Liquidate!

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Kevin Drum notes Robert Samuelson pointing out that recessions have benefits, too. Benefits like low wages:

Recessions also have often-overlooked benefits. They dampen inflation. In weak markets, companies can't easily raise prices or workers' wages. Similarly, recessions punish reckless financial speculation and poor corporate investments. Bad bets don't pay off. These disciplining effects contribute to the economy's long-term strength, but it seems coldhearted to say so because the initial impact is hurtful.

I sometimes complain that the Post should make Samuelson write something other than his endless bellyaching about the need for Social Security cuts, but that was just a polite way of saying I think they should fire him. This sort of thing isn't really what I was after. At any rate, Samuelson seems to be a party to what J.M. Keynes would have called the "liquidationist" view of such matters -- recession is the population getting its comeuppance for having been not-poor just a little while back:

It seems an extraordinary imbecility that this wonderful outburst of productive energy [over 1924-1929] should be the prelude to impoverishment and depression. Some austere and puritanical souls regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it; a nemesis on man's speculative spirit. It would, they feel, be a victory for the mammon of unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy. We need, they say, what they politely call a 'prolonged liquidation' to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again.

I do not take this view. I find the explanation of the current business losses, of the reduction in output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding up to the spring of 1929, but in the subsequent cessation of this investment. I see no hope of a recovery except in a revival of the high level of investment. And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity.

Note in particular that there's no particular reason to think a recession is necessary in order to prompt people to pull out of bad investments. If you've got money to invest, you want to invest it in the most lucrative way possible. If things are really booming, it may be possible to earn some profit with a really dumb scheme. But if things are really booming, then you could earn even more profit with a non-dumb scheme. In a bad recession, meanwhile, even perfectly reasonable schemes may go bad. Either way, smarter investments are always better-rewarded than bad ones; recessions seem bad because they're bad.

Photo by Flickr user Seansie used under a Creative Commonse license

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Matthew Yglesias is a former writer and editor at The Atlantic.

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