By Jesse Williamson
I prefer the old rule of thumb – “if your neighbour is out of work – it is a recession. If you are out of work – it is a depression”.
Unfortunately, economists prefer the more boring approach. The official measurement of a recession is two consecutive quarters of negative growth. Growth as measured by Gross Domestic Product (GDP) which is, to oversimplify, a dollar measure of all final goods and services produced and consumed by the economy. A measure of what we get done and what we create.
The June quarter was down seven per cent of GDP and the March quarter before that was down 0.3 per cent of GDP – a technical recession.
Most economist agree that a depression is simply a prolonged or severe recession. Some stipulating 12 months, others two years. At this point it is important to point out US President Truman’s oft-quoted wish for a “one-armed economist” so that he could didn’t have to consider “on the other hand”. I mentioned this because I said “most economists agree” – those who have spent any time reading about the “dismal science”, as economics is sometimes, unfairly referred to (and it is not just because of the jokes), will be aware of the often divergent views amongst its high-priests.
Economists fear recessions and depressions for the capacity reducing impact they have in the long run. Economists are obsessed with “runs” but none can really tell you how long any of the “runs” are You may have heard commentators talk about this lost productivity – well it is permanently lost. As the productive capacity of an economy shrinks because of a sharp shock – jobs are destroyed.
The Austrian economist Joseph Schumpeter talked about “creative destruction”, meaning that resources tied up in unproductive enterprises are liberated to be applied to more productive undertakings once the unproductive ones are dismantled by market forces – or more succinctly – they fail. This, however, relies on the healing power of economic growth.
These ideas can be hard to consider when you contemplate the social and emotional impact of unemployment particularly when positive economic growth may be some way off in perhaps – the mid-to-long run?
There are signs of green shoots in the economy so all is not lost. Some industries have experienced an improvement in their performance. It also comforting to remember that some of today’s most successful businesses were forged out of the fires of the GFC back in 2008. The share market seems to have shaken the downturn off in an almost miraculous fashion (I hope I do not regret writing that). The split path between small to medium business and big business is not a new phenomenon.
We all need to engrave into some piece of metal we own the phrase “this too shall pass”.