all but the most necessary jobs in order to gain the most market power possible.

    This competition for market power has also had the effect of competitive bidding for very valuable personnel, whether to utilize their skills or just prevent them from falling into the hands of competitors. The result is that some people get paid a great deal more than other people, and have relatively less to do than the people who make much lower salaries.

    Usually, this is just treated as a social problem without economic effects. However, I think that it creates vast discrepancies in the ratio of labor-hours to value and prices in different sectors. So, for example, certain personnel in certain sectors get more flexibility and free time along with more disposable income - and as a result they are able to consume more and spend more money and stimulate more service-work, leisure industry, etc. Likewise, some products and services generate a lot more profit with less hours than others that create relatively little profit but cost enormous amounts of labor hours.

    The economic consequences of this are that the economy grows through leisure and other types of consumption and this translates into an overal increase in standards of living and the associated costs. Put another way, the per-capital expectations for what kind of leisure activities, services, and consumer goods are available to those who work hard increase to the point where it is impossible for everyone to achieve them, no matter how hard they work or how lucky they are in business.

    The result of this is that the leisure, service, and consumption industries become interdepleting. In other words, each sector is competing to usurp profits from others in order to gain access to relatively elite levels of consumption. Yet, the more they raise their standard of living - the more pressure they put on others to relinquish or reduce theirs. This is an impetus for inflation in itself, as sectors are simply catering to whoever is spending the most money by raising prices as high as possible.

    This is not sustainable economic culture. It is subjugation driving pricing designed to displace subjugation onto others. In other words, the economy has evolved into keeping people impoverished in order to motivate them to serve the leisure interests of others, while the drive to rise out of poverty ensures the high prices that keep people relatively poor.

    The only way I can see to resolve this inherent instability and self-defeating aspect of the economy is for people to become less consumption and service dependent. Clearly there is no way to turn back the clock on technological and efficiency advances that generate so much more free-time and profit, but there must be some way to reduce how much is spent without propelling unemployment and poverty still higher. If not, I think the stress on service-industry personnel would grow to the point of making those sectors unsustainable, to the extent they're not already.
     
Know someone interested in this topic? Share this thread via Reddit, Google+, Twitter, or Facebook




Similar Discussions: Operational Definition for Recession
  1. Definitions (Replies: 7)

  2. Definitive or not? (Replies: 11)

  3. Lunar Recession (Replies: 15)

Loading...