We are faced with one of the most serious issues that this country has ever dealt with — and it is not the recession. Don’t misunderstand, the recession is a real problem, maybe even an disasterous problem. However, its seriousness is dwarfed by the horrible implications of the remedies the national government is frantically trying to implement before we catch on to what they are doing.

First things first though. As thinking conservatives, we seek to understand before deciding what action to take. This is in total contrast to the liberal approach, which is act now, act fast, and act radically, because we don’t have time to understand the problem or figure out how to fix it. So, as rational citizenry, let’s pause and consider the problem at hand.

Are recessions common?
The National Bureau of Economic Research (NBER), the organization that determines the official dates for periods of economic expansions and contractions, has identified 32 U.S. recessions since the mid-1850s. Looking at the whole history of America, we have had more than 40 recessions (and just as many recoveries).

What are recessions?
Most experts agree that it is an “official economic recession” only when GDP (gross domestic product*) growth is negative for two consecutive quarters or more. For practical purposes though, a recession is a significant decline in economic activity spread across the economy and lasting more than a few months. The average duration for a recession is 10 months, while the average expansion lasts 57 months, making the average business cycle 67 months. Since these are averages, some recessions/expansions are longer and some shorter.

How do recessions happen?

Nearly all modern economists believe that recessions are unavoidable. As you might expect, a healthy economy goes through periods of rapid growth, slower growth, no growth and retraction/recession (think negative growth). Recessions are a natural part of the cycle and set the stage for another growth period. Even though recessions are common and normal, we really don’t know what causes them, but the experts have a number of theories.

The most common theory says that recessions are caused by events that have a broad impact on the economy, such as high interest rates or low consumer confidence in the economy (people believing the economy is bad, which causes the economy to slow down). The most common “broad impact” is the mismanagement of the money supply. The Federal Reserve (the nation’s central bank, which is responsible for country’s supply of money) tries to maintain an ideal balance between 1) money supply, 2) interest rates, and 3) inflation (things getting more expensive). When the balance is lost, the economy can slip into a recession.

There are times, however, when a recession seems to be triggered by a traumatic incident that impacts a sector of the economy (housing, manufacturing, banking, etc.) or a very large business. When this happens the damage can spread to the rest of the economy. Traumatic incidents can include bad investments, stock market crashes, sharp price increases for critical items (such as oil), and shifts in the normal business cycle (such as manufacturing companies moving to lower-cost countries).

More often than not though, recessions are complex and confusing. The current recession of 2008-2009 (and perhaps beyond) was triggered by a number of factors, including:

• A rapid rise in oil and gasoline prices
• Government policies designed to increase the number of home owners put pressure on lenders to give loans to unqualified borrowers
• Housing prices rising rapidly for many years (also called the housing bubble)
• Rising interest rates
• The injection of lots of money into the economy by the Federal Reserve
• Bad Wall Street investments in “toxic” mortgage loans (sometimes called the greed factor)
• High budget deficits (the US government borrowing money to pay for programs it cannot afford)
• Collapse of the US Dollar (the value of the dollar in the world has dropped dramatically, which means foreigners are less inclined to invest in America)

What are the impacts of a recession?
We all know that recessions are difficult periods for the country, businesses, and often for individuals and families. Depressions typically increase the risk of financial emergencies, unemployment, foreclosures, and bankruptcies. In this climate, lenders also dramatically reduce the availability of loans and other credit, making it hard for people and businesses to financially survive a recession.

There are, however, some good things that result from a recession. Just like a diet helps you lose weight and be healthier, a recession can:

• Cause business and government to be more efficient and cost effective
• Motivate investors to trim their bad investments
• Encourage businesses and consumers to lower their debts
• Rebuild confidence in the dollar

Each of these steps are not only helpful in surviving a recession, but also help build the recovery that has always followed a recession.

How do they get fixed?

Recessions will always end, even without government involvement. Because recessions are painful, governments are rightly concerned about the impact on its citizenry. Since the national government is so large, it can have a huge impact on the recovery from a recession; government is in a powerful position to help speed up the recovery or extend it for years (even causing a depression as it did in the 1930’s) if it takes the wrong action. So what can the government do?

• Lower interest rates to make it easier for businesses and consumers to borrow money. If used well, this extra money helps stimulate spending and the economy, fostering a recovery. If used incorrectly, it can cause serious economic damage. There is a limit though on how low interest rates can go – you can’t lend money at 0% (or less).
• Print money and flood the economy. This will make it easier to get and spend money and could motivate consumers and businesses to spend their way out of a recession. That’s the good side. However, increasing the money supply has a really scary downside: inflation. If the government prints too much money, it can trigger a vicious increase in the prices of everything we buy, which would only threaten the economy further.
• Borrow money and spend it. Plunging the country into debt (budget deficit), the government can generate the funds necessary for it to spend a lot on government projects (think things like highways, bridges, government buildings, government programs, and more). Unfortunately, there seems to be no upside to this action and lots of downside. 1) Government spending is often wasteful spending, 2) Government projects are much more expensive than having the private sector do the same work, 3) Oonce the government spends more, it refuses to cut back to previous spending levels, forcing higher taxes or greater debt on the country, 4) Government projects take a long time to ramp up – often longer than the recession itself, 5) A lot of government spending is for political reasons and does nothing to shorten a recession, 6) The government is left with a huge debt that it must repay with higher taxes – higher taxes hurt the economy and contribute to recessionary tendencies. This debt, if big enough, will take decades to pay off. Spending proposals for the current recession are so huge that our grandchildren and great-grandchildren will still be paying off the debt.
• Use Tax Policy to stimulate the economy. By lowering taxes, businesses and consumers see immediate savings, have more money in their accounts and are free to spend (stimulate the economy) and grow their businesses. This action results in a very quick and powerful response from the economy. If done correctly, tax cuts increase business and income which results in more taxes. To illustrate: if you tax $100 at 40%, the government gets $40. If taxes are cut to 20%, the tax savings can be reinvested and grow revenues. Let’s say revenues grow to $300 because of the tax break. The government in this case gets $60 ($300 x 20%). This is the most powerful, immediate, and successful tool the government has in easing and reversing a recession. It has been used successfully to bring an early end to several previous recessions.

In my next post, I’ll take a look at the economic stimulus package being considered by congress.

*GDP is a measure of national income for a country. The most common way of measuring it is:
GDP = consumption + gross investment + government spending + (exports − imports)