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The cartoon above illustrates how growth and recession work in business cycles. As we have mentioned earlier in the semester, recession is defined as a time of decline in income, total output and employment in the economy. The amount of time a recession lasts is on average about six to twelve months although some can be longer are called depressions. After years and years of observation, it is popular thought that the consumers pull an economy through a growth stage, as is illustrated above. When consumers feel like they are financially secure enough to spend their money then they stimulate the economy with their purchases which moves it forwards. When an event occurs that consumers no longer feel safe spending their money then they tend to save it up and that does not stimulate the economy because of the lack of demand from consumers. Keynes came up with the theory that lack of Aggregate Demand is a major cause of economic recessions. Because aggregate demand determines the country's final output, it is made up of four factors: consumption, investment, government spending, and net exports. This shows that simply getting people to spend more money is not the only answer of getting out of a recession. The complete answer to turning an economic recession into a growth still does not seem to have been found based on the state of our economy today and it is a rather big problem. As illustrated above, consumers are what pulls the economy through the growth stages with their purchases, because those purchases stimulate all aspects of the economy, but when a recession hits, the consumers are hit rather hard by the economy that it once helped be successful. According to the NBER, recession not only affects consumer spending but it also affects the real GDP of the country, real income of the people, employment of the people, industrial production and wholesale and retail sales. Today we have a larger than average percentage of people without jobs and many have lost hope in getting back their previous job or getting a new one period because there just don't seem to be any out there. Consumers are also hit with inflation which makes what little amount of money that they are making not go as far as it once would have. It seems that if an answer to fixing all aspects of the economy by making everyone and everything work together to collectively increase aggregate demand in order to get out of the recession, the consumers will continue to be hit the hardest by the economy.
Maggie, I feel like the cartoon above is a good representation of the economic recession as well as growth in the economy. However, I’m not completely sure that I understand your definition for recession which is “a time of decline in income, total output and employment.” In my opinion, I feel like this was a little confusing. I think if you would have put it into different words it would have made more sense. For example, “a recession is a significant decline in the economy, lasting two consecutive quarters.” You could also have mentioned that a recession can be seen in GDP, real income, a rise in unemployment and sales; or simply that in a recession, businesses usually cease to expand while GDP diminishes, unemployment rises and housing markets increase. I do agree that in the cartoon above, consumers do stimulate the economy through the consumption function and savings. As far as aggregate demand being a major cause of economic recessions, I think you should consider other alternatives that contribute to an economy’s fall into a recession. In my opinion, inflation which refers to the rise in the prices of goods and services over a period of time is a major cause of recession. Inflation can occur for a variety of reasons such as, higher production costs and national debt. In the case of an inflationary economy, because prices are higher people tend to cut spending and increase in savings. Nevertheless, as people and businesses decrease expenditures in order to cut costs, this causes GDP to decline. Following the decline in GDP, unemployment rises because businesses start to lay-off workers in order to cut costs; due to this, the economy falls into recession. In regard to no jobs, societies think it’s the lack of skills from individuals. However, if this was the case, then the unemployment rate would have been low a few years ago. Unemployment has risen about 2% since 2007. Therefore, the lack of jobs is due to the fact that businesses are not doing well enough to be in need of workers; it is not the workers that are lacking, but rather the work itself, I feel. Lastly, we have talked about the Phillips curve, which refers to the inverse relationship between high unemployment and inflation. The Phillips curve theory faced society with the tradeoff of living in an economy of high unemployment or in an economy with recession; therefore, if we get out of a recession, it is likely inflation would hit the economy.
ReplyDeleteMaggie, you picked a great picture to represent what the current economy is going through. It was the home owners (consumers) who helped fuel the most recent financial bubble that we experienced in 2008-2009. Once that bubble popped, it seemed like every financial "genius" was pointing the finger at the home buyers for going outside of their means, but they never looked in the mirror to see that it was their side of the fence that placed the homebuyers in danger. In your picture that wagon that says "Economy" could also be seen as the financial sector running over the individuals who helped pull them up to the levels that they reached. When it comes to how to fix this problem we currently have, low inflation, low unemployment, and low GDP growth, it would be normal to look at the GDP equation to see what needs to be increased to help the economy to recover. Consumption, investment, government spending, and net exports are the parts of the equation but there is one that I think needs to hold off for a second. That would be the government spending. We have already tried it with Bushes TARP stimulus and then with a much bigger stimulus Recovery Act by the Obama administration. The Bush stimulus all it did was reassure banks that if they create a problem, then the government will step in and act as a lender of last resort with endless lines of credit to help the survive. The Recovery Act by Obama all it did was pump money in the economy by saving failing companies (GM and Chrysler) and creating fake job growth numbers. With all the government spending done by those two administrations then the economy should have been out of the current hole that it is currently still in. Look at the other parts of the equation, consumption, investment, and net exports. When it comes to helping these parts I firmly believe in the Austrian economic point of view. That view is very simple, government intervention should not be used to prevent and economic recession, but instead allow the economy to run its course and it will fix itself. They believe in the idea of creative destruction, "describes the way in which capitalist economic development arises out of the destruction of some prior economic order"(Wikipedia). In short, only the strong well prepared companies will survive an economic recession and the other will go to the way side. Once this happens consumers will have created confidence in the companies remaining, they will begin once again to spend money, which will increase investment by companies that will create the possibility for those companies to create more exports which will out do the imports creating greater net exports. That is just how I see that the country should try and get out of this slump that we are in as an economy. Once again I love the picture and it can be seen in some many different ways by economist.
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