What is an Economic Recession? The serious consequences of Recession

Many economic theories try to explain why and how the economy can temporarily halt its long-term growth trend and fall into a recession. These theories can be broadly classified as based on economic, financial, or psychological factors, with some bridging these elements.Some economists focus oneconomic changes, including structural shifts in industries as most important.

Examples:

Strong, prolonged increases in oil prices due to political crises can increase costs across the economy, while a new technology can quickly render an entire industry obsolete, leading to a recession as a logical outcome in both cases.

The COVID-19 pandemic in 2020 and the public health restrictions applied to check its spread are another example of an economic shock that can lead to a recession. It can also be the case that an economic shock merely accelerates the onset of a recession that was already happening due to other economic factors and imbalances.

Some theories explain recession dependent on financial factors. These issues often focus on credit growth and financial risk accumulation during the good economic times before a recession, credit tightening and money supply reduction at the start of a recession, or both.

Monetarism, linking recession with insufficient growth in money supply, is a typical example of this type of theory.

Psychological-based theories of recession tend to focus on over-exuberant economic booms and deep-seated pessimism during recession periods to explain why recessions can occur and even be prolonged. Keynesian economics focuses on psychological and economic factors that can reinforce and prolong a recession. The Minsky Moment concept, named after economist Hyman Minsky, integrates psychological and financial frameworks, emphasizing how market exuberance in bull markets can distort economic agent dynamics and encourage unsustainable speculation.

Consequences of Economic Recession

Measures to Overcome Economic Recession

What Solutions are Applied to Prevent Economic Recession?

• Tax Reduction: When governments reduce taxes, they often have to pay the price by increasing budget deficits due to receiving less tax revenue, but the economy receives an overall boost, helping consumers have more money to spend and encouraging more spending. If the trend of consumption increases, the demand for goods and services must also increase, creating jobs and stimulating the economy.

• Increased Government Spending: Government spending itself is a component of GDP, so any increase here will create an overall boost in the economy. However, this may come at a long-term cost – through higher inflation rates or higher taxes. Both of these can cause a significant decline in economic growth. Public work programs and investments in infrastructure help put money in the hands of workers, helping them to go out and spend, while also promoting a stronger economy. At the same time, such programs are more cost-effective as the government doesn’t have to pay welfare benefits for those they employ. So, instead of paying benefits, the government is paying wages – meaning the costs are lower.

• Lowering Interest Rates: By lowering interest rates, central banks essentially put more money into the pockets of consumers and businesses – encouraging those who save money to spend it. Lower interest rates also mean businesses have to repay less capital – creating a boost in company cash flow. Lower rates also make borrowing cheaper, creating opportunities for companies to invest in better equipment.

• Deregulation: Overlapping and complex regulations make it difficult for many businesses to operate and incur labor and cost expenses. When complex regulations are removed, it helps businesses operate more smoothly, reduce production costs, and lower product prices.