Argument: Recessions are not a necessary evil

Issue Report: Bush economic stimulus plan


  • Mike Moffatt. “Are recessions good for the economy?” Retrieved 1.22.08 – “While the logic seems sound, it doesn’t seem to match the data. If recessions were necessary to ‘clean the fat out of the system’, we’d expect there to be a lot of bankruptcies and firm closures during recessions and little during booms. The data, however, does not support this as you can see in the table on the bottom of the page [see article].
I have data for five different years, 1990, 1995, 2000, 2001 and 2002. The only year in the chart that overlaps with a recession is 1990, as the National Bureau for Economic Research indicates that the United States had a recession from July 1990 until March 1991. For the five years here, the GDP growth rate was positive in each year, from a high of 3.8% in 2000 to 0.3% in 2001.
Notice how little firm closures differ between these five years. We do not see great differences in firm closures between periods of high growth and periods of low growth. While 1995 was the beginning of a period of exceptional growth, almost 500,000 firms closed shop. The year 2001 saw almost no growth in the economy, but we only had 14% more business closures than in 1995 and fewer businesses filed for bankruptcy in 2001 than 1995.
Rostenko is correct when he claims that firm closures are a necessary part of capitalism since it allows ‘resources (skilled workers, capital) [to be] freed up to be deployed more efficiently elsewhere.’ When we look at the data, though, we see that we do not need recessions for this to occur; firms do not close that much more frequently in busts than in booms. So at least in this regard, recessions are not necessary at all.”