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There Is No Recession-Free Economy In The World

By: Gopal Alankar, Ph.D.
Mar-27-2009
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(The writer is a retired freelancer. He holds a Ph.D. in Administration and Management in addition to degrees in engineering. He enjoys writing on community related issues.)
 


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The American economy is the crucial issue of the day; it is the talk of the nation. Day in and day out Obama used spacious language filled with caveats that warned of the nearing doom reminiscent of the Great Depression. Sure that language was purported to get the stimulus bill passed. But the analogy used was far fetched. If some one tags it as topsy- turvy economy I would go along. But to tag it as the harbinger of human suffering is beyond one"s imagination. Such caveats fall within the realm of scare tactics.

With all its ups and downs, American economy still enjoys global supremacy. This is amply demonstrated in the run up to the first stimulus plan passed by the Bush Administration.

Invariably the American economy has a ripple effect on the world economies. This is hard to deny. The recent downfall of American financial institutions had a domino effect on the financial institutions abroad. The collapse of home building in America surfaced else where as a death knell for home construction. The near bankruptcy of the American auto industry put the global auto industry in a tail spin. When the Wall Street took a nose dive, the stock exchanges, FTSE of England, FCHI of France, XETRA of Germany, NIKKEI of Japan, HANG SENG of China and BSE of India reacted with a suicidal plunge.

Today"s economic crisis is global, and every industrial nation is following America in devising a stimulus plan of its own on the lines drawn by Americans. This is testament to the American astuteness in coming up with ways and means to correct an errant economy. So any talk of imminent American decline in leadership of global economy is preposterous.

Part of the lethargy for not addressing our current economic malady in time is that there is no clear cut simple and comprehensible forecast for national economy, which would have led to the arrest of the problem before it sprouted. We have the ability to forecast a storm before it rips through. We receive forewarnings before a volcano erupts. But we did not have credible data to predict a bad economy of the current type.

We should remember that everything about economy whether good or bad is known only after the fact. A good definition would have offered the consumers a smooth and timely adjustment to the impending crisis. The definition that we read in textbooks is mind-boggling. It challenges the intellectual ability of the run-of-the-mill individual to clearly grasp it. In saying so I do not disparage the intellect of our economists. They are great. Given the inherent difficulty in quantifying and predicting the behavioral trends of an economy, our economists have come up with excellent indicators to National Economy. These are,

. Gross Domestic Product (GDP)
. Consumer spending
. Exchange Rate
. Interest Rate
. National Debt
. Rate of Inflation
. Unemployment
. Balance of Trade

Most of these indicators are measurable but some can only be approximated. The consumer spending, unemployment rate and rate of inflation, are the cases in point. Added to this impreciseness is the fact that GDP has its own set of components comprising of Consumption, Investment, Government spending, Exports and imports. Lo and behold, the national economy sure is a complex subject!


President Obama"s belief that housing is the backbone of our national economy is seriously flawed. Housing is the sub-component of the GDP"s component, investment, but by no means is the backbone of a nation"s economy. Where would be housing if a nation reaches its zero population growth? Home builders plan their builds for probable new entrants into the housing market and not for the second home buyers. When people loose jobs, they postpone buying homes. New employees prefer renting an apartment to buying a home. Soaring property and school taxes will push the decisions on home buying to back burners.

Therefore, the National Economy resembles a multi-variable equation that has no easy solution. None can predict that it will be recessionary or inflationary ahead of time. It is, indeed, an abstract term that the Wall Street pundits and more so the politicians qualify rather than quantify it by saying "inflationary", "in recession" or "leading into depression" only after its state is known. These phrases are wishy-washy and bear no semblance to what is really in store ahead of us. Hence, the use of the qualifiers is symptomatic of the difficulty that arises from the absence of a good measuring tool for economy. This is an interesting subject to digress a bit in here.

Out of what is available today for a good measuring tool, some may argue that DJIA, the index of the stock market might be the best bet. I differ. Without adulteration it may represent the sum total of the performance of industrials and financial institutions, growth of energy sector, burden of foreign debt and severity of unemployment if and only if the world that we live in is a perfect world. But is it? We are living in an imperfect world treaded by charming Madoffs, greedy CEOs eying for fat bonuses for nonperformance, big investors clamoring for quick bucks by hook or crook and greedy reporters engaged in make-believe stock reports for ulterior motives. Consequently, the field of stock market is full of unethical characters and is riddled with crimes and manipulations.

Stock market suffers from the vagaries of the law of "demand and supply." The stock price escalates when the demand for it is greater than its availability. On the other hand the price declines if supply outstrips demand. This is the fundamental principle on which the stock market operates. Furthermore, ingrained in this operation is the skewy and goaded human psychology that reinforces risky decisions to sell or buy. Here lies the big problem. In the current stock market unknown to the unsuspecting mind, are the artificially inflated demands and supplies that serve the vested interests. Many small investors eagerly watch "Cramer"s Mad Money" for hints to buy or sell their holdings. They read Barons and Wall Street for a bright spark. A down-graded stock triggers a mad rush for a sell. A favorable discussion of a stock in the "Opening Bell" of CNBC channel perks up the interest of small time day-traders for a buy. We watch the big investors for clues to do what they did. If Bill Gates invested in Kodak, we blindly jump into his bandwagon. There is no rhyme or reason for these actions. It is all tutored psychology.

The products of recession are the results of this tutored psychology. A simple utterance of recession from Federal Reserve chairman, Ben Bernanke or Treasury Secretary, Tim Geithner will drive the stock market to tank. That spells destruction for the safety nest of the retirees or the 401(k) of the working young. But the inquisitive question that we all should ask is "Why would anyone want to invest in common stocks?" It can"t be for dividends because a vast majority of stocks have no dividends. It can"t be that a shareholder reaps the bounty when the company goes belly up. The harsh fact is that a share holder looses every thing when a company files for bankruptcy. The true answer is that we buy stock in anticipation of price appreciation. We speculate, based upon the information fed to us by stock analysts, that good earnings catalyze stock growth and so will its price. But what we fail to understand is why would the better earnings of a stock push its price up? The popular answer is "It is P/E ratio, stupid. A low ratio is an attractive buy." This is ridiculous. Think for a moment where would the price be if none want to buy the stock after the earning"s report. Theoretically it will either sink or stay where it was. The true answer is that it is all psychological.

Therefore, stock market does not fit the criteria for a true economic barometer. It is a field of psychological maneuvers artificially induced to outsmart each other in trading stock to get rich quick.

Politicians aspiring to political offices often use unemployment figures to gain an edge over their opponents. Unemployment has its own merits and demerits. A 10% unemployment rate is as disastrous as a zero unemployment rate. Both will wreak havoc on the economic health of a nation. An accepted optimum unemployment figure is around 4%. A figure below this will give rise to workers" demand for higher wages. Any figure above this will make the bargaining power of the workers weaker. A worker will be willing to work for a pittance.

In general unemployment is related to what we are required to produce, as opposed to what we are capable of producing, to meet the domestic and global demands for American products. If global demand slows down due to the emergence of foreign nations from underdeveloped state to developed state, the global demand for American products will simply fade away. The prospect of this happening is now real. Therefore, the government is not the sole reason for the current crisis. Growth in population and the absence of quality and innovative products for exports are two other reasons. But the government can do a couple of things in this regard - to discourage unhealthy growth in population and encourage research for new innovative products to invigorate foreign demand for American products. Laws should be enacted to discourage women to follow the example of octuplets" mom, Nadya suleman or toe the line of Daad Abdul Rahamn of Dubai who has fathered 84 children with 17 wives. These are more serious national problems than the bickerings for a large stimulus package for banks and industries.

The need of the hour for America is the foreign talent for research and innovation. It needs badly the brain power to sustain the leading edge technology that it excelled for years. One cannot achieve this by retrenching H1-B visa holders and packing them back to India. Obama administration should focus on legalizing the residence status of H1-B visa holders as opposed to legalizing the illegal immigrants crossing the borders in hordes like no tomorrow. Obama has received unprecedented support from the Indian Americans in his bid to the White House and now is the time for the politically active Indian supporters of Obama to broach this subject with his administration and seek a fair resolution to the issue. I believe that every H1-B holder who served this country for 5 years or more should be eligible for mandatory permanent residence.

Recession is an expectant phase of a natural economic course. There were eight recessions beginning with the recession of 1953, which lasted for one year. The last recession occurred in 2001 and was attributed to the dot-com bubble burst. It lasted for six months. Of these 8 recessions four were of 1 year duration, 2 were of 2 yr duration, one lasted for six months. The recession that we are in now is suspected to have started in January 2008. So if the past history is any clue to the length of a recession, I would imagine that the current recession may be over by the end of 2009.

The fervent chatter of recession on internet and TV media that aim to propagate distress signals does more harm than good. It drives the people to change their life styles by curtailing personal spending, liquidating bank accounts and deferring home purchases. These changes go against what is truly required to arrest the ongoing recession.

Of late, Obama has made recession a pet theme of his talks. Oodles of time he warned the nation of the onset of recession. On January 8, he said that the U.S. economy could stay mired in recession for years without bold action. On January 30, 2009, he warned, "The recession is deepening and the urgency of our economic crisis growing." On February 26, 2009 in Fairfax, Virginia, he added, "If nothing is done, this recession could linger for years." These are scary outbursts that neither help the recession nor the people subsisting on retirement accounts. Serious talk of recession should be confined to the inner meetings of the Treasury and Federal Reserve Bank and not air in public because recession is all about twisted human psychology.

Recession is an economic state and is not the economic measure. It is the degrading stage of a good economy gone sour. The National Bureau of Economic Research (NBER) defines,


"A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."

There is no standard benchmark for recession. America is in recession because the GDP stayed at 2.6% growth. By the standard of International Monetary Fund (IMF), if the average GDP growth sinks below 3.0%, the world"s economy is in recession. India is in recession because GDP growth in 2008 is likely to be less than 8.5% which it attained in 2007. For China, a 9% GDP Growth in 2008 is a recession because it is lower than the 13% GDP growth it attained in 2007. In general, if a country"s GDP growth does not follow a steady trend of beating the previous year"s GDP growth, it is viewed as "in recession."

The above criterion for recession brings home an important conclusion, which is that there is no recession-free economy any where in the world. If there were one, the GDP growth rate of that country would have already reached the unreachable infinity. Therefore, anyone promising a recession-free economy either does not know what the recession is all about or is deliberately engaged in political demagoguery.

To sum up, recessions are natural and cyclic; they come and go. Based on historical data, a recession, on an average, occurs every nine years. It can last for as short as six months or as long as two years. The essential point is that it triggers the beginning of a new cycle for GDP growth. It is temporary. To castigate it as a long drawn suffering is a figment of one"s imagination.

Recession has a bright side too. It instills in all of us the values of frugality, belt tightening, elimination of wasteful spending and family togetherness. It reinforces the virtues of kindness, generosity and love and concern for others.

Recession is an unavoidable correction to a GDP growth that has gone off on a tangent through unproductive and unrestrained spending of the government, financial institutions and industrial executives. It is a testament to the saying, "What goes up slowly, comes down heavily."


Gopal Alankar, Ph.D.

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