Monday, April 06, 2009

What is Good About Recessions?

I risk being hung for raising this question. I would like to point out that I have been blogging more or less continuously about potentially negative psychological consequences of economic downturn in terms of things like: the psychological costs of unemployment, psychological costs of home repossession and so on. I am not posting this question on some whimsical idea that everything is rosy for everybody and that nothing serious is happening. However, several people have either emailed a version of this question to me or mentioned it in our discussions, and Gerard and Kevin's comments were the straw that broke the camel's back in terms of making me want to just come out and ask the question.

In terms of actual evidence about the effects of recessions, you would have to give me a lot of drugs before I would accept the argument that losing your job, business or home does not have negative psychological effects (at the very least short-term), even if we do accept that people do have some trouble in predicting emotions (perhaps I am overestimating the negative effects due to my own biases). Kevin's point (made in the context of religion) about the difficulty of demonstrating a pure causal effect of any variable on well-being is well-taken. But the degree to which the unemployment literature has been tested seems to pass Kevin's bar for proof and, while I still think some questions remain about the pure causal magnitude of the effect, I would be genuinely stunned if unemployment shocks were found to be only spuriously related to well-being.

All the above caveats aside, some potentially positive effects of recession for individuals include the ones listed below. There are perhaps other potential upsides in terms of fundamental reevaluation of institutions and government spending. I see more intuitive sense in the latter than the former, but here goes anyway.

- Improved patterns of health due to less stress and more positive health behaviours. This has been shown in some papers by Christopher Ruhm. These were mentioned on the blog,


- Recessions may lower the pressure with respect to maintaining consumption to keep up to the reference levels of one's peers. This seems plausible to me but I dont know of any paper that explicitly tests this.

- Recessions may provide more time with family. Again, this may not be positive, particularly if a person is stressed due to financial considerations but worth looking at whether this helps.

- Recessions may provide more social solidarity and a feeling of "we are all in the same boat". Coupled with more time, this may lead to greater amounts of volunteering and so on. Again, dont know if this is true but testing it would be interesting.

- Recessions may provide a break on habitual behaviours and cause people to think more clearly about where they can maximise their talents. Once again, no idea if there is evidence for this. In general, the literature suggests to me that on average a painful recession has long term effects on people's wages and well-being even beyond the actual downturn if they are unlucky enough to lose their job or to be graduating at the time. It is plausible that a sub-group of the population may experience the opposite effect, whereby being removed by force from a badly matched position leads them to reevaluate and come back in a better post. What percentage of the population this would occur for is open to speculation.

- In the long-run, living through a recession might give you a lower reference point for evaluating later outcomes. The fact that we are going through this one now might inoculate people against later shocks. Again, plausible but I am not aware of an inoculation literature along these lines.

1 comment:

Liam Delaney said...

Gerard is on the case - falling prices is of course one aspect of the recession that I should have alluded to. If you can keep your job and wages intact, it is of course a good year for a substantial minority of the population in terms of their purchasing power. Seeing their assets values savaged might remove some of the lustre from this though.