The Recession We Need To Have | Economics Explained - YouTube

since industrialization modern consumer-focused  economies have followed the business cycle the  

business cycle is the observed cycle of  economic expansions during periods of high  

employment consumption and consumer confidence  and contractions during subsequent periods of low  

consumption employment and consumer confidence  these booms and busts as they are more casually  

known tend to have a frequency of about seven  to ten years and some economists have added that  

these cycles take place within larger cycles that  play out over decades or even centuries thankfully  

most economists will also point out that these  cycles tend to trend upwards as economies grow  

over time despite some temporary setbacks that's  all fascinating but is this boom and bust pattern  

of modern economics a bug caused by human nature  or is it a feature of the systems that we have  

built that provide us with some kind of benefit  a necessary evil of sorts we are currently living  

through one of the most trying times in our global  economy for the past five decades the world has  

shifted to favor free trade and globalization  all for the arrangement to be challenged with  

a global pandemic disrupted supply chains labor  crises trade wars and actual wars taking place  

on the doorstep of the largest economic region in  the world despite this most economic metrics are  

looking pretty good in the us growth is strong  unemployment is below four percent and asset  

markets are hovering around all-time highs but  has this only been achieved by subverting the  

natural order of things with the most expensive  and expansive fiscal and monetary policy decisions  

in history are we entering a new age where serious  downturns caused by genuine economic hardships  

can be avoided with piles of cash or is this all  just putting off the inevitable and potentially  

making it worse further down the road most of you  watching probably have a good grasp of the forces  

of supply and demand the quantity supplied and the  quantity demanded determine prices and prices in  

return determine how much of a good or service is  supplied and demanded this reciprocity means that  

markets tend to form an equilibrium where supply  meets demand and everyone is happy if supplies  

rise or demand falls then prices fall if demand  rises or supply falls then prices rise again i  

imagine this is probably not used to most of you  watching where this does get interesting is that  

economists can apply this same logic across entire  nations using aggregate figures aggregate supply  

and aggregate demand are the terms that economists  use to describe the total supply of goods and  

services in an economy and the total consumption  of those goods and services respectively economic  

growth can be achieved by increasing either of  these factors but in the long term you really  

need to increase both of these together to achieve  stable economic prosperity let me demonstrate why  

say an economy creates some new manufacturing  method that makes building everything much  

easier that economy would then be able to produce  more things which would increase aggregate supply  

increase supply without increased demand would  mean more goods and services are consumed all with  

the added benefit of lower prices but deflation  as this is known is not sustainable long term  

we explore the issues of deflation in  depth last month in our video on japan  

so i don't want to repeat too much here but while  on the surface falling prices might sound great  

it causes issues of stagnating wages investment  and consumption because people have no stick at  

their back prodding them to put their money to  good use economic growth caused by increasing  

demand without increasing supply is also possible  although equally unsustainable in the long term  

satan economy gears 1400 checks to all of its  citizens that means everyone has more money and  

can buy more things this increases total demand  if demand grows without an equal growth in supply  

then people are going to have to compete with  one another to get their hands on the goods and  

services that they want this competition normally  comes in the form of just paying more money  

the increasing price level of goods and services  in an economy is inflation and obviously this can  

do serious harm as well so the trick is really  making sure that an economy achieves growth by  

growing supply and demand more or less in unison  so how is this done growing supply is simple  

in theory you just increase the factors of  production land labor and capital you grow and  

train and experience workforce or attract foreign  workers to your country you then give them the  

space and facilities they need to add value to the  market be that working in a factory researching  

new technologies providing financial services or  anything else of value that can be supplied to  

the aggregate market of course simple in theory  does not equal simple in practice and forcing  

supply-side growth is unbelievably hard for  governments to do for a few reasons the first is  

that in almost all major economies the government  is not the primary supplier of goods and services  

most of that is handled by the private sector this  means that the government can't just order 100 new  

factories to be built in order to increase output  they have to somehow encourage the private sector  

to do it there are some very direct ways that the  government can do this like awarding government  

contracts to build anything from fighter jets to  bridges where this direct supply side spending  

fails though is that it doesn't normally supply  the goods that are truly demanded by consumers  

public goods are very important and as we have  seen in recent weeks there is true value in having  

things like fighter jets to protect your country  but you can't build an economy around stuff like  

this look around your own house and try and find  anything that was built by the government rather  

than the private sector it would be challenging  so the real solution for governments is to use  

more indirect methods to encourage supply-side  growth in their economies this can be done  

through government grants to motivate research  and development or it can be done through forging  

mutually beneficial trade deals or it can be as  simple as making it easier for people to start a  

business of their own one other more controversial  strategy is the privatization of public industries  

the theory is that the private sector can produce  things more efficiently than the public sector  

because they have market competition and a  profit motive you can probably see why this is  

controversial all i'll say is that there are some  industries that are best handled by the private  

sector and there are others that are best handled  by government deciding where to draw that line  

is really the hard part nevertheless there are  thousands of government policies in place across  

the world that are there to try and stimulate  business activity of course all of this means  

nothing if the demand is not there to go with it  businesses are ultimately profit driven entities  

so they are not going to operate unless a market  exists for them to sell their goods and services  

fortunately demand is a lot easier for governments  to control demand is a function of consumers  

businesses or government entities who are  willing and able to buy a good or service  

aggregate demand is a function of all of  these participants in an economy's ability  

and willingness to consume all of the goods  and services that economy provides increasing  

demand is as simple as putting more money in more  people's pockets and making them willing to spend  

it the more money part is actually easy just cut  taxes increase welfare or in extreme circumstances  

give money to people directly getting people to  actually spend that money can be a little bit  

trickier because of course they could just choose  to save it this is why consumer confidence is  

talked about so much in the news in general though  more money in more people's pockets will mean more  

people that are willing and above all else able  to consume okay great economies grow by increasing  

supply and demand it's harder for governments  to intervene in supply and it's relatively easy  

for governments to influence demand but why  does all of this mean that we need recessions  

there are two broad classifications of economic  downturns that we experience and by now you can  

probably hazard a guess at what those are demand  and supply downturns demand-based recessions are  

the ones that we are most familiar with and they  are the foundation of the cyclical business cycle  

during good times people get good jobs they use  those jobs to take out big loans they use those  

loans to buy lots of things and the companies  making those things use this revenue to give  

people good jobs this debt eventually needs to  be paid back which is what causes the debt cycle  

if someone was making a hundred thousand dollars  a year after tax they could spend a hundred  

thousand dollars per year but at some point  they might want to purchase a new car holiday  

boat holiday home or whatever that would mean  that they are spending more than they are making  

in that year they have two options to make this  possible the first is to forego consumption for  

a few years to save up the money needed for  the big purchase to economists this person's  

consumption would be below their household income  level for a few years and then spike in the year  

they finally end up buying whatever it was that  they were looking for of course no one saves  

for anything anymore we just get a loan and what  this does is effectively the same but in reverse  

economists will see a huge spiking consumption  for the given consumer followed by a period of  

consumption below their household income level  as they pay back this loan in aggregate these  

peaks and troughs in household spending feed  back off one another as we saw earlier as soon  

as a few people start tightening their belts to  pay back their debts company revenues fall and  

those businesses are forced to lay people off once  those jobs are lost those people stop taking out  

loans to buy new things once people stop buying  new things the businesses selling new things  

start laying off workers adding the fact that even  people with jobs would be afraid of taking on new  

debts during a period when all their colleagues  are getting laid off and you can see how this  

can get out of hand pretty fast governments can  intervene in this loop by injecting money into  

the system to compensate for falling household  incomes and consumer confidence counter-cyclical  

monetary and fiscal policy has been used  for decades now to smooth out the debt cycle  

and while they cannot eliminate these booms and  busts entirely they can smooth them out to make  

recessions less severe at the expense of making  the booms less extreme at least that's the theory  

now the other type of economic downturn is what  we call supply shocks these are the downturns  

that are caused by real tangible damage done  to an economy's ability to produce value  

wars natural disasters trade disputes and even  things like global pandemics can all impact an  

economy's ability to produce goods and services  supply shocks reduce supply which limits an  

economy's growth but as we saw earlier it's much  harder for governments to stimulate supply because  

that isn't really their domain even  privatization as controversial as it is  

probably isn't the right tool for the job during  a supply shock because governments are not going  

to get very good deals by selling off their  infrastructure during an economic downturn the  

thing that a lot of economists and especially  politicians shy away from is admitting that  

sometimes economies will have rough patches and  trying too hard to avoid these downturns entirely  

can push this delicate balance out of whack  causing worse issues down the road inflation is  

the obvious problem at the moment as government  stimulus has spruced demand to all-time highs  

while supply struggles with stagnant domestic  production and disrupted global supply chains  

but it's more than just that economic downturns  caused by both demand and supply side issues  

play a crucial role in sustaining long-term  growth in economy because they act as a filter  

to weed out poor economic practices that are  only surviving thanks to good economic times  

the easiest place to see this is in investments  during good economic times there is a lot of  

money flowing around the economy and businesses  will find it very easy to attract investors who  

are themselves more likely to invest because of  the confidence that comes with an economic boom  

if investors start to think that growth can  continue forever they will throw money at any  

business they can find at best this will create  asset markets with unreasonably high valuations  

at worst this will facilitate investments into  bad businesses that don't make economic sense  

investors have a very important job they determine  how an economy's capital is deployed in order to  

maximize output if investors can endlessly count  on government stimulus to prop up markets they  

have no reason to take this job seriously economic  downturns act as an impetus for the weakest  

businesses in an economy to fall to the wayside  and allow for businesses with better products  

better management and better systems to fill  the vacuum for lack of a better way of putting  

it it's survival of the fittest and unfortunately  natural selection can't take place without a bit  

of adversity be it a lion or an economic downturn  these same downturns also create new opportunities  

for businesses which are robust enough to make  it through if a car manufacturer goes out of  

business during a downturn they will be forced to  liquidate their machinery and lay off their staff  

that is capital and manpower that can be utilized  by a company that was able to survive this  

downturn of course not all of these workers will  be rehired which is another way that recessions  

can kind of do some good most economists are  extremely hesitant to talk about any benefit  

to economic downturns and even fewer want to talk  about this particular perk yeah this one is going  

to get me some down votes but fortunately youtube  has decided that that doesn't matter anymore so  

here goes in the same way that recessions get  rid of underperforming businesses they are also  

effective in getting rid of underperforming  workers if an economy is at full employment  

then businesses will find it very hard to attract  new employees because there is no one looking for  

a job this means that attracting workers becomes  more expensive because businesses need to compete  

with one another to offer the highest salary for  a given position it also makes getting rid of bad  

employees much harder because a bad employee is  often still better than no employee australia once  

had a relatively large automotive industry with  four gm holden and toyota having major operations  

in the country these operations have since closed  and one of the biggest reasons for their departure  

was not the expense of australian labor which  was comparable with germany and the us but rather  

the attitude of the australian workforce the  motor companies reported instances of up to 50  

of their workforce faking sick days to extend  public holiday long weekends the workers could get  

away with this because they knew that they were  hard to get rid of and replace obviously this was  

not sustainable long term even with the australian  government literally paying these companies to  

stay in the country and today australia has no  car industry of its own economists model something  

called the nehru or the non-accelerating inflation  rate of unemployment this tracks the relationship  

between inflation and employment the more people  that are employed the higher the inflation rate  

will be as the increased cost of salaries and  unproductive workers are passed along to consumers  

this is compounded by the increased aggregate  demand coming from the same households that  

will be demanding those higher wages economies  work best when participants have to compete  

businesses have to compete against other  businesses for a limited pool of customers  

and investors and workers have to compete  against other workers for good paying jobs  

an economy where customers have to compete for the  honor of being able to purchase consumer goods and  

businesses have to beg workers to stick around  is inevitably going to be played by higher  

prices and lower productivity a surefire way  of reintroducing this competition is to have  

a recession one of the more colorful economic  professors i had during my time at university  

probably said it best economic downturns are  painful but pain serves a very important purpose  

it lets people know what's going wrong and points  to areas that need to be fixed there is nothing  

wrong with governments giving out painkillers  to avoid the worst of this necessary evil  

but take too many or take them for too long  and you're going to end up with some bad  

side effects all while doing nothing to avoid  the issues that cause the pain in the first place