Why Recessions (And Depressions) Are Important

Forest fires suck. Once upon a time, we thought if we protected our forests from forest fires the forests, and we, would be better off. It took a long time, but eventually it became clear this was a bad policy. So we have, slowly, begun to realize it is better to focus on being able to recover from a fire, and able to minimize property and personal damage from fires than to take the naive and reckless position of preventing them in the first place.

Now, what does that have to do with recessions, and even depressions? A lot. Government, politicians, and many pundits believe - or at least claim - that we can and should prevent recessions and depressions. Depending on what side the speaker or writer is, you’ll hear different reasons.

The socialist or Democrat will claim we can prevent them and we should so people are better off. They will say that we need more “regulation”, more “oversight”, and ultimately lay the blame at the mantra that “capitalism has failed and this proves it”. Fundamentally, they want what is not possible to have: control of the economy and business cycle. Then they will propose more regulation.

The Republicans will claim the recession was due to over-regulation, that we tried to control it too hard and need to trim it back. They will lay the blame, ultimately, and “the need to moderate the business cycle” aka - the failure of capitalism. Fundamentally, they want what is not possible to have: control of the economy and business cycle. Then they will propose more regulation.

Both parties are ignoring the fundamental reality: the economy, and by extension and in particular the business cycle can not be controlled. But they are also ignoring the reality that not only do busts, recessions, failed corporations, and even depressions not mean capitalism is failed or broken - they are essential to continued growth.

Look at what what our media (movies, cartoons, pundits, bloggers) assert happens to people who get rich. By these people’s notions, and I suspect a majority of people agree, when you get rich you lose sight of what is important, you obsess over material goods that you don’t “need”. What is unfortunate is that however much truth is in that notion, it applies to a society as well. A society isn’t something created intentionally, it is made of everyone who is a part of it.

If individuals forget what is fundamentally important when they get wealthy, then so does society. I would posit this is already happened. We as a society obsess over celebrities and their meager personal lives. We have, as a society, lost sight of the fact that people are who makes the economy work or fail, that individuals make or break corporations, buy or not buy, save or not save, and interpret regulations and expectations as befits their world view.

Much of this recession, in my opinion, is due to the deliberate perpetuation of a mistaken belief about the role and purpose of a corporation and it’s Board of Directors. I can detail that in a different post, but that is IMO a key piece of the puzzle.

Another key piece is one of the common causes: we lose sight of the fundamentals. You don’t have to be wealthy to do that, in fact in today’s government structure you are enabled and empowered to do that even more so. Some might even say encouraged.

How? Class warfare among those who want to hold the power has been around for a long time. Today, that is done by convincing those who are not wealthy that they can simply take it without recourse from those who are. Never you mind the fact you aren’t eating healthy with the resources you have, we’ll just take more from someone else and give you more money to eat more unhealthy food.

Never you mind the fact that our priorities are all wrong, you can benefit it we redistribute … wait we can’t call it that … tax the rich so they “pay their fair share”. As a result the governments' budgets grow beyond reason. As they have done. As a consequence those who don’t have the means to repay loans are encouraged to get them, and those responsible for ensuring the safety of the system by not loaning said people more than they can afford.

It encourages a society-wide belief in the impossible - that we can just spend and spend and spend without recourse, that tax revenue will only increase and home values can only increase. The reality is despite the claims to the contrary, there is no “New Economy”. There is only the economy with new infrastructure. There is no free lunch for anyone, and a falling tide lowers all boats.

But how is that a good thing? What does a responsible family do when budgets get tight? They re-visit what is more important to them. They cut down or cut out the things that are less important, or not enough. We make choices we sometimes don’t like; but we make them and we are reminded of our priorities. We are reminded of the true cost of revolving credit, of savings, and of time.

It isn’t just families, however. Businesses do the same. You can tell what a company deems important when their revenues shrink and budgets get tight. Do they batten down the hatches and battle the storm by keeping as many workers on and continuing investing in new development, or do they hit the panic button and drop costs, hitting R&D and head count first?

Some of that depends on how they handled the good times. If they built up their equivalent of a savings account, they can afford to weather it

• just as a family with savings to weather a downturn can. Some of it depends on how they view the coming days. But in any case, they are reminded of what is important and you see the results in their actions.

From a business side, a downturn also represents an opportunity. More people start businesses and can do so because the costs of entry, naturally, are lowered. Smaller companies with an eye toward growth have the opportunity to pick up capital resources at prices lower than new. Big businesses that liquidate their assets do so at fire-sale prices and smaller businesses can reap the rewards by getting better equipment at lower prices.

In a sense, this happens for families, too. Houses get cheaper as those who bought too much liquidate them, or more often have them liquidated for them.

A key here is the ability to bounce back. Why we haven’t yet is two parts. One is the fact that as a society we’ve shunned savings. The other shoe is the government’s. It opposed savings as well, and tax and monetary policy reveals this. Whether it be suppressed interest rates or increased taxes on getting better off, our governmental policies from both ruling parties in Washington have contributed heavily to our national savings rate being in the crapper.

This is the downside to making it a “softer fall”. We don’t get to feel the real pain, and as a result don’t get a sense of the importance of countering it. Combine that with a continued effective interest rate of zero and why should anyone bother to save?

The reason we are still in what seems to be a effective recession if not in technical name, is that we haven’t learned the lesson. By and large, the various governments are resisting the lesson and continuing to spend more and more. Plus they continue to encourage more spending and discourage more saving.

The faster we learn the lesson of this downturn, the faster we will climb out of it.