Everyone hates recessions (excluding repomen), and with human ingenuity wethey should be able to make recessions go the way of 80's hair bands, and Pokemon. WeThey just can't seem to do it. Of course it doesn't help when you have people who believe that deregulation would work in the 21 century, regardless of it's failures in the 20th. You should panic cause I have no idea how to prevent recessions. Don't fret though, I have come up with a way to prevent recessions. I'd like a golden statue built right in DC, and a three day holiday named after me. It is the least that society can do for their savior.
Contrary to popular believe, and the rest of my diaries, this diary isn't snark.
In order to stop something it would probably be a good ide to understand it. George Bush proved this with his Middle East policy. Some recessions are caused by the "normal business cycle," and speculation, while others are be caused by supply shocks(1980's), disease, war, and some other stuff. Since supply shocks, disease etc aren't things we can easily control I'll be ignoring them, and just dealing with "business cycle" and speculation.
Many recessions start due to overinvestment, usually in durable goods. For example housing prices going up because everyone's buying them. This in turn makes everyone invest in the housing market to make money. Eventually everyone who can buy a house will get one. When demand goes for the floor there is still a lot of resource allocated for building homes. All the resources, employment, training, and money invested in the housing market suddenly becomes worthless. Companies stop makign a profit and have to fire workers who than stop spending, than investors see their investments become penniless, and stop spending. This causes the industries that were supplying the housing industry to go the same way, causing a chain reaction that leads to a recession. The statistics correlate with this.
The period from 1955-1960 had recessions that experienced contraction where residential investment, and durable goods were the catalyst. Real recovery from the down turns generally occurred when those two sectors began experiencing growth again.
Even though the 60's had several periods of contraction in these two sectors they did not turn into recessions, however GDP did grow at a slower rate, during those years.
The recessions and recoveries in the early 70's, 80's, and 90's were all similar to their predecessors.
The 00' recession follows the trend, but not as closely. I would venture to say that the reasons behind that is the Dot.com bubble popping, the Y2K Scare which caused slight overinvestment in nondurable goods, and 9/11.
The current recession (2007-20??) started as a housing contraction, followed by durable goods.
GDP data
I can think of several ways to counteract, and prevent this type of recession from occurring. Here's the list (list is not ranked in any order).
- Mass transit. Having a large part of your transportation expenditure going to mass transit decreases demand for cars, therefore making the auto industry a smaller part of GDP, thus it will have a smaller effect. Another good thing about mass transit is that it is more environmentally friendly, and possibly less costly. American cities spend 13.2% of their GDP on transportation while European ones spend 8.1%.
- Taxes/wealth redistribution
At the start, and early period of economic expansions governments could tax,, and restrict the durable goods industries(including housing), and/or demand for durable goods. This causes these industries to grow slower, and stretches the demand for their goods over a longer period of time. Stretching the demand would reduce overinvestment, and soften the crash, because their would be less money going to those industries at the time of the crash.
Also when demand for durable goods starts to weaken governments can slowly lower durable goods taxes, and provide the poor with more wealth. This would cause demand for those goods to stabilize, and die down slowly.
The other cause or augment to recessions is speculation.
Speculation and stock short trading
This article goes into detail about how speculation, and short trading is correlated with bubbles. Such as the tech boom, and the current housing bubble that has popped, and showered us with acid rain. Short trading, and speculation are basically like gambling. Short trading is were you buy a lot of stocks in a small company causing others to buy that companies stocks by making them think the company is doing well. When others begin buying you start selling. Short trading isn't based on investing, it is based on tricking people in order to get yourself some money, and at the same time hurting a company that now sees it's stocks take a nose dive.
A solution that the link gives is to tax all stock transactions. This is a deterrent to speculates cause every time a stock is sold or bought it is taxed. Long term stock investments based on the well-being of a business wont get taxed very much because those stocks aren't sold. Short traders get taxes a lot because they are constantly selling and buying.
Some other examples of speculation is how people speculated on oil futures. This speculation caused the price of oil to be determined by predictions of the future instead of the realities of the present, and supply-demand.
Oil futures and that stuff
Congress reinstated regulation on oil trading and futures in 2008. A diary by ConrnSyrupawareness goes into detail about it here