Question

Can we, society and our elected officials, do anything to prevent recessions?

Answer 1

A recession is a fall in the country's economy(GDP). Business, investors and government officials track various economic indicators that can help predict the onset of recessions, but they are officially declared by the NBER. It is visible in industrial production, employment, real income, and wholesale retail trade. To avoid recession the government should increase aggregate demand. Amongst other things, lower interest rates reduce mortgage interest payments, giving consumers more disposable income. Lower interest rates also encourage firms and consumers to spend rather than save.  On the other hand if recession is caused by high-interest rates, then cutting the interest rates may helpn avoid recession. But, if there is a large fall in asset price it is difficult even if you cut interest rates, banks may still not lend. We can take few policies to avoid recession as a whole. As well as cutting base rates, the monetary authorities could try and reduce other interest rates in the economy. Buying there bonds causes lower interest rates and helps to boost spending in the economy. However, it is not guaranteed that it always works. In UK interest rates were cut to 0.5 percent during 2008-2009, yet it didn't avoid recession because Banks didn't pass the base rate cut onto consumers. Although interest rates were low, banks were reluctant to lend and consumers were reluctant to spend. And we call this phenomenon as a liquidity trap. If interest rates are 0, then the Bank may have to pursue unconventional monetary policies. This increases bank reserves and should help encourage bank lending. Cutting the tax rates may also help, but there is no guarantee that it will boost spending if confidence level is very low. Some economists are concerned higher government borrowing will cause crowding out where private sector lend to the government and then spend less themselves. Expansionary fiscal policy is less practical for countries in the Euro, who have less flexibility over borrowing levels in the Eurozone. In practice, it is difficult for goverment or society to always avoid recessions. Depending on the economic circumstances othere policies may be appropriate.