Cathartic recessions

Governments and their agents in central banks are pulling feverishly on the policy levers in a bid to lessen the impact of the downturn. Interest rates are being slashed, temporary tax cuts seem to be all the rage and governments spending on capital projects are being fast-forwarded in an attempt to pump prime demand and stabilize confidence, output and jobs. Within a year we may find that such measures have been effective in moderating the depth of the recession, or that the impacts of asset-price deflation in property and shares together with a closing of the arteries of credit caused by the crunch have made traditional macroeconomic policy instruments impotent.

But should there be this manic policy response in the first place? Painful as recessions are, they do serve a purpose. Hamish McRae writes in the Independent today about some of the benefits that can flow from a period of retrenchment and reflection.

“Recessions, slowdowns, squeezes, however you describe them, do serve a purpose. They force efficiency. They force our whole society to figure out simpler and more effective ways of doing things. Increasing efficiency is the only way our whole society – not just a few talented or cunning individuals – gets richer. Why is Germany the world’s largest goods exporter? Because its companies have lived through the fire, first of a high deutschemark and then joining the euro at too high a rate. Again and again the pressure on them has forced them to lift their game.”

It is inevitable that many good businesses go under during a recession whilst shadier rivals unearth a strategy to survive. But we shouldn’t automatically try every trick in the book to prevent recessions. They are part of macroeconomic cycles; they can sort out some of the wheat from the chaff. And they serve as a sober reminder of the need to avoid excessive borrowing and irrational confidence in the first place. The danger is that short term palliatives serve only to delay the inevitable. Britain is not alone in having an unbalanced economy with too little saving, a dependence on highly priced debt and not enough investment in creaking infrastructure. A recession can help to rebalance and its benefits should not be underestimated.