📹 The Recession We Need To Have | Economics Explained
Are we entering a new age where serious downturns caused by genuine economic hardships can be avoided with piles of cash?
Does production decrease and unemployment increase during recessions?
The natural rate of unemployment, also known as the nonaccelerating inflation rate of unemployment (NAIRU), is a measure of an economy’s long-term potential, meaning it doesn’t impact inflation. However, when unemployment deviates from the NAIRU, inflation is affected. For example, during a recession, firms may lay off workers and refrain from raising prices, leading to increased unemployment and inflation. This trade-off, known as the Phillips curve, is temporary.
Once prices adjust to a new equilibrium, firms return to full capacity, and unemployment falls back to the NAIRU. Understanding the long-term equilibrium rate of unemployment helps policymakers understand how to change it. Policies that aim to lower unemployment by boosting consumer demand can only do so temporarily, at the cost of higher inflation later. However, policies aimed at easing frictional or structural unemployment can boost employment without necessarily affecting inflation. Structural changes, such as technological advances and demographic shifts, can also have long-lasting effects on unemployment trends.
What happens to production during a recession?
Recessions often coincide with drops in international trade, unemployment rates, and inflation due to reduced demand for goods and services. They are often associated with financial market turmoil and the erosion of house and equity values. The latest US recession, which began in December 2007 and ended in June 2009, was the longest and deepest since 1960, lasting 18 months and resulting in a 3. 7 percent decline in output. The typical US recession prior to 2007 lasted 11 months and resulted in a 1. 7 percent peak-to-trough output decline.
What is causing the productivity slowdown?
The study reveals that economic growth has slowed down due to a decline in capital deepening, a slowdown in investment, a lower growth of allocative efficiency, mismeasurement of aggregate productivity, and a slowdown in global trade. The authors identified cyclical factors such as the financial crisis of the later 2000s and longer-term factors such as the shift to more intangible forms of capital.
The study also found that the rates for new firms entering and exiting the market have declined, and pure profits and concentration have increased, causing concerns about productivity growth from improved resource allocation.
The study also highlighted the impact of innovation on long-term growth, highlighting that the private sector’s investment in research and development may undermine the positive impact on productivity. However, the researchers caution that it would take time to see the effect of new technologies and innovations on productivity.
Why did productivity fall so much during the Great Depression?
The study examines five common explanations for the significant decline in U. S. total factor productivity (TFP) during the Great Depression: changes in capacity utilization, factor input quality, production composition, labor hoarding, and increasing returns to scale. It finds that these factors account for less than one-third of the 18 percent TFP decline between 1929 and 1933. The rest of the decline remains unexplained. The study suggests that declines in organization capital, the knowledge firms use to organize production, could be attributed to breakdowns in relationships between firms and their suppliers.
As some firms failed, efficiency decreased, and managers had to shift time away from production to establish new relationships. Firms had to shift to unfamiliar technologies that initially operated inefficiently.
Why did productivity growth fall?
The study reveals a long-term downward trend in productivity and growth, primarily due to growth to productivity. The root causes could be various, including hysteresis effects on labor and capital markets and slow innovation dynamics in stagnating economies. To lift growth and create room for creative destruction, stronger demand is needed. Collective action is needed to lift growth rates in Europe and other regions, with a collaborative approach.
The G20 summit in 2009 provided an example of a collective stimulus program. If developed countries agreed to foster an overall growth agenda, the risk of protectionism could be contained. However, if each country pursues its own agenda, protectionism could stifle the possibility of spillover growth effects in the global economy. A new age of protectionism and “beggar-thy-neighbour” policies could further harm growth with more negative consequences. De-globalisation could have devastating economic effects, even if globalisation has not improved everyone’s living standards.
How does recession affect productivity?
The productivity rise during the recent recession was primarily due to employees working harder, not because employers kept good workers and eliminated laggards. During the Great Recession, the aggregate number of hours worked in the United States fell 10. 01 percent, but output dropped only 7. 16 percent. Thus, output per worker rose. Edward Lazear, Kathryn Shaw, and Christopher Stanton study computer-tracked daily productivity data for over 23, 000 workers at a large technology services company between 2006 and 2010. They conclude that productivity at the firm they analyze rose 5. 4 percent during the recession, with at least 85% of that increase attributable to employees boosting their own productivity.
The nature of the labor market affected the productivity of workers, as evidenced by measuring differences at the firm’s far-flung facilities. With operations spread across many states, the company had workers doing the same job in high-unemployment states such as Florida and in states less affected by the recession, such as Kansas. The authors find that worker effort increased the most in the firm’s operations where unemploym
ent rose the most.
The least productive workers before the recession were the ones who boosted their productivity the most as unemployment climbed. When the local unemployment rate rose 5%, workers whose initial productivity was below the firm median boosted their productivity by 5. 5 percent, while workers with above-median initial productivity exhibited minimal change.
How does a recession affect the production possibility curve?
In macroeconomics, points inside the curve are considered inefficient as the economy is not fully utilizing its resources. In a recession, unemployed workers are not producing goods and services, resulting in the economy not reaching its long-run potential. The PPC represents maximum levels of production, and all points outside the PPC are not possible. Increases in the quantity or quality of resources can shift the PPC outward, allowing for greater production of both goods. However, decreases in the quantity or quality of resources can shift the PPC inward, decreasing the production of both goods.
Who gets laid off first in a recession?
The warn layoff list often includes departments that are not profitable and may be seen as financial detriments. Signs of a department being on the chopping block include budget cuts, departmental hiring freezes, or a decrease in designated or assigned workload. High-performing departments may not be among the first to go. However, non-essential departments, which do not contribute to the core functionality of the business, are often seen first. Non-essential departments are most vulnerable when business slows down, departmental projects are diverted to another department, and focus is away from the team.
Some roles may become redundant as efficiency continues or are no longer aligned with the company’s strategic direction. People in positions like these might be the first to go, along with those whose direct impact cannot support the business financially.
Why is US productivity declining?
The US labor market is experiencing a decline in productivity, with a drop of 2. 7 percent in Q1 compared to last year, according to EY-Parthenon, the global strategy consulting arm of one of the “Big Four” accounting and consulting firms. The low productivity is attributed to the current environment, which is defined by high inflation. The drop in productivity is exacerbating compensation pressures and pushing up unit labor costs.
There is no magic productivity wand, and cost-cutting via layoffs and wage growth compression is often easier and faster to execute. Despite this, Q1 output grew slightly and hours worked increased, indicating that people are working longer hours and producing less products due to a decrease in productivity.
What causes productivity to increase or decrease?
Labor productivity is the output per worker or hour worked, influenced by factors such as workers’ skills, technological changes, management practices, and changes in other inputs like capital. Multifactor productivity (MFP) is output per unit of combined inputs, typically including labour and capital but can include energy, materials, and services. Changes in MFP reflect output that cannot be explained by input changes.
In Australia, the Australian Bureau of Statistics (ABS) produces measures of output and inputs for various industries, sectors, and the economy as a whole. Productivity growth contributes to economic prosperity and welfare for all Australians.
📹 Ray Dalio Reveals What NOT To Do During A Recession
What the heck is going on with the debt in the US? Ray Dalio (Investor & Hedge Fund Manager) joins Zachary Crockett to discuss …
The recession we need is one where the big companies that are “too big to fail,” fail and all the people that got screwed over get the real bailouts so they can create new small businesses. Increasing competition and decreasing monopoly. Along with better stabilizing the economy and reducing the most suffering long term. A decent example of this would be Iceland.
I’m not kidding when I say that the market crash and high inflation have me really stressed out and worried about retirement. I’ve been in the red for a while now and although people say these crisis has it perks, I’m losing my mind but I get it Investing is a long-term game, so focus on the long run.
on a fundamental level i agree the issue though is that we aren’t just dealing with companies anymore but megacorporations. whenever we go into a recession only the strong survive works, until you have companies so full of capitol and assets that they can literally weather any storm. once the storm passes they buy up all the removed competition until it is literally only them, they buy out the new competition, stop innovating because there is no competition to compete against, and focus on absorbing as much money from the consumer as possible with things like planned obsolescence. they became so powerful they literally influence entire countries, and some have even more power than the countries they operate out of. the warehouses that collapsed a while back as i’m sure everyone has heard got tornado warnings but the company believed it knew better and ignored the warning and order people to keep working… and they did because the handful of companies that own everything have too much power and a recession would only let me acquire more.
“they are also effective at getting rid of underperforming workers” Man I’ve been in the work force 22 year and I’ve never had a single job that made me felt like I mattered no matter how hard I performed, we’re all just cogs in the machine, discs to put on a grinding wheel until we’re ground down to nothing. Maybe people are waking up to the fact that we shouldn’t have to kill ourselves for a paycheck when that paycheck doesn’t even give us the ability to survive.
There’s also the “The Cantillon Effect”, which exacerbates wealth- and income-inequality. When the money supply is expanding, rich people tend to get the new money first (before prices rise), and see less inflation, while poor people get it later and see more inflation. It’s part of why trillion-dollar corporations can scoop up single-family homes but more & more average people can’t.
I think one problem with the assessment about the benefit of an economic downturn is the foundation of many economic theories: they assume a rational human being behaving rationally. When it comes to reducing the workforce, this then comes in the form of assuming that the underperforming staff are the ones to be laid off first. Having been employed through several economic downturns and having survived the cut, I can say for certain that this is not my experience.
Well said EE. When you stop small wildfires, it weakens the forest and allows for the old, weak growth to strangle new life. Eventually, the whole biome is vulnerable to burning down. The economy is similar. Keynes was a brilliant man but his theories willfully ignored the fact that no one wants to pull back fiscal stimulus when they need to.
A recession as bad it can be, provides good buying opportunities in the markets if you’re careful and it can also create volatility giving great short time buy and sell opportunities too. This is not financial advise but get buying, cash isn’t king at all in this time! I have been reading of investors making about $250k profit in this current crashing market, and I need ideas on how to achieve similar profits.
I feel as though a recession is just going to enrich those well off further.. Our terrible housing policy in Australia has favoured investors and particularly early investors (most of which have paid off their loans). As prices drop their purchasing power arguably increases. Just seems like the middle and lower class will suffer as per usual.
If recessions are necessary tools to weed out unproductive businesses and workers, the key question that separates political affiliations from each other is, “What should society at large do with the people who failed to make the cut?” EE’s article cut off just before addressing this question, but I get it’s probably not his job to answer this
“Underpeforming employees” is comstantly adjusted, meaning that a stellar employee 10 years ago is now extremely slow and unproductive. As an employee, your exploitation will get worse in this economic system, which is why the number of hours worked every year creeps up and why you’re burnt out. Realize this, and you realize that nothing benefits you, neither recession nor good economic conditions.
Inflation begins when dollars are printed. Printed dollars are a data input to the CPI. The CPI print is the feedback loop from printed dollars. Keynesians have been trying for decades to print dollars to create inflation-used as a signal to show the stimulus is working. Then before inflation gets entrenched, deflate by destroying printed dollars. The problem here is the Fed didn’t remove the dollars it printed to stimulate. So the higher prices are here to stay for a while. The dollar strength is transitory. You will see a weak dollar once those bonds the fed has on its balance sheet become difficult to sell as higher yielding assets will be more desirable to investors.
An important thing to point out about the model of supply and demand is that it no longer works as a model. Both supply and demand are artificially engineered. Today companies will intentionally reduce the supply or demand of a rival business. Some are much better than others. Dumping perfectly good milk b/c the government gives farmers a check to ruin supply
Workers need improved conditions too! The ball has been too much in the court of employers up until now and quality of life has deteriorated to the point where most workers can’t afford the basics of home ownership and is completely out of reach for many! While inequality grows like a hockey stick we need a way to level it a bit or workers will just rebel.
It may seem inconsistent that we have a very low unemployment rate and are heading towards recession. But this is because we have changed the way we measure employment. A large proportion of the employed are under-employed part time and casual workers who are struggling to make ends meet. It is these very same people that will be laid off first, and they will need to be laid off in droves with the coming recession. If this is true, then the unemployment rate is going to skyrocket overnight.
Deflation will never be an endless cycle and in fact I feel we NEED deflation to happen now and than. People will still buy food and repair things they currently own regardless of cost of living. Sure some people may save their money for later but we all know the economy is always in flux and any deflation will end. What makes me pissed is Wages rarely if ever match inflation or deflation rates. But I bet my left foot that during a deflation governments will lower wages.
is there a way to model an economy in such a way that economic stability doesn’t require ever increasing (or even allow decreasing) consumption? because i felt like for most first world country, we are definitely over consuming goods we don’t need. In a way that are not personally responsible nor even beneficial but is still highly encourage in the current model of economy
What about companies that only reinvest 10-20% of their profits into themselves, and the rest is given to shareholders or owners in case of private company. What effects would it have if they actually reinvest more, increasing the salaries of employes, expanding more and speeding up technological development cycles? Left out that companies this way can employ sometimes tens of thousands of people on what is minimal expenses for them. And if the goverments don’t let them have their way, it is enough for them to mention layoffs.
Major issue is housing, cost of housing spikes, store owners need more to survive, too many people own more then 5 houses, this is extortion as it lock too many people into renting driving the cost of housing/rentals threw the roof, thus increasing the cost of everything, including materials to fix houses, heating/electricity production/gas Also ruins the market for industry because no one can get into it without lots of money
Competition is a very healthy part of the economy, as long as the competition is between the workers competing for jobs. Companies having to compete for workers is bad economics apparently. Wouldn’t want employees to have too much bargaining power, then companies might have to cut back on stock buybacks and dividends to afford paying employees more
The problem is that, unlike you said, big revenues don’t necessarily translate to good jobs. In fact, I’d argue that the opposite is the more common scenario. Good jobs often mean high pay which reduce decrease profit margins, while bad jobs increase profit margins. When all you care is the highest profit, you will squeeze out everything you can (and can’t) out of the market and the labor force. Cool vid tho
We often talk about how it is good to have an important economy, but I think it’s important to ask: what is the purpose of an economy? If the purpose of an economy is to ensure the distribution of resources to meet the needs of people, then, arguably, modern computational technology could mean a centralized, planned economy may be able to supercede the decentralized capitalist model as the most efficient method of seeing everyone’s needs are met. However, such a system would require a radical shift in cultural values away from purely what is good for the self in favor of what is good for the whole. Indeed, it may necessitate the removal of monetary values entirely in favor of a needs based model of economic distribution and complete elimination of labor in certain fields by automation. Such a system would harness one of the potential risks of automated systems. It would turn the complete removal of labor markets in certain fields into something not only sustainable but desirable.
I’ve been doing my own value investing for around ten years now – completely agree with this article. The distortions of the current government approaches are deeply worrying (The percentage of zombie companies in the S&P is very high, possibly the highest it’s ever been, some of the highest long term valuation measures of all time matched only by 1929 and 1999, etc), to say nothing of how straight up everything is a bubble (Equities, housing, you name it). I think when this all finally goes sideways, it’s going to be a big one; but, I do think – and hope – that things will eventually be better in the aftermath, as well.
Love this economics website, I just get the feeling we are going to be in need of some further new economics theory now that we are faced with some incredible modern challenges. The rise of AI and robotics on the supply of workers for one. The destruction of the natural environment and the lack of recycling for another. Then there is the lack affordability of housing. It seems to me that if you apply only the survival of the fittest, supply and demand, and other Keynes rules to these modern problems we are all going to be either at war or living in some ghastly society that nobody wants. If we are smart enough to invent incredible new technology, we had better get smart enough to add some new economics principles too.
I understand the cold hard facts presented in this article. But in reality, the only ones who genuinely suffer from these ‘necessary pains’ are the ones who are doing all of the work. Real humans suffer during these recessions; people get mentally unwell, physically unwell, lose their homes, jobs, friends, family. Since the economy is not a real living thing, it doesn’t have to deal with the fallout of going through these so-called necessary evils. Who cares if the economy comes back stronger if you now have PTSD from being evicted, anxiety from years of financial struggles or health problems from routinely skipping meals or eating poor quality food whilst the economy was bad? All the while the Owning class mostly breeze through recessions having masses of resources to keep them comfortable. A recession would be a little easier to bare if we had faith that we too could bounce back afterwards, obtaining the things we were working so hard to achieve before we had it ripped away… but for Millennials and Gen Z it would seem that life just gets harder and harder between each recession. Prices go up, don’t come back down and our jobs don’t increase salaries to match it. So we just earn less and less each year, all the while being told such price hikes are ‘necessary’ by people who have likely never had to skip a meal in their lives. I think we as a society need to take a really deep look at what is truly important, because if we continue sacrificing the less fortunate just to please The Economy, we are no better than our ancestors who sacrificed one another on an alter to a made up God just to ensure a harvest.
This article hits on something I’ve been saying for a while. The crash we are heading into now is not a new crash, it is the 2008 crash that was delayed through QE. Rather than letting the system reset itself, the Fed stepped in with QE and propped up the failed business models that led to the crash. It just reinflated the bubble. It didn’t create a new bubble. My fear is that this reinflated bubble will be worse than the original bubble.
As always, profits have a tendency to decline so the private sector uses their connection to government to keep their speculative value afloat. Which in turn creates a bubble that can only be resolved through austerity. The owners cash out and the working class get to carry the burden of an economic model completely comfortable with their immeseration.
Unfortunately instead of countercyclical policy we’ve seen procyclical policy. Large tax cuts in 2017 when the US had a solid economic boom going on were particularly poorly timed. Also during and after the pandemic it can be said that the government splurging out money in the way it did was too aggressive. Similar pro-cyclical policies have been seen in several other countries as well. The next downturn will be exacerbated by lazy and unprincipled policymaking.
You’re missing a qualifier. Recessions are necessary **for sustained economic growth**. However, to many individuals, economic growth does not mean better living. In order for economic growth to translate to better living, there must be real wage growth, adjusted for hours worked. That has not existed in the US for decades. For ordinary workers to want a recession that might make them homeless, there has to be something better on the other side, and they simply don’t see it. This is why some people will dislike your article. You are promoting something that causes them harm, but brings them no benefit. Yes, economic growth will bring benefits to some, but nobody really cares how many more zeros we can add to Jeff Bezo’s investment portfolio.
Shame that all that theory rarely translates cleanly into reality. Companies with disproportionate market power survive too. Some companies also gain disproportionate market power as a result. The housing market is inflated to obscene levels, but investors will do their level best to keep them inflated despite the downward pressure they put on consumer demand. Among other issues
Although it was a very delayed reaction, my local government actually ‘cleaned up’ their work force in very specific areas post the GFC. One property boom later and these exact public servants were the first to be rehired. No net improvement in quality unfortunately. With this in mind, I would love to see a article explaining why all levels of government (in Australia) pay much more than private industry for the same goods and services. Thanks for the regular great articles!!
I love this website partly because I am a novice at economic theory and thus all this intro economics is both informative and easy to learn. Wanting to learn more about this subject, I am wondering if there is a “speed limit” to growth. By this I mean, even if a product or process brought down the price of many products to very extremely low levels (say to almost zero) would growth still be limited? I love futurism sites like Isaac Arthur’s very much and on these sites, “wonder products” and tech singularities are discussed. I am wondering if economic theory should bring us futurism optimists down to earth.
😂. Yeah that’s all definitely true. I remember as I went from a very lean economy where I had to battle to get any sort of job and that work ethic was rewarded and then went into different labor markets where working to hard made others look bad or other types of toxic labor markets where production was often not the goal. Often they actually lock out productivity and can even creep up to a business level where completing or providing quality work was undesired.
Once again great article. One suggestion. In the Netherlands there is debate about part time work, given the shortages on the labor market. Some people argue the government should provide for some sort of a full-time bonus (e.g. a deduction or tax cut for the labor tax for the parts above .8FTE). I wonder whether this would work (if only people have other reasons than taxes to work part time). Perhaps a topic for a future article?
Love your content, but this piece was much more partial in that it seems to almost admire the ability of large corporations like Amazon to squash out competition, and applaud the “need” to flush out workers. Also attributing the closure of the Australian automotive industry to some sick days around public holidays is a pretty weak argument at best (you usually provide some good lines of evidence for your arguments, but to make this argument I think you need a few more points of substance). Competition in the market is important, but it doesn’t mean that competition needs to be a zero sum game. Massive corporations don’t need to completely squash out small operators to have a functioning market. When I moved to WA from the east coast I was shocked to see Woolworths and Coles couldn’t operate after 5 pm on the weekends, but then found out this gives an opportunity for independent groceries to compete with the big two players in this space.
Recessions for the benefits of productivity. A lot of economists focus on the need to increase productivity and wealth generation, but I wish the capital system could factor in the human side better. A slight decrease in productivity for higher wages, higher quality of life, and work choice for workers is obviously worth it if you think like an actual person and not a number optimizer. Businesses keep employees barely happy enough so that it doesn’t drastically lower productivity, they rarely do more than the bare minimum that is required to not effect them.
I think there are GOOD counter cyclical policies and there are bad ones- a good one would be governments doing more pruning of gov employees etc in a time of a hot labour market. The reverse is to not sack people and cut deficits too far in a recession. I think these things still preserve plenty of private sector discipline
Ideally we try to increase productivity while also giving a decent floor to everyone so during these poor times people don’t go hungry and still have a place to live. We should have the government try its best to redirect productivity into basic necessities like hosuing and health care, right now a lot of it just goes into generic business which doesn’t help the everyday consumer.
EE, I think the reset is here. Big Tech stocks crashing, soon this is spilling into the housing market considering the interest rates hikes. You have to keep diversifying well enough if you must stay up in this market. My diversified portfolio is still up 14%. It’s a much better deal than letting it sit in savings or checking earning near 0-1% interest.
Good article, but it does raise a question. As recessions cull the weakest elements of an economy, this is alright as smaller businesses and declining industries go bankrupt. However, what happens when the strongest elements of the economy are also on the verge of collapse? For example, in the wake of the 2008 Recession, many massive corporations that were keystones of the American and world economy nearly collapsed and were only preserved by bailouts. Would the answer still be the same where the economy is strengthened in the long run by the demise of those massive companies?
Avoid debt. Cut cost. Retired with a 7 figure portfolio and Receiving about 30k in dividends. Building wealth involves developing good habits like regularly putting money away in intervals for solid investments. My investment strategy with my F.A Rita Wildrin Mora gives me the best returns even during recessions. Its been a year of steady growth.
Problem is: At least in America there isn’t a worker problem. But workers get destroyed each recession 1) There is no guaranteed sick leave or vacation time 2) There is no guaranteed healthcare & welfare puts you in poverty and gets removed the second you make any income 3) We have an unlimited labor pool. Immigration, both legal and illegal, means tight labor markets can be relaxed without raising wages 4) The Fed thought natural unemployment was way higher than what it was meaning we never get a tight labor market So in short: You sound like a traditional economist whose ideology has lead to 40 years of stagnant standards of living
I think one of the other things that’s throwing the supply and demand out of whack is the increase in technology. Technological advancements decrease companies’ demand for labor because the new technology can perform a task cheaper and more efficiently than a human worker. The decrease in labor then brings a decrease in demand for products along with it. Except that the economy is designed for mass consumption, so that would have a disastrous effect on the economy if 90% of the population just starved to death. I think a new economic system is needed. The economy needs us to consume more than it needs us to produce in the computer age, and we need an economy that reflects that.
You forgot the one way of increasing demand that has historically worked best: Increasing the minimum wage. More money in the pockets of billionaires won’t sell more apples, haircuts or refrigerators. In the pockets of working and middle class people, it does. And no, historically it has not caused rampant inflation.
This is a pretty good explanation of basic economic theory and the role that recessions play. We only run into problems when it comes to how countries handle recessions that invertedly make recessions worse, the most notable example I can name is the theory of trickle-down economics which end up creating massive wealth inequality.
There’s a high chance that we will see a 𝐫𝐞𝐜𝐞𝐬𝐬𝐢𝐨𝐧 in the US in the next quarter.. thankfully. With this and everything going on, the stock market might continue falling over the next months or even years, but we’ll never know until it’s done. Best thing we can do is be prepared and take advantage of whatever opportunity arises as a result. We’ve been through hard times before, and I doubt we will never see them again.
Absolutely nailed it. We need the ‘pain’ portion of the cycle. The governments stupidly avoided it with the 2008 crash – the world truely needed to rid itself of some of those corrupt and inefficient financial institutions, but the governments bailed them out – avoiding the short term ‘pain’ and allowing them to continue to operate. Eventually it will be unavoidable, but there will be much more pain involved because they’ve let it go so long.
Woah, I’ve always thought that the Australian automotive industry went under largely because of structural problems like too many manufacturers in a small market unable to achieve economy of scale, and a lack of vision that kept the industry pumping out fuel-guzzling large sedans when there is no longer a market for them. Now it turns out that it was just workers taking too many sickies. I have been enlightened.
“Look around your own house and try to find anything that was built by the government” Ok, this was challenging until I looked at my ceiling that has original wooden beams from the 16th century and I remembered that I live in the first municipal building of my city. That was probably built by the government at the time?
I take issue with the perfect world supply and demand examples as historically suppliers are fully capable of inflating Demand by reducing Supply. Also using stagnation of wages as a downside of deflation is semi-moot when wages in the western world have been stagnant. I don’t mind the argument you make, but there are blaring flaws to what your giving.
The current situation is being created because those in charge of the economy (global and individual countries) care more about protecting the stock market than the cost of living of their citizens The pain won’t end till the Fed raises interest rates which will be painful in itself but is a survival necessity
You should do a speculative article on what would be likely to happen if the governments of the world’s major economies tried to bounce back from the coming recession by funding unprecedented investment in renewable energy infrastructure projects and essentially trying to speed up the green revolution and sever its dependence on Russian oil and gas by going green fast.
I for one wouldn’t downvote you for delving into the “necessary evil” of a workforce cull. The website is called Economics Explained and you have explained very well how this system works. I would argue however, that any system intrinsically sustained by human suffering is one we should at the very least start to revisit.
When markets are competitive and elastic, this analysis holds. However, some of the most important markets (housing, healthcare, etc.) are not very elastic, and many markets now have high barriers of entry, or super powerful companies that force out competition (most tech companies). In these instances, there is not much creative destruction to be found in recessions, except of course for the companies able to fire underperforming employees (although I have my doubts that they are able to bring any better workers in as a result). All in all, I need to see some hard data before I’m convinced that recessions are a necessary evil.
The problem with economics as theorized by most economists is that they accept extremely exploitative preconditions that become self-enforcing. And let’s not forget that despite the fact living standards have improved globally under the global capitalist framework that the price of this may very well include rendering large swaths of our planet uninhabitable.
I recently lost all of my reserves due to changing life circumstances, thankfully they mostly went to improving my life long term. This has put me in a unique position where I now have a good amount of stability and a decent room to start saving and investing long term over the coming years as many others struggle. This comes after having a had a very rough life before some shorter upsides so while I sympathize with everyone else right now I am hellbent on enjoying this opportunity.
Why do these conversations always end with everything being the worker’s fault. “…bad worker’s are the cause of inflation.” You never hear: “Inflation is cause by companies knowing they have pricing power. Companies will continue to push up prices until it causes a recession as goods and services become unaffordable by people.”
If you increase supply without increasing demand, and then things become cheaper, then wages slack, so people work less hours; then to me you don’t have a problem, you have reached the goal of all civilization– prosperity with leisure time. The fact that economist see this as “just as big a problem” as supply shortages just shows that economics is an evil ideology.
So an economic downturn can weed out under performing companies and under performing workers. So why do underperforming CEOs always leave with small fortunes as compensation for their being fired? After that this former CEO becomes CEO somewhere else. No real adversity except that person couldn’t keep their entire collection of exotic cars. But the everyday worker really must worry about the prospect of loss and homelessness. Why should we continue to allow such extreme discrepancies in outcomes when those extremes are so destructive to those at the bottom of the economic ladder.
Very entertaining to see all these armchair economists weighing in here in the comments on how they’d turn this all around and completely missing the point of the article. The closing statement put it best. We need pain to grow and we’ve been artificially avoiding it for too long thanks to the mindset of avoiding pain by any means necessary which has completely overtaken our society the past few decades. Right now the world is full on dope sick.
All these complicated capitalist economy huddles, can be solve by just eliminating them and redefine distribution. Say supply and demand, if it is not prices that are being adjusted, and in stead change it to production, and then you can see that more than halve of the complex system is gone, if people need it, increase efforts to obtain it, if there are surplus, apply that effort elsewhere. A currency system in the mix would just complicate things, making distribution of goods more delayed and wasteful. To stimulate economic activities that is manufactured by capitalist consensus, more currencies would have to be distribute, adding a complicating process in between the finished product, and end user.
As mentioned, the painful downturn makes a bell ring for the things that need to be fixed otherwise there is no coming back. Competition in a way only pushes us to actively improve ourselves to be “conpetitive”. With COVID, all the job openings occurring due to workers realizing there’s more to life than work (and stimulus off course) may be corrected by a financially harsh economic period that “forces” workers back into the labor market. Thus, entering the next cycle where with all the new “experiences” gained through the time off work, employees will seek for better and more competitive positions to allow such spenditure again. Maybe after this recession, the US may experience great production growth as factories and international conflict (china) push manufacturing back to the country. Also, just an opinion and I might miss many things as I am only human and a regular person
This article is (as Slavoj Zizek would say) full of ideology. My dude right here is really trying to justify millions of workers losing their jobs, getting their whole financial lives ruined (maybe for good, some of them might become homeless in this process) while big capitalists hoard more capital for themselves and thus widening the gap of wealth as capital tends to concentrate in fewer and fewer hands as something “good and necessary”. “…Not all of these workers will be rehired, which is another way that recessions can kind of do some good” I mean, are you listening to yourself, dude? You don’t need to justify and defend this feature of the capitalist system, what you should do is to advocate for a better economic system where this kind of things don’t happen anymore.
Something similar is happening in Malta right now. Most of the tourist traps who always mistreated and underpaid workers crashed hard, and fast. It did create a great opportunity for workers since you can finally get fair pay and attention to good work that gets rewarded. Sadly it’s a terrible time to be an employer even decent companies are finding it rough getting any staff.
It seems like our economy is like a child with a stomach ache and has the feeling it is going to throw up. But throwing up is very unpleasant and nobody really likes to do it, so you hold it in as long as you can but all this is doing is making you feel worse. Sometimes you just gotta let yourself throw up, it’ll be unpleasant at the time but you almost always feel better afterwards.
So if its survival of the fittest, how surely after a downturn the surviving companies that cornered the market should be broken up so the competition in the market isn’t lost. Also, isn’t the need for downturns obsolete since the great depression? That was the biggest boom/bust cycle ever and the cycle itself stopped until governments just decided booms and busts can’t be allowed to happen on that scale.
12:50 the recession / workers relationship is connected. Just as a recession where it is hard to find jobs weeds out low performing workers because they have more competition for the position, so too does a boom weed out low compensation jobs because they have more competition for the workers. Thus those poorly compensated positions are eliminated and the remaining jobs have less competition for workers.
I’m a little disappointed you didn’t touch on the difference between Austrian & the current debt based Keynesian economics. What most people don’t realise, & are not taught, is that Keynesian economies (fiat) have a provable 100% failure rate throughout history. Each dollar printed into existence under the existing system is a debt owed by the government (YOU) to the (& you touched on the fine line between what should & shouldn’t be privatised) to the 100% privately owned & operated “federal” Reserve Banks, with interest. One effect of inflationary currencies is the increasing reduction over time of a long term outlook on savings for the future in favour of spending now before the cost increases. These currencies start with the backing of some form of hard money like hold or silver but that backing is inevitably removed to enable essentially unlimited amounts of currency to be printed into existence to fund wars etc which would otherwise bankrupt a country in short order, this debases the supply & compounds the increase in inflation. This means you are borrowing from future generations & due to the inbuilt inflationary structure this debt can never be repaid. Eventually even servicing the debt (paying interest) becomes unsustainable & the economy collapses. But no you say, this can’t happen to which I say; Roman Denarius German (Weimar Republic post WW1) Mark to name but a few. Here’s a few examples of countries whose economies have collapsed when their currencies have experienced hyperinflation & stagflation.
where i live there is a huge labor shortage. ive been offered like 6 jobs in the last month. Everyone blames it on pandemic hand outs keeping people at home, but i think that the businesses in our area are doing really well ergo the need for workers. alot of people dont want to talk also about the local prejudice against workers of other nationalities. there are alot of people who are moving here from out of country but alot of them wont make it past the front door or businesses.
I argue (for those that think this hurts the middle class) that it actually does good. Example being that housing prices drop, rising interest rates help those that have savings, (not millions, let’s just say 30 or 40k) and basically will drive most prices down making things more affordable…. If you don’t have cash… we’ll things are a bit more sticky as your going to pay more to borrow of course, but at the same time it will prompt more people to save, which is a good thing… either way we need it. And yeah the rich won’t feel it much, but I’m not rich so I’m just gonna deal with it my way and not worry about that.
This whole article only convinced me further that capitalism is a failed system. It needs to go. When a series of highly damaging inflationary and deflationary periods are assumed to be the norm, the topic of discussion gets shifted in a harmful way. If we start by asking the question, “why are these boom-bust cycles necessary?” we end up pissing off a lot of grad students who write their economics papers under the assumption that it is necessary. More importantly, we begin to challenge the status quo. When a system has failed as catastrophically, and as often, as capitalism has the conversation should shift to looking for a better and entirely different system.
“In the same way that recession get’s rid of underperforming businesses, they are also effective at getting rid of underperforming workers.” I’m not sure if ‘effective’ is the right word. The people who get fired first when a company is in stormy waters are rarely if ever the people who’s underperformance caused the companies predicament. Layoffs are selected on social standing and hierarchical power. Work performance is but a small part of social standing. Company politics is social studies, not economics.
Some of the numbers people use to call these times the best ever are just not the same. People can say “We have lower unemployment than ever before”, but if the labor participation rate is lower than ever before, then you can’t compare the past to now. For that reason, things are probably already worse than economists looking at the numbers uncritically think.
You made a lot of points against giving people money because of an emergency but also talk plenty about doing it for bussinesses, one could say it’s because bussinesses produce wealth but you already said that it’s only if there are customers willing to buy. It left me feeling off, like you were jumping over one of your own points, but that’s an assumption based on what Wasn’t said
Recessions can have an impact on mental health and personal confidence that is almost always forgotten about entirely. The US birthrate has declined by 70% since 2008. Consumer confidence has declined by 40%, and remember the 1996 projections that said the global population would be 10,000,000,000 by 2050? Well we can forget about that, because people are too starving, depressed, and sick to have kids. If global trends continue, we will actually see a *net decrease in global population by 2060*. This decrease is particularly unhealthy because it is for all the wrong reasons. People aren’t just deciding, “well there’s too many people, I guess we won’t have kids”, it’s actually, “if we have kids, we’ll all starve to death”. This decline in population will absolutely destroy productivity and general betterment of the human race. We as a species should be ashamed.
In many systems there is no difference between a well paid worker who does their job at peak performance, or lowest possible load. Especially in government jobs. Everyone gets the same or different pay. The pay is not regulated by how much you do or don’t do. It’s by education, prior experience and demand. So a highly educated person with a high salary can do close to nothing, and still get paid more than the person doing the same job with a lesser education with a higher quality output. So what is the incentive to work harder when you know someone else get more than you for doing less? Or even better, takes part of the credit for doing a good job. Or this example. You have a worker with same education and experience. One works at peak performance and the other does the opposite. The one doing the most does not get any more pay. But they might get more praise and perks with the job. But that does not really work in the long run. The worker doing more will over time get complacent. Most likely quit their job for a better one or worse, lower their standards to the same level as the worker who does the bare minimum. What could fix this? Value the worker that does more with higher salary and/or promotion? Talk with, reprimand or fire the “useless” worker? What will the union leader do if you try any of this. All workers are equal in a union. And they will/have to fight as hard for the person even if they don’t want to. Maybe it is the company itself and its own leadership that is at fault?
Great article! I run a small business. But I don’t understand how when talking about how the government could encourage people to open small businesses, you did NOT mention lowering taxes for the working class, and de regulating industries to make it easier for people. Put a working guy’s money in his savings, most working class people have a dream of having enough money to start their own business. But when inflation, over regulation by the government, and the Federal Government is trying to INCREASE taxes of struggling people…. so THEY can spend OUR own money on whatever THEY think it’s best for…. Well, that DECREASES the amount of small business you’ll see starting up, and it DECREASES supply as people cannot afford to continue running their businesses at a loss. I blame 85% of this on Biden’s policies, and the rest can be blamed on the Fed.
“For God so loved the world, that he gave his only begotten son, that whosoever believes in him shall not perish but have everlasting life.” -John 3:16(bible) “the wages of sin is death”-Bible. Therefore God the judge has given man the death sentence due to man’s sin, but because of God’s mercy, he gave himself(god incarnate/jesus)to die on a cross for the sins of the world. That means he paid our fine and if we trust in him God can legally let us go guilt free in court/judgment day and have everlasting life with Him! “Go and sin no more!”-Jesus <3
Sooo…. what happens when the whole thing stops working. For example. We are heading towards a large food shortage. That will result in people refocusing on the basics, but the price for them will rise extremely quickly to the point, people just cant buy them (demand outstrips supply). And similar with energy. You dont have any “room” to move if there is no supply. And then economies start to just fail. Because everything else, suddenly becomes valueless – money, houses, cars, tvs and so on. This is a highly likely scenario starting to play out in front of our eyes right now. The “supply shortages” due to inflation and money printing, is putting everything in a very precarious position. More worryingly, there are no moves to rectify it??? Whats going on??? the UN, IMF and World Bank are just going to let people die in the millions? Is that what we’ve become? Sooo… what is the economist answer to this? When anarchy appears on the horizon, it often looks like something we can fix. When its banging at your door… its too late.
Can you imagine how un-Australian you have to be to sit there and say with a straight face “taking a sick day for a slightly longer weekend is a bad thing” I’m a Blue-Collar worker mate and I can tell you we’ve earned those extra days off. When you’re working in a factory in winter, sweating in your hi-vis all so your boss can say “this line went up”, you take advantage of everything you can get. It’s not “laziness in the workforce”. It’s a genuine need to rest the body and mind.
The policy of capitalism for the poor and socialism for the rich, or better said, socialized losses and privatized profits, is what causes the divide we are experiencing between clases. The concept of an egalitarian society is not suited with peoples desire to be rich. If everyone was rich, then everyone would have as much as everybody else, and none would be rich. Thus, our own desire drives US to organize society such that the rich get richer and the poor get poorer. And we view this as progress. Billionaires are sucessful, and we all want to be billionaires. And that implanted desire to have money, is what gives paper money it’s value, and is what prompts us to spent the best years of our lives, the best hours of our days, labouring towards this structure of wealth creation that benefits the owners of capital. This is why the “wealthiest in the world” are constantly paraded in front of US!!
Who really questions the reason for the unnecessary business cycle anymore. Economists act as if currency isn’t a construct and try to denote very controllable events in the market as “part of the natural process” or “volatility”. People panic because no one completely trusts the information we’re given. If the governments, banks, big corporations, and media weren’t so predatory then there would be no significant economic volatility. As resources became “scarce”, which is also hard to believe is possible, governments and corporations would align to provide relief. Not feed off the mass panic fueled by the media.
I have not thought a lot about these ideas – I’m just throwing them out there to see how people respond. 1- If printing too much money causes inflation, couldn’t government counter that by temporarily raising taxes on mega corporations by billions, large corporations by millions, smaller corporations by thousands and well off individuals by hundreds of dollars AND THEN BURNING THE MONEY? Do it publicly so it’s understood in a graphic way that the money supply has been reduced. 2- If there is a “danger” that stimulus checks would be saved, why not send out “gift cards” that have an expiration date? Consumer confidence or not, you’ll spend it if you’d lose it anyway, even if it’s to buy freeze dried survival rations.
yeah, giving people extra money for nothing can be harmful, but you tossed in that comment about $1400 checks, alluded to the US’s mid-covid stimulus, and insinuated that it was a bad thing. ignoring the fact that for many people – that wasn’t extra money, it was all the money they had. and $1400 once means fuckall. if the economy can be overturned and ruined with the piddly little stimulus the us government tossed out during the pandemic, then it’s not an economy that’s worth keeping.
Residental Real estate isn’t a ‘productive’ property. It’s an economic endpoint, a place where things that are produced go and stop being valuable. Residential real estate creates a designated physical space that creates potential capacity for product consumption. Obviously, they need residents capable of paying for them, but they aren’t going to live at work. Consumers who live in shacks and shantytowns are not major economic drivers. The better the residential space, the higher forms of economic consumption it requires. An apartment building may only ‘consume’ the bare minimum, but a single family home will buy those same items, in addition to lawn care services or equipment, more child care and entertainment products, and higher grade electronics for example.
So why does the government protect underperforming banking sectors instead of letting them die? They should just be replaced by the better performing companies. What’s really happening is governments get involved and the parasites don’t learn from the pain, they experience no pain – same as politicians who keep getting reelected and are wasteful of their people’s money. How do you fix that?
Without mechanisms to break up financial enterprises of a relatively large scale, “burning the brush to reduce the impact of major forest fires” ends up feeding the poor to the rich. The fix is not to rob the poor through inflation, taxation, or recession; rather to eliminate holding companies and subsidiaries, as well as promote single-industry-only businesses.
Tbh.. I find the phrasing in the last 3 minutes of this article extremely disturbing. It talks about the pain caused by a recession in very euphemistic terms. It talks about the economic pain, and glosses over the very real human cost of the fact that the means of survival is tied to employment. When people are made unemployed, some are able to get new jobs, and others die. This is a big part of why I consider capitalism to be an evil ideology.
The Australian automotive industry was too expensive and couldn’t compete.. The news article was bs and you blindly listening to it shows stupidity on your behalf.. Car pistons were costing hold Ford and Toyota around 18 bucks per piston. In Mexico the same piston cost 3 bucks including fraight. Wasnt the Australian workers being lazy, it was the strong unions that always pushed for pay increases which lead to manufacturers to move to cheaper countries