Recession

A recession is formally defined in macroeconomics as a fall of a country's Gross National Product in two successive quarters. Combined with inflation this process is known as stagflation.

A sustained recession is known as an economic depression. A short-lived one is often called an economic correction. However, many theorists including John Kenneth Galbraith believe that there is no reasonable distinction between the three, other than a desire to downplay risk of a panic. In the nineteenth century, such theorists point out, business cycle events of the same magnitude were typically called "crises" or "panics".

To avoid all these politically loaded terms, the more neutral term 'recession' is to be preferred, despite the overly-specific technical economics definition. The politics implied by the current definition, including the assumption of relevance of Gross National Product to human well-being, or the desirability/necessity of reporting by quarter-years, are challenged in some theories of a larger political economy consisting of voting, market, and other activities.

That said, there is little challenge to the idea that GNP (or GDP) are related to job availability in a wage-employment economy, nor to the idea that business confidence and consumer spending tend to decrease during a recession, which is usually a crisis of trust.

Recessions are mostly caused by economic shocks. The greatest, worldwide recession that humanity has ever experienced was the Great Depression (late 1920s and 1930s); other notable recessions include the Oil Crisis in the 1970s. In both cases the reliability of prior pricing decisions and leadership quality was in question, and money tended to seek 'safe havens' (like real estate) and avoid speculative investments exposed to the 'crisis'.

Some common questions and answers about recession issues:

Q: Money has to be explicitly created or destroyed. So what happens to all the money during a recession. Suppose you have 250 million people living in a huge hall and there is a recession in the hall, no money went into or left the hall. Where did all the money go?

A: Money actually can be destroyed, but it's hard to see where and when. Prior to the Great Depression a huge wave of investing in the stock market had taken place which created artificially high prices of stock. This process was driven by the fact that shares were being used as a collateral for loans in order to buy more stocks. When the economy showed signs of slowing and share prices plummeted, this caused an extensive domino effect. The investments lost their face value and the loans on them "went bad", which, among other things, triggered a crisis of the banking system. In consequence, there was the famous rush on banks, with people not being able to access their deposits. They had disappeared. After this, people grew extremely wary of investment which resulted in extreme deflation.

While the amount of "hard" money (also referred to as Central Bank Money) can only be changed within certain restrictions, this is not the total amount of money that an economy relies on. The latter is a multiple of the former, determined by factors like the speed of exchange and the reserve policy of a central bank, or of other banks who borrow from that central bank.

Q: Isn't a recession a normal part of the business cycle?

A: Some think so. But, the definition is set where it is (reduction in GNP for two successive quarters) because this is supposed to be an unusual event, outside the normally-expected cycles in which no more than one quarter should go by without some kind of growth. An alternative view of this is that of Karl Marx for whom economic "crisis" is symptomatic of a dysfunctional society, capitalism, forcing valuable social resources to be destroyed in order to return the system to profitability. Another alternative view is that the GNP and GDP are relevant only to waged jobs, and that the expansion of money supply to support certain activities, e.g. chronic hospital care, e.g. political lobbying, advertising, can encourage those activities even though they actually represent declines in quality of life. So it all depends on what you mean by 'normal', and whether you think the definition is relevant to it.

The fact that parties and theories compete to set policies in the vote market, and have the power to set definitions on such terms as 'recession' or 'depression', and explain their meaning to the public as authority figures, leads to larger questions in political economy, specifically those explored in political choice theory.

An example of the importance of this is the Great Depression itself. When President Franklin D. Roosevelt entered office in 1932, he was intending to continue a relatively conservative fiscal policy to placate his business critics (Herbert Hoover in particular had warned him that any controversial early action would affect business confidence very adversely). However, after Black Monday Roosevelt was forced to change his mind, and instituted the "New Deal" economic reforms to stave off any future depressions.

To date none have happened. At least, none we are allowed to call "depressions", regardless of their impact on actual human lives.

It is an open question whether a "depression" can even be noticed at all under the terminology in use among technical economists today. Galbraith among others thought it could not, and that the terminology was merely exercise in concealment - a potent criticism from an economist who was a central part of that Administration during the war years.

See also: business cycle, measuring well-being, money supply, central bank, reserve policy, political economy, job cut, job exportation