The Age’s Tim Colebatch has just penned the most astonishing claim:
“Prime Minister Kevin Rudd, apostle of economic morality, has overlooked one basic fact — recessions make most people better off. Our mortgage bills plummet, our taxes are cut, and as inflation sinks, our wages rise faster than the prices we pay.”
There’s an important analytic point that Colebatch is trying to make, but along the way, he’s botched it. Badly. I’m guessing he meant to say that recessions hurt some people more than others. That’s right. But he went further, claiming that they make most people better off. That’s silly. If recessions are so good for the majority, why aren’t voters clamoring for more of them?
Who loses in a recession? There’s the unemployed, and it is true that they are only a small proportion of the population. But there’s also the hidden unemployed, the under-employed and discouraged workers to consider. Add in those who are fearful of losing their jobs, and school leavers worried there’s no jobs waiting for them. Oh, and the unemployed aren’ t a separate 4.4% isolated from the rest of the population–each month tens of thousands of Australians enter a period of unemployment, and a recession typically raises the duration they go without work. Then there’s folks like me, who aren’t at any risk of losing our jobs. But lower aggregate demand will reduce wage growth throughout the private sector, and tax revenues are likely to take a hit, which will likely mean slower wage growth for public sector employees. Aussie stocks are already down by over one-third, and our superannuation accounts are suffering. I’ll concede that lower interest rates mean lower mortgage bills for borrowers, but equally Colebatch needs to recognize they also mean lower returns for net savers, and many of our grandparents are net savers. By the way, Rudd’s tax cuts aren’t free, either—they will show up in the future as higher taxes for today’s youth. And beyond the financial consequences, I’ve written elsewhere about the huge impact that recessions have on more subjective measures, like happiness.
If Mr Colebatch a single stick of evidence to back up his claim that “recessions make most people better off,” I would love to see it.
Recessions can be beneficial for the majority of people if one accepts Ludwig von Mises’ view that economic busts are a necessary correction for the excessive malinvestment during the boom. But obviously, that’s not what Colebatch was arguing.
A significant minority of politically connected individuals and corporations do benefit from recessions, however. These can be separated into two pressure group categories: (1) the people who benefit from bailout packages – i.e. pork disguised as “fiscal stimulus”; and (2) people who benefit from artificially low interest rates, i.e. pork disguised as “monetary stimulus”.
During recessions, everyone in positions of influence tries to leech off the taxpayer. Indeed, the academic cartel is benefiting nicely from the lobbying by universities for more government funding during these tough economic times.
So in summary, recessions may or may not be good for the majority (depending on whether one accepts Mises’ view), however they are definitely good for a significant minority of politicalaly-connected groups.
I’ve got another $950 in my back pocket, quite sound in my employment and looking more likely than ever to buy a house in the next 12-18 months. I’m feeling better off.
“If recessions are so good for the majority, why aren’t voters clamoring for more of them? ”
because people are much more frightened by any risk of a catastrophic event such as unemployment, than pleased with the small but pleasant benefits of lower mortgage payments etc
The number of people I have heard celebrating all the latest measures suggest that this ‘recession’ is looking good for the majority. Didn’t Keynes warn against being pro-cyclical?
Colebatch doesn’t mention it, but Ruhm’s work on mortality and recessions might be the strongest piece of evidence in favour of this notion. (Though discount rates would have to be low for that to work.)
“Our wages rise faster than the prices we pay” … this makes The Magic Pudding seem rational.