Depressions Cause a lot More Pain than Benefits-Becker

Some older theories of business cycles-usually associated with the "Austrian" school of economics- claimed that recessions and depressions were useful in helping to remove the poison from an economy that builds up during good times. For example, weaker companies are the first to go when the demand for an industry's product falls during recessions. Employees who are allowed a lot of slack during good times are forced to work harder during recessions in order to keep their jobs. Positive effects such as these may be somewhat important during very mild downturns, but they are overwhelmed during major recessions and depressions by the negative effects. I define a "major" recession as having an extended period of unemployment rates at 9 percent or more, coupled with declining GDP. It looks like the US and the world economies may be headed for such a recession for the next year or so. Economists have underplayed the cost to individuals of mild to severe recessions in part because they have neglected the cost of the "fear" generated by bad economic times. In his1932 inaugural address in the midst of the Great Depression Franklin Delano Roosevelt reassured he American public that the "Only Thing We Have to Fear Is Fear Itself". In fact they had a lot more to fear, but Roosevelt recognized the great importance of fear during depressions. In the present crisis too, consumers and workers have multiple fears due to various kinds of uncertainty. Homeowners fear that they may lose their homes after having used most of their savings as down payments on their homes. The employed fear that they will be laid off, while the unemployed fear that its duration will be quite long, and that they eventually will only get jobs that are much inferior to the ones they had. To be sure, some of the unemployed in many countries will receive unemployment compensation, but many unemployed American do not qualify for this benefit. Moreover, unemployed workers in this country usually receive much less than their earnings while employed, and after a while they run out of benefits, although benefits get extended during recessions. The fear about losing one's job interacts with fears about being unable to make payments on homes, cars, and other consumer durables. Unemployed persons start missing payments on their homes or cars. If this goes on for several months, they may have their cars repossessed, and their homes put into foreclosure, usually at a time when home prices are down a lot, so that can at best regain only a fraction of the equity they put into their homes. In addition, the burden of a major recession is not shared uniformly. It usually falls disproportionately on unskilled workers, the young, and those in shaky financial positions, which tend to be persons with lower educations and incomes. For example, the unemployment rate of high school dropouts is traditionally several times that of college graduates, so when the average unemployment rate goes from 6 to 9 percent, that of college graduates may rise to about 4 percent, while that of dropouts will increase to over 20 percent. This recession may be a bit different since the financial sector is being hit so hard. Individuals and families already in shaky circumstances get hit especially hard by major recessions. It is relatively easy to measure what happens to the unemployment rate during recessions and its differential incidence among different groups, or the number of persons who drop out of the labor force because they despair of finding a job. One can also measure relatively accurately the effects on profits, wages, the path of GDP and personal incomes, and other important variables. It is far harder to measure precisely the effects of serious recessions on individual welfare and happiness. Surveys of reported happiness find that workers who become unemployed are less happy than they were, and persons whose incomes have fallen reported a decline in their happiness, at least initially. Divorce rates and even suicide rates also tend to rise during major recessions, as does crime, discrimination against minorities and immigrants, and pressure toward greater protectionism. Relative to these major costs, the alleged benefits of a recession to the United States seem quite small, and some of them could also be costs on balance. For example, how many infrastructure projects can be undertaken when states are already running deficits, and face even larger ones in the coming months? The federal government will have a huge deficit during the next year, perhaps a trillion dollars, because of the $700 billion bailout, the stimulus package, and the expected sharp declines in tax revenues. A serious recession will certainly lead to increased regulation of business and labor markets. Some greater regulation of financial markets would certainly be desirable, as I have argued in prior posts, but some of the likely new regulations will be harmful, such as greater protectionism, wage-type controls over income of top executives, higher taxes on capital gains, and others. The decline in oil prices by over 50 percent to $60 or less a barrel will certainly help American consumers and companies since the US imports about 2/3 of the oil it uses. It is also helpful to American interests to have less revenue flowing to Venezuela, Russia, and some of the Middle Eastern countries. On the other hand, the US is a major exporter of grains and beef, and the decline in their prices will cause considerable problems for farmers. On balance, I believe the decline in commodity prices is a plus for the US, but not a huge one, especially if oil prices begin to rise sharply after the world recession is over. A serious recession will further erode the pay and bonuses of top executives at financial and other companies, which many will be happy to see. Managers of mutual and hedge funds and investment banks may have been making much more money than is justified by their productivity, but surely the misery inflicted on the lesser skilled workers, low income families, poor homeowners, and other economically weaker groups is not worth any benefits from a sharp fall in the incomes of those at the top. So my bottom line in discussing the question whether depressions have a silver lining is that any such lining is very thin and small compared to the major costs to households, workers, and small businessmen.

Comments

[justynianyo]

Raivo Pommer
raimo1@hot.ee

OECD-Papiergeld

Der Satz ist kryptisch: Liechtenstein akzeptiere die OECD-Standards für Transparenz und Informationsaustausch in Steuerfragen und unterstütze die internationalen Maßnahmen gegen die Nichteinhaltung von Steuergesetzen. So teilte es die Regierung des Fürstentums mit. Hinter diesem Satz verbirgt sich jedoch eine echte Revoulution: Liechtenstein beugt sich dem internationalen Druck - und hebt sein striktes Bankgeheimnis teilweise auf. Damit will das kleine Land sein Image von der unkooperativen Steueroase abstreifen.

Mit den USA hat das Fürstentum bereits ein Abkommen geschlossen, wonach Informationen in Steuerfragen ausgetauscht werden können. Es tritt 2010 in Kraft. Damit wird deutlich: Das Land wird sich im Kampf gegen die internationale Steuerflucht künftig nicht mehr auf das Bankgeheimnis berufen.

Seit Juni 2000 steht Liechtenstein auf der OECD-Liste der Steueroasen. Auf dieser schwarzen Liste zu finden sind derzeit auch Andorra und Monaco. Schärfster Kritiker des Liechtensteiner Bankgeheimnisses ist Deutschland. Denn viele Deutsche haben versucht, über den Umweg Liechtenstein dem deutschen Fiskus Steuergeld vorzuenthalten. Prominentester Steuersünder war der ehemalige Postchef Klaus Zumwinkel. Dieser wurde im Januar vom Landgericht Bochum wegen Steuerhinterziehung zu zwei Jahren Gefängnis auf Bewährung und einer Geldstrafe verurteilt.

[John1048]

Very nice site! cheap viagra

[John1048]

Very nice site!

[plastic injection molding]

what we really thinkis:
plastic jar manufacturer and good quality.

[Anonymous]

thanks all
ÿØÿ±ÿØÿ¥ÿ©

[Anonymous]

thanks for your post.perhaps you will like abercrombie

[Anonymous]

Very nice site! cheap viagra

[Anonymous]

Very nice site!

[Anonymous]

thanksss
ÿ¥ÿßÿ™ ŸÖÿµÿ±
--
دردشة مصرية

[Anonymous]

ÿØÿ±ÿØÿ¥ÿ©
___
صور

[Anonymous]

Great site. Keep doing.

[Anonymous]

Great work, webmaster, nice design!

[Anonymous]

Perfect site, i like it!

[Anonymous]

thanks for your

ÿ¥ÿßÿ™

دردشه

[Anonymous]

I bookmarked this link. Thank you for good job!

[Anonymous]

I bookmarked this link. Thank you for good job!

[Anonymous]

Very interesting site. Hope it will always be alive!

[Anonymous]

Great. Now i can say thank you!

[Anonymous]

دردشة برق

دردشة الخليج

[Anonymous]

Incredible site!

[Anonymous]

fKJZRN I want to say - thank you for this!

[Anonymous]

If you have to do it, you might as well do it right.

[Anonymous]

If you have to do it, you might as well do it right.

[Anonymous]

Great work, webmaster, nice design!

[Anonymous]

thanks to tell me that,i think thats so usefully----
tiffany jewelry
links london