Originally posted by Toad
I think the case can be made that this is a rather unique downturn in the history of the US economy.
Cyclical economic downturns are common. There have been many in US history. What is unusual is that we have gone for nearly 10 years with excellent economic growth.
While 9/11 was certainly a major factor in the current downturn, it really began earlier with the failure of the dot-coms. In that case, investors suddenly realized that the total assets and projected incomes (primarily from advertising) of these companies did not justify their stock prices. Then 9/11 frightens consumers (they don't want to be in public gathering areas where commerce takes place) and business travelers are stranded for a month without adequate air service or are too frightened to use the air service available. That certainly put a damper on growth.
There have been similar economic shocks that led to a recession...the massive increase in the money supply in the late 70's; the early 70's oil embargo; the margin call of 1929; etc.
How do you end a recession where people are just not in the mood to spend? Neither Hoover nor Roosevelt really had much success after the '29 cataclysm. I think the case can be made that WW2 ended that one.[/B]
There is not a quick fix. Once people
feel they have survived the worst of the recession and
feel secure in continued income, then they will spend again. Note the part about
continued income. That is why short lived tax rebates don't bring an economy back to life. People realize that this is a one time thing and they may not get the money next year. Only the belief in continued stable income allows people to risk spending rather than saving.
Unfortunately, a recession is caused by the fears of individuals aggregated. If we truly acted rationally as individuals in our own best interest and the best interest of the group, we would not have a problem. But Nash's theory does not work well for large numbers of independent actors such as 300 million Americans trying to decide how much to spend for Christmas. In that case, our independently rational decisions lead to sub optimal results.