Are Recessions Bad?

on | Filed under Economics

By Richard G. Scott, December 20, 2008

The answer is yes. Recessions are unpleasant experiences for many businesses and the people who work for them, not to mention of course the people who ultimately lose their jobs during recessions.

So then if recessions are bad, then we should just ban them, right? Why would we want to keep having these pesky occurrences every few years if it makes so many of us downright miserable? Surely we can elect people to make sure that we are protected from recessions, with their powerful big government sugar daddy programs and bailouts. Yes, that’s the role of government, to make sure that none of us experience personal hardship as a result of the business cycle.

Unfortunately most people, including politicians and reporters, don’t even know what a recession is. A recession occurs when a country’s economic growth contracts for 2 consecutive quarters (a depression takes 4 quarters of negative growth). So with that yardstick in mind, is Canada currently in a recession? So far the answer is no. Not only have there not been 2 quarters of negative GDP growth, but our government has forecast 0% growth for 2009 in Canada. That’s not great, but it’s also not a recession.

Recession or not, in the technical sense, is really not the point. There have been 10 post WWII recessions of varying severity, each of which has been followed by the natural recovery of business strength. The point is that recessions are a needed component of the natural business cycle. Recessions remove the froth, burst the bubbles, and cool down excessive unsustainable growth. It is part of our free enterprise system and is taught in most first year economics classes. Businesses and economies never grow in a straight line. There are always peaks and valleys.

The good news is that left to its own resources, the system invariably emerges stronger than before. Recessions cleanse our economy. Businesses restructure, become more productive, create more jobs and ultimately are more viable than before. Some government help is always welcome, provided it is doled out in reasonable measures and does not disrupt the natural course of events to any great extent. Monetary stimulus in the form of moderate rate cuts, and fiscal stimulus such as small deficit spending are a welcome boost to the system, just as tighter monetary policy and budget surpluses come in the good times. Minor adjustments to the economic levers are not a bad thing.

What has happened here in Canada as we end 2008 however constitutes the biggest government intrusion into the private sector in most of our lifetimes, all in the name of averting a so-called economic crisis. This is a very dangerous adventure by our government, and could easily result in a precedent setting disruption of our economy. Once out of the bottle it’s very tough to get the genie back in again.

Such massive and knee jerk spending acts by our government will leave the country in a budget deficit condition for years to come. Other government programs will be curtailed, and hardships will simply be delayed or experienced elsewhere. The best thing in the end that governments can do is to interfere as little as possible in the private sector, which by definition has always taken the good times with the bad. The good times have always been longer in duration, and on balance have given us all an ever better standard of living.

But of course politics and economics are strange bedfellows, and politicians seldom look beyond the self interest of their own re-election.