The Lowdown on Recession

Merriam-Webster defined “recession” as “a period of reduced economic activity”. It doesn’t sound all that bad, but why does it scare the US government so much so that it insists on calling the current economic situation as “not-yet-recession”?

How exactly does recession happen? Economists contend that recession generally occurs when the aggregate demand—or the demand for final goods and services for a particular time and at a certain price level—decreases to an inadequate level. The definition is pretty straightforward, but the strategies for combating it and its myriad effects vary according to different schools of thought.

For example, monetarism is a school of economic thought that emphasizes on the role of money supply in determining the inflation rate in an economy. According to monetarists, recession is best handled through expansionary monetary policies such as lowering inter-bank interest rates to raise the supply of money.

On the other hand, there is also the Keynesian theory, which advocates active intervention by the public sector to tackle economic crises. Keynesians support increased national government spending to boost economic expansion, as well as tax cuts designed to increase demand for goods and services.

Yet another school of thought contends that economic growth can be achieved by offering incentives to encourage suppliers of goods and services to continually produce. Called “supply-side economics,” this school of thought recommends tax adjustments and deregulation as means to boost production and supply, and spur economic growth.

Finally, the “laissez-faire” (French phrase meaning “let alone”) school of thought advocates the policy of non-interference by government and other external forces in the natural movements of the market. Laissez-faire economists believe that the best way of dealing with recession is to leave the economy alone and allow it to be influenced by natural market forces.