John Wilder has up an excellent piece on why recessions are good for the economy.
“I’ve shared this opinion before: recessions are good for the economy. Bankrupt businesses are good for the economy. Are they painful in the short term? Certainly. But they provide a great service – they clear out the companies that don’t add value to the customers.”
This is something that I’ve talked about before. Cleaning out the dead wood is not just good for the economy; it lets new start up businesses enter the market and succeed. That success is critical because a big reason why new businesses succeed is in being innovative. Innovation is one of the core concepts of true market capitalism. The beneficiaries of innovation are the consumers. With innovation we get better products at lower prices. Televisions and mobile phones are excellent examples of this concept in action. Note that there is no government interference in these markets. Partly due to that absence of government manipulation, these products become cheaper and better over time. Companies must innovate in order to keep attracting customers. Products in which governments interfere will inevitably get more expensive and progressively worse. Think healthcare or education.
Crony capitalism is the exact opposite of this. With crony capitalism companies manipulate governments to protect themselves. They do this primarily by encouraging governments to regulate their industries. These regulations are barriers to entry for new businesses. Established companies with office towers packed with their own lawyers absolutely love having lots of regulations as they have the means and expertise to deal with them. New companies attempting to enter the market have to devote a large amount of their productivity into meeting regulations. This comes at the expense of innovation, which seals their doom as they are unable to compete with the big boys and they cannot innovate their way into the market.
This is why the EU is a very bad idea, and it is also why every major established company in the UK are opposed to Brexit. They want to have a captive market where they can devote their time to meeting government regulations while dreaming up new regulations together with enthusiastic government bureaucrats. And the product that the company is supposed to be making? Pfft – who cares? The customer has to purchase it anyway, notwithstanding how awful it is, as they have a captive market. They have no competition because it has been regulated out of existence.
This is another reason why recessions can be very good for economies. The dead wood is involuntarily cleaned out which leaves space for start ups. Of course, if all the old regulations are still in place then they still have an immense hurdle to overcome. This is one of the reasons why Trump has been so focused on eliminating regulations. As a businessman, he understands just how much of a barrier to entry they are.
“A decade is a long time without a recession. Based on the past experiences of the 2001 and 2008 recessions it’s easy to come to the conclusion that the longer you wait to address a problem economy, the bigger impact it will have on people’s lives. Heck, the longer you wait to address any problem, the worse it becomes.”
Australian politicians love to boast that the country has gone without an official recession since 1991. In equal measure, the same politicians are absolutely terrified of the inevitable recession landing on their watch. Australians should be worried too because our politicians are so clueless and inexperienced with these matters that when the next recession hits, (and it will most probably be a depression), they will attempt to fix it. The only way to properly emerge from a recession is by government getting out of the way. In other words, government must resist the urge to fiddle with things such as manipulating interest rates.
The chances of that happening, of course, are near zero. So the next one won’t just be a big hit; it will last a very long time indeed. It will be the Roosevelt of depressions.