Alexander Yoshizuka-Panijel
Professor Creaney
ENGL 110
11/29/2019
Silver Linings from Recessions?
Recessions, a tentative period of decline in economic output, are not at all associated with joyous and prosperous sentiments. Businesses close, workers terminated, confidence eroded, deepening the severity of poverty, indignance and distrust. Essentially, living standards plummet. In worst cases, recessions can have a permanent detriment on the economy that cannot be recovered, such as the loss of educational attainment by the youth can have rippling consequences in the future (“Iqbal”). The sentiment on recessions is more than clearand not a thought wavers otherwise, and this waver of thought is what I wish to research: What are the possible silver linings that arise from recessions? This question will be kept as broad as it is because the extent of the positive outcomes are very limited and rather trivial to the actual detriments recessions bring with it.
A recession begins with a combination of ‘conducive’ factors to nurture a recession. The following is one of many possible chains of events that leads to a recession: Firms overproduce at times when consumer demand is weak. This sends a signal to businesses to cut back on production, investment, and letting off employers. This ‘signal’ is propagated greatly by fear which is why the cutbacks are usually rather sever. This vicious cycle continues to degrade consumer’ purchasing power and firms’ revenue. Banks then loan less to the economy which slows the economy even more (“Seabury”). What this source does not explicitly explain is the source of this weak demand which can be anything from x, x, and x. This weak demand causes prices of virtually all things, goods and services, to drop. When firms are overproducing and are unable to adapt this this shift in demand, panic on the businesses sets in. Thus, stock and home prices see a considerable decline during recessions which creates an opportunity for a shift in wealth among socio-economic classes. Furthermore, interest rates also begin to drop during recessions in an attempt to foster growth in a slowing economy. This is a chance for consumers to invest and make use of low asset prices, houses and stocks, and interest rates. “For those who can take advantage, a recession could be a nice time to buy through a combination of lower housing prices and lower borrowing costs.” (“Carlson”)
For many, not all, stress and pressure are one of most potent drives in life. This drive can be for creating or reaching your personal goals which in itself can range tremendously from person to person. Such few events like the recession exist in the same sense of pervasiveness, influences on socioeconomics, and detriment to sentiments: War, natural disasters, and cultural revolution are some examples. These catastrophic events, however, have the chance to redirect many people’s paths toward a better life. It shapes and directs people’s life to somewhat better futures. The New York Times article by Ben Casselman, ‘The Great Recession Knocked Them Down. Only Some Got Up’, is what the article is. It interviews individuals that were affected by the financial crisis of 2008 more significantly than others and their stories on how they recovered. Not many of them do but some are able to change their lives around significantly (“Casselman”). Though this article does not encapsulate every household with set scenario, it boils down to how they played their cards. However, the harsh reality of things is due to their age, ethnicity, or skill level, they were not given the same set of cards to maneuver out of their struggles. This is especially highlighted in the following quote in another source: “The Great Recession did not affect all subgroups within the population equally; rather, the impacts of the economic downturn differed for different groups, according to their members’ gender, race, and ethnicity. Men, the less-educated, and African Americans were especially hard hit.” (“Arne”) A second source also highlights my claim in the following: “Entrepreneurs and business leaders often need to get creative when euphoria turns into fear and this can create some wonderful business ideas.” (“Carlson”) This quote, however, specifies entrepreneurs and business leaders which are a very small minority out of the entire country. They are at an advantage compared to the rest of the population as they are most likely with affluence and connections to capitalize the gains of a recession. As the quote by Arne shows this very fact, not all people will be able to benefit and see the silver linings out of recessions.
The theory of creative destruction is one developed by Austrian economist Joseph Shumpeter, he believed and advocated the necessity for recessions. The businesses that enjoyed prosperity with no real basis for their growth are cleaned out and the resources that the economy, as a whole, was allocating towards these businesses will have an opportunity to be re-allocated to the appropriate businesses (“Legrand”). During times of economic prosperity there is much, perhaps too much, alacrity and enthusiasm that rational decision making begin to wade. This causes a misallocation of resources which, over a certain extent, turns into a recession. The following quote: “Shumpeter believed that the process of liquidation and reallocation of productive resources which took place in the recession and the depression phases of cyclical fluctuations was not only an essential and unavoidable characteristic of capitalist evolution, but also was necessary, and ultimately beneficial, for long-run development.” Shows Shumpeter’s belief on the necessity of a reallocation from a time of over-jubilance to equilibrium.
A macroeconomic advantage of a recession is that the imbalance of a nation, the current account deficit, improves, especially after a financial crisis. The following quote: “Unlike in the 19th and the first half of the 20th century, current accounts generally have a tendency to improve in postwar recessions, even more so in those associated with financial crisis.” describes this (“Jorda”). This is important because while the current account deficit, when the budget is greater than the income of an economy, is often greater during recession as government programs, transfer payments, and projects increase during recession to help the people in need. However, when the economy is recovering from a recession, according to this source, the current account imbalance improves. This is important because the more prolonged deficit a nation goes into, each subsequent year, the more debt the nation will be into a foreign nation. This undermines the sovereignty of a nation and is usually aimed to avoid.
This paper, quite frankly, because of my niche research topic, felt rather uncomfortable and wrong to write about. Reading about the stories of victims who never recovered, not because of their lack of drive or motivation, but simply due to their circumstances, age, profession, skills, were not conducive for a recovery. A lot of the families that were most impacted were ones with no savings and little financial literacy. I believe that if our system was more ‘ready’ for events like these, the shortcomings could have been substantially less. This also brings into question of the robustness of the field of economics. Compared to 2018, which was a decade ago, a lot of things have changed. The way we consume and learn has changed and the thriving sectors have also changed. With many more opportunities and types of technological advances than 2008, the upcoming recession should not be as detrimental as 2008 one. We also are able to learn as we have an abundance of data that is readily accessible by everyone in how to prepare for it. Especially, in the end, it is the severity of the recession that dictates the level of detriment done to society. People of poverty or households with little assets to fall back on should receive the most amount of government stimulus.
Something I keep repeating is the fact that consumer sentiment is the main driver of the state of the economy. “Recessions and depressions create high amounts of fear. Many lose their jobs or businesses, but even those who hold onto them are often in a precarious position and anxious about the future. Fear in turn causes consumers to cut back on spending and businesses to scale back investment, slowing the economy even further.” (“Seabury”) In this quote, it implies that the economy is run by consumption, which is an overwhelming majority of 60 + percent, and without it the economy simply does not thrive (GDP growth). GDP is a main indicator of standard of living. My argument or point I would say is that the premise that the GDP, which stands for the standard of living or happiness of the constituents and so forth, is dictated and thrives off of consumption is rather counter-intuitive when the lessons learned from the 2008 recession is to not spend excessively and to save in case of a recession (“Iqbal”). Consumers are too reactive in the presence of a recession, they either start saving too much and not consuming which begins a chain reaction of recession like events or they don’t save at all and are the most affected by the recession. The consumer culture we live in today is, undeniably, built on the foundation of having to fit in and ride with trends. Fashion trends, brand trends, even dietary trends, and now lifestyle trends. I believe if the people learned some financial literacy, which can translate to the self-control of spending, which the current education system does not teach, will result in far fewer casualties and depth in recessions. These periods are never fun to live through but there is a bright side to the downside if you go into the next recession prepared, both financially and psychologically.
In conclusion, we have reached a point of sophistication in the fields of information technology and economics to not only predict but prepare greatly for recessions. It is enough for people to prepare and plan contingencies to ride the recession and even benefit off of it. People are able to benefit off it in terms of health, the likely explanation is the depression in consumption during recessions. During my arduous research in finding the silver linings in a recession, something that is rarely spoken, I came across an interesting research paper on the health benefits of a recession. The following quote: “the microdata reveal that higher joblessness is associated with reduced smoking and obesity, increased physical activity, and improved diet” shows that (“Ruhm”). The caveat in all of this is you must be prepared for a recession before it actually happens. It’s impossible to take advantage of lower asset prices, declining mortgage rates, and entrepreneurial opportunities if you don’t have your finances in order ahead of time. “That means ensuring you have a rainy-day fund set aside to see you through tough times. You need a portfolio that’s diversified enough to allow you to hang on when the stock market is getting annihilated and gives you enough dry powder to rebalance into the pain. Your credit score must be good enough give you access to borrowed funds when rates are falling. And your savings rate needs to be high enough to give yourself a margin of safety to put funds to use when everyone else is struggling.” (“Carlson”)
MLA Citations:
Arne L. Kalleberg, and Till M. von Wachter. “The U.S. Labor Market During and After the Great Recession: Continuities and Transformations.” RSF: The Russell Sage Foundation Journal of the Social Sciences, vol. 3, no. 3, 2017, pp. 1–19. JSTOR, www.jstor.org/stable/10.7758/rsf.2017.3.3.01.
Iqbal, et al. “The Deeper the Recession, the Stronger the Recovery: Is It Really That Simple?” Business Economics, vol. 46, no. 1, 2011, pp. 22–31. JSTOR, www.jstor.org/stable/23491632.
Jorda, Òscar, et al. “Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons.” IMF Economic Review, vol. 59, no. 2, 2011, pp. 340–378. JSTOR, www.jstor.org/stable/41290964.
Legrand, Muriel Dal Pont, and Harald Hagemann. “Retrospectives: Do Productive Recessions Show the Recuperative Powers of Capitalism? Schumpeter’s Analysis of the Cleansing Effect.” The Journal of Economic Perspectives, vol. 31, no. 1, 2017, pp. 245–255. JSTOR, www.jstor.org/stable/44133959.
Seabury, Chris. “Perhaps Recessions and Depressions Aren’t So Bad.” Investopedia, 28 Sep. 2019, https://www.investopedia.com/articles/economics/09/lessons-recessions-depressions.asp.
Ruhm, Christopher J. “Are Recessions Good for Your Health?” The Quarterly Journal of Economics, vol. 115, no. 2, 2000, pp. 617–650. JSTOR, www.jstor.org/stable/2587005.
Casselman, Ben, et al.“The Great Recession Knocked Them Down. Only Some Got Up Again.” The New York Times, 21 Sep. 2018, https://www.nytimes.com/2018/09/12/business/great-recession-2008-anniversary.html
Carlson, Ben “When the Next Recession Hits, 4 Good Things Could Happen.” Fortune, 19 June. 2019, https://fortune.com/2019/06/19/next-recession-assets-mortgage-rates/
