How Does an Economy Turnaround?

How does an economy turnaround? That is the big question in Washington D.C. and around the country. Some say it is infrastructure spending while others say it is tax cuts. Usually the entire debate is focused around what will stimulate the economy enough to lift it out of the recession we are in. Of course this assumes the government must do something to turn the economy around, and that without government action, the economy would simply continue in a downward spiral. At least that is how a lot of the discussion goes.

Of course the flip side of the question is how does an economy go into a recession in the first place? If the question is asked at all, the answer usually finds a nefarious actor to blame. During the recent political campaigns, the candidates usually blamed greedy Wall Street types. Many blamed the former President and his political party - usually ignoring that the other political party controlled the Congress since 2007 - which actually sets the federal budget and makes law. It sort of begs the question whether a nefarious actor has to be found to blame at all for the variations of the economy. Do those nefarious actors get credit when the economy does well? Usually not. Besides, different parts of the political spectrum have their own nefarious actors to blame, lambast, and ridicule. It usually only adds to the acrimony in politics rather than help to solve any problems.

Another way to look at recessions, recovery from recessions, as well as expansions of the economy is the business cycle. Just as there are cycles for many things, including the seasons, there is a business cycle for an economy. In general, economies tend to expand for a certain time, peak, then start to contract, bottom, and start recovering. Sometimes the cycles are longer and sometimes they are shorter. Usually when economies are expanding, they reach a point when they have outpaced the capacity of that economy to continue expanding, and the economy has to contract. It usually contracts until the forces in that economy are in a state to expand again, which is usually called a recovery. Hopefully, the economy continues to rise overall from one cycle to the next. The business cycle usually occurs without any action from the government. This means the government does not have to do anything for an economy to recover. It usually happens all on its own.

Of course politicians do not like to say this. They are elected to do something, especially when an economy takes a downturn. They like to indulge in big talk about how they are going to take action to turn the economy around, even though it will likely do so all on its own. I think the government can help in an economic downturn, as long as the actions it undertakes helps the recovery that usually already occurs all on its own. The government can also help those hurt by the downturn, since the churches, charitable organization, communities and families who usually help are also hurting. This is similar to the field of medicine where the best cures work with the natural ability of the body to heal itself. What I worry about is that action by the government can work against the natural ability of the economy to recover from a downturn and thereby extend the downturn -possibly even turning a recession into a depression, which is simply an extended recession.

A lot of scholars are reexamining the Great Depression to determine if this happened. They are examining actions by the government under both President Hoover and President Roosevelt to determine whether government action extended the Recession of 1929-1930 into the Great Depression which did not end until the start of World War II. I think this is a worthwhile study that is very relevant to our current situation. I will discuss their research and conclusions in a following post, perhaps the next one, though I have wanted to do one about Out of the Silent Planet for a while.