Cathartic recession?

Is there such a thing as a "cathartic recession"? A recession that purges the demons of excess from the economy and punishes the badly-behaved for their sins?

I'm not sure there is. But I unwittingly found myself in an argument with the former US Treasury Secretary Larry Summers on the subject.

I asked him whether central banks should be modest about how much they can hope to achieve and whether they might sometimes have to accept that economies slowdown.

My question was motivated by a sense that there's a limit to the imbalances an economy can accumulate to keep itself running at a good speed. (You can hear the interview on Saturday's Today programme).

Maybe I shouldn't have raised the topic.

He certainly put me in my place, arguing that the very question betrayed an adherence to one of most cruel, fatalistic and mistaken beliefs of the economics profession. It was the view held in 1929 he said.

He's once of the brightest economists around, Larry Summers and one of the most articulate. (His forthright views have got into trouble on more than one occasion). And his views need to be taken seriously.

As it happens, I don't actually believe in cathartic recessions, but his vociferous denunciation of them invites us to think carefully about exactly what it is we should believe of the economy at the end of a bubble. We might be right to tolerate a slowdown as part of a process of sensible rebalancing while also having to avoid a deep recession that wastes the potential of the population and needlessly makes people poorer than they should be.

My view is that the correction of imbalances probably involves some slowdown and we should live with that. Larry Summers' view (I think) is that we should not talk that way, because it will soon lead us into tolerating or creating the needless cathartic recession.

After he had finished with me, Professor Summers said he had been inspired by my questions (the sheer stupidity of them) to give a talk on this very subject.

It's good to know that my interview was so inspirational.

Comments   Post your comment

  • 1.
  • At 12:16 PM on 25 Jan 2008,
  • Craig Wood wrote:

Evanomics continues to be the "must read" blog, especially during times of uncertainty.

Whilst Cathartic Recessions may not be real, I'm left wondering whether there is such a thing as "Media-induced Recession". If the man on the street didn't hear the bad news, would he just continue on as normal, or at least not react quite so quickly. So much of our modern economy is about confidence or lack of. Maybe blissful ignorance should be added to the list!

  • 2.
  • At 01:07 PM on 25 Jan 2008,
  • Scott wrote:

Fair enough - but might a US recession now be both inevitable AND a bad thing?

  • 3.
  • At 02:24 PM on 25 Jan 2008,
  • Edmund wrote:


Not a stupid question at all. A better question, in view of Summers' response, would be whether the phrase "bright economist" is an oxymoron. How does "bright" describe the belief that future can rest comfortably on consumers' guileless expectation that things can only get better?

Economists are people who group together round empty oil wells chanting "come on out, there's plenty of demand out there."

When Shell's chief exec emails all his employees telling them that supplies of cheap, easy, oil won't meet demand from 2015 - perhaps you'd care to do a column on how scary that is for a growth-dependent, credit-based system - it's pretty weak for the likes of Summers to suggest all our problems can be solved by blindly ignoring the possibility that we'll run out of energy to fuel growth.

The message from Shell's boss was "contract (conserve) or die." What price economists now?

  • 4.
  • At 04:11 PM on 25 Jan 2008,
  • thunar wrote:


Sheep do not flock together where they didn't want to go unless the very thing they fear is driving them there under the control of its master who has a plan unknown to both!

  • 6.
  • At 10:07 PM on 25 Jan 2008,
  • Edward hatfield wrote:

I find the obsessesion with confidence and the idea that confidence is a crucial factor quite bizarre. When a person or company or country borrows more money every year and spends more than they earn eventually they find the interest becomes a problem. Then a few people and companies go bust, then a few more stop spending out of fear, then it all goes wrong and confidence in the system is lost because the sytem is proving to be flawed and corrupt.
It is not confidence that causes the recession, It is a simpton of the desease in the banking system creating too much money.

  • 7.
  • At 10:45 AM on 26 Jan 2008,
  • Paul wrote:

I don't know why you give his side of the argument so much creedence, just because he's a respected figure.

I believe we will see a cathartic recession as you call it, not because of economic factors, but because of psychological ones.

Economics is to psychology as engineering is to physics.

  • 8.
  • At 04:02 PM on 26 Jan 2008,
  • Robin wrote:

that's like saying is there sych a thing as a cathartic hangover cure, it's not the right question in the first place. The point is if you've had too much of somehting it takes a while for it to get out of the system and in this case it's trillions of dollars/pounds and euros of leverage. It will takie quite some time for the indigestion to go away.

  • 9.
  • At 08:45 PM on 26 Jan 2008,
  • Rhys wrote:

To Craig Wood: I think you'll find most people are ignorant of what the economics news is. Most people are far more interested in what's happening in the lives of the rich and famous. They do worry about it when it really does affect them (in terms of jobs, salaries, inflation, etc.).

  • 10.
  • At 10:04 AM on 27 Jan 2008,
  • Jonathan wrote:

It's perfectly fair to ask how imbalances in an economy can be addressed. Japan failed to face up to structural problems in its economy when the tide went out in 1989 and for more than a decade paid for having lived in a state of denial with crippling deflation. It's clear that there are severe imbalances in the West with asset prices divorced from affordability and debt beyond safe levels. The issue is 'how do we rebalance the economy?' and that isn't a stupid question.

  • 11.
  • At 02:03 PM on 27 Jan 2008,
  • Ant wrote:

Like many keen observers of the economy, I can't avoid being concerned by recent economic releases, but is the media's constant searching for the "impact story" hastening panic moves by the consumer.

I firmly believe that the Northern Rock "crisis" was fuelled by an agressive media campaign to make the sub-prime woes in the US more relevant for its' audience.

Is this a symptom of news agencies' drift away from impartial effective reporting to agenda ridden comment?

  • 12.
  • At 11:52 PM on 27 Jan 2008,
  • Ben wrote:

The term 'healing crisis' in the medical field refers to the need for most diseases and illnesses (e.g. fever) to reach a breaking point, before the patient recovers. Thus, 'cathartic recession' seems an appropriate economic analogy.

  • 13.
  • At 08:22 AM on 28 Jan 2008,
  • Ian Kemmish wrote:

When I read the phrase "cathartic recession", the words "structural unemployment" from a generation ago popped into my mind.

We all know that nobody can run a perfect economy. Like a child learning to ride a bicycle, we teeter along between different threats. Human nature being what it is, we tend to rank those threats in different ways. The MPC, for example, seems to think that inflation is a threat more to be feared and avoided than a recession (depending the depth of the recession, I trust!). The Fed seems to think that a recession is more to be feared and avoided than inflation.

Since we can't avoid all the threats all the time, we're more or less forced to accept some of the lesser evils as inevitable, and, human nature once again being what it is, rationalise them as "doing us some good". So the MPC might agree with the idea of a necessary slowdown (if not a cathartic one), and the Fed might agree with the idea of structural unemployment

  • 14.
  • At 09:46 AM on 28 Jan 2008,
  • Simon Wellicome wrote:

re. Post #1 (Craig Wood):

Well said: Evanomics is excellent - especially helpful to economics ignoramouses (sp?) like me!

Media-induced recessions are certainly possible - just as media-induced booms/bubbles. Commentators in the media need to be (and I suspect, actually, usually are) aware that the opinions they express about what might happen run a huge risk of becoming self-fulfilling prophecies.

If you tell people:
- that there is probably going to be an economic slow down because the general population is going to spend less; and
- that that reduction in spending could put companies profits at risk, which in turn could lead at best to lower pay increases at a time when prices will continue to go up and at worst to job insecurity
then each person's natural reaction is to draw in their horns, spend less and save more to help themselves cope with the predicted bad times. So the drop in spending happens and the economic slowdown happens and the suppression of wage increases/increased job insecurity happens - and the bad times arrive right on cue.

Blissful ignorance, though? Not a good idea.

If we are ignorant of circumstances as something starts to go wrong, that thing tends to go much more wrong before we notice; and the rate at which it goes wrong tends to increase.

These factors combined mean that (compared with the level of action and effort required following early recognition of a problem) by the time we realise we have to do something to put that thing right:
- much more needs to be done to make it right; and
- much, much more effort needs to be made to do what is required.

Whether it is a car we are driving that needs to change speed or direction, or an economy we are dirving that needs to do likewise - being ignorant of circumstances is not good.

The smart approach to individual behaviour within a wider economic framework is to draw in the horns and save during the good times and relax a bit more and spend during the bad - constantly modulating the economy back towards its long-term trend line - but we humans are much too short-termist on the whole to pull this trick off.

It is this short-termism that prevents the bad times being cathartic. As a population, we just don't learn enough from our mistakes and our memories are far too short.

Whatever we think about whether they have been successful or not, the "neither boom, nor bust" approach espoused by the likes of Ken Clarke and Gordon Brown (in his early days as Chancellor) is actually the smartest one.

Being old and ignorant, I am puzzled to know where the £375 billion is now. OK, so the Frenchman betted it and lost the bet, but somebody must have won the bet. So who has got it? and what can they spend it on? Does it in fact exist - or is it just in Monopoly tokens?
An explanation would be much appreciated.
Oliver Postgate

  • 16.
  • At 03:02 PM on 28 Jan 2008,
  • Rod McLeod wrote:

Whilst the idea of cathartic recession is old, 'the politics of crisis' is a current tool. As the sub-prime, bond insurance and SocGen problems all add to the present bubble-burst (caused mostly by mis-selling of the motgages) this is certainly the moment for the financial and political institutions to divest themselves of under-performing and redundant portfolios, processes and staff. "Lets publish the bad news and hide behind the worse news".
Is this not cathartic?

  • 17.
  • At 03:04 PM on 28 Jan 2008,
  • David Bassett wrote:

I do indeed believe in cathartic recession. Too much affluence makes us hard and greedy. A little discomfort is good for the soul!
Best wishes

  • 18.
  • At 04:02 PM on 28 Jan 2008,
  • Andrew H wrote:

Did he have anything to say on positive central government action to avoid the issues that cause 'cathartic' recessions? There is a whole whiff of avoidability about this one, and more than a little stench of personal greed on a massive scale...

  • 19.
  • At 04:16 PM on 28 Jan 2008,
  • Colin Smith wrote:

Right... Because we can just keep devaluing money infinitely.

  • 20.
  • At 04:55 PM on 28 Jan 2008,
  • n.radhakrishnan wrote:

Greed of financial institutions & banks has led to sub-prime lending &financial crisis.Poor rate of saving in U.S.A.,coupled with huge deficit of government &dollars flowing into the coffers of oil rich countries have aggravated the situation.Credit card woes are not going anywhere.Recession is inevitable.

  • 21.
  • At 06:47 PM on 28 Jan 2008,
  • Chris wrote:

It seems to me that a forthcoming recession is timed very nicely to match the babyboom generation reaching retirement age. The inflationary pressures of companies attempting to replace their staff could balance the deflationary pressures of debt repayment. Sometimes I think it was deliberately planned.

  • 22.
  • At 06:57 PM on 28 Jan 2008,
  • Mike Dixon wrote:

Hi Evan - no the point you make are as valid as ever and if Larry Summers can't accept them - well that his problem. And yet his is correct that there IS a great difference between today and 1929. In 1929 all the main economies of the time, Britain, France, the United States, were ether bankrupt or nearly so. This is not the case today.

The problem today is that the American Econamy has 'run out of steam'. This expression had real and serious meaning in the days when ships and railway engines were powered by coal burning boilers. To be out of steam ment just that. the train was unable to climb a hill because there was insufficient pressure in the boiler. If it happened to a ship, the result was potentially hazardous. Not only did the ship loss way but there could be insufficient steam to work the steering engine so that the rudder would not answer the helm. The ship was then at the mery of the tide and wind until suficient steam could be raised to get under way again. This is just the present state of the American economy.. It is also why it is not responding to the 'helm' i.e. changes in Bank Rate.

America will recover but it will have lost its preminant position in the world for ever.

  • 23.
  • At 03:48 PM on 29 Jan 2008,
  • Mark wrote:

What remarkable egoism and hubris Europeans have. BBC has been asking since the middle of last week, would the US Federal Reserve have lowered its interest rate 3/4 of a point had it known in advance that the markets were riled by the 7 billion dollar loss at a small foreign bank, the one time result of a rogue trader being finally discovered? How laughable to think that a US government organ would be influenced by such small potatoes when it is responsible for steering a 14 trillion dollar a year economy or when well over one trillion dollars a day is traded in the currency markets. Think of how many hundreds of billions are gained or lost every time the Dow or S&P 500 or the NYSE index goes up or down a percentage point or two and you can appreciate the insignificance of the SocGen loss. Neither does the Fed respond to momentary fluctuations in the markets even if it does not know the immediate cause of them.

If you think that 7 billion dollars was a big loss for a bank, watch and see what happens to China's banks when the US economy tanks, the Treasury starts printing money driving the dollar down, interest rates start to rise, prices go up, and US imports from abroad sink. Can't happen? Just go back about 20 years and read history, the same thing happened to Japan's banks when its Nikkei collapsed from over 40,000 to around 12,000 taking their over inflated real estate market with it. Japan has been in or near recession ever since even though interest rates there usually hover around zero percent.

When a bubble bursts, the shock waves travel outward and the US housing market bubble is a whopper. The only option the US government has is to decide whether the brunt of that shock will be borne by Americans or those outside the US. What do you think the politically correct decision will be?

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