January 24, 2008

That R-Word

If you follow the news at all, you've probably heard that a lot of people are worried about a recession in the near future. In case you didn't know, a recession is when the economy stops growing and actually contracts. There's fewer jobs to be had, people have less money to spend, and it's generally something most people would like to avoid. If we could find out what causes recessions then we could, in theory, take preventive measures and avoid or reduce the severity of recessions when they do come. There are entire branches of economics devoted to this cause and it can get pretty boring, so I'm just going to talk about one that I think is interesting: you.

Ok, so maybe not you, but the public in general. The analysts and news outlets have been talking about a possible recession since last fall. Eventually, a bunch of people are going to start believing that a recession is very possible or imminent. So they anticipate, and begin to curtail their spending in preparation for the dark days ahead. They start to save some money just in case they are the victim of downsizing, thereby taking more money out of the economy. If enough people do this, then businesses make less money and they can't expand and they have to cut jobs, and voila, there's a recession.

Imagine that. What if, just by people saying and acting as if a recession might come, they actually create a recession? Talk about a self-fulfilling prophecy. In more economics-like terms: consumers' expectations about a recession might induce a real economic contraction. It could be that if someone could convince enough people that a recession is coming, then they could, in essence, create a recession. Perhaps not probable, but I'd say possible in these days of apathy and mass-media.

Posted by chupathingy on January,24, 2008 at 1:34 AM | Comments (3)

In a way, that makes it sound like individuals acting somewhat irresponsibly and buying a lot of things on credit would be good for the economy - temporarily. Which I'm guessing is what happened... And then they defaulted and suddenly we realized that there wasn't enough *real* money to go around to pay all the debts. Is that an accurate assumption?

Comment by: matt g at 8:55 AM, January, 24, 2008

I totally agree. Look at how the markets across the globe tanked early this week. It was a mass hysteria thing perpetuated by the media.

Comment by: jon at 11:02 PM, January, 24, 2008

Well if people truly believe that a recession is coming then they're acting totally rationally if they're preparing for it. The thought that really struck me was that if it's possible to manufacture a recession by convincing people that one is coming, then that's something potentially powerful.

Of course, in theory what I described is possible, but whether it actually happens I don't know. Another interesting thought is that the savings rate is part of what determines long term growth, so it could be possible that the recession-induced saving could be good for us in the long run. Again, totally unproven, but possible.

Comment by: neil at 11:26 PM, January, 24, 2008