The Benefits Of Recessions
In general, recessions are painful. Unemployment surges. Assets, such as stocks, plummet. People see their retirement nest eggs evaporate in front of their eyes.
Some people try to point to the deflation associated with recessions, such as falling oil prices, as a plus. This is of course incredibly short sighted. Who cares that gas is cheaper if you don’t have a job anymore.
The benefits of a recession are long-term. It is mainly that a recession is a cleansing period that exposes and gets rid of many societal inefficiencies.
For example, let’s take our current recessions. The investment banks like Lehman Brothers and Bear Stearns have been destroyed by the credit collapse. While many people were laid off of work, those people’s labor was essentially be put towards an unproductive purpose. Those companies were taking excessive risk and leverage for unprofitable activities. It took awhile, but the deck of cards finally collapse. Now those laid off can find work in businesses where their work goes towards productive use.
In general, the white collar labor world has been filled with inefficiency. Rarely is the bus boy at a restaurant or the factory worker (unless he works for the UAW) grossly overpaid for inefficient tasks. But this has persistently been the case in the white collar world. Since white collar tasks tend to be managerial or indirectly affect a company’s bottom line, inefficiency in that realm can go undetected for quite awhile.
But with the current recession and the cost cutting that is necessary for businesses to survivive, they take a hard look at their work force and see what is going on. Companies cannot afford to pay their CEOs $20 million a year if the CEO is really not adding that much value that a replacement CEO would bring for $1 million a year. Fresh out of college kids are often not worth paying $120k a year to have them do a bunch of meaningless research.
People are cutting out spending that they did not care much about. Newspapers are being forced to go online since most people realized they don’t care about reading a physical newspaper more than the online version.
Recessions need to not let be spun out of control. We cannot allow for a deflationary spiral where perfectly good businesses are laid to waste because of short-term credit needs. Nevertheless, bubbles inevitably burst.
The good thing about government intervention is that it aims to prevent the situation from getting worse. The government will not and is physically unable to permanently prop up every inefficient business. GM’s labor woes will have to be dealt with, carmaker bailout or not. All of the government spending in the world will not save the fact that many hedge funds will have to close up shop since the world does not need tens of thousands of people investing our money for us in the market.
The tech bubble’s burst proved that you cannot just build a website and hope it will make millions eventually. Labor and capital was shifted out of the tech sphere and put towards more productive uses. Likewise, we have seen a huge bubble in credit-driven industries, which are primarily comprised of white collar labor. As these businesses get flushed out, many employees in these industries will have to find a new line of work that actually provides value to companies and society.