What causes recessions?

[Suburbia]

I'm not an economist, what causes recessions? Politicians don't create jobs, but they lay out the economic landscape.

[OSR stands with Israel]

Two Consecutive Quarters of Negative Growth

[Vittorio]

Two Consecutive Quarters of Negative Growth

Question: "What causes night?"
Answer: "When it gets dark."

[OSR stands with Israel]

Two Consecutive Quarters of Negative Growth

Question: "What causes night?"
Answer: "When it gets dark."

In that case, there is literally only one way that happens: The Sun setting

There are literally so many different factors that can cause a recession on the other hand so the technical answer is the only proper answer you can give to such an open ended question.

[136or142]

Two Consecutive Quarters of Negative Growth

Technically not officially correct, though most people believe it is.

There are two primary causes of recessions.

1.The 'business cycle' recession.  Through business expansion the economy reaches a peak when there is greater demand for inputs (resources and labor) than any increase in supply can fill.  This causes a spike in input prices (resources) and a much slower increase in labor prices.  This puts an upward pressure on inflation which leads to higher interest rates which causes a slowdown in business activity.  

It's very difficult to completely smooth out business cycles to avoid booms and busts, however, central bankers have gotten much better at doing that and the time between recessions has tended to get longer.  

There were recessions in 1982 and 1990-1991 that were caused by interest rates sharply increasing to fight inflation.  Central bankers understand a lot better how an inflationary spiral can occur, and they've been able, whenever necessary, to stop them early without causing a recession.  The severe recession of 1982 was caused by the sharp raising of interest rates to deal with an inflation rate that started to increase in 1966.  This increase in inflation had multiple causes though, not just the 'business cycle' including excessive government spending and deficits.

I mentioned at the start that '2 quarters of negative economic growth' is not the actual official definition of a recession.  Officially, the National Board of Economic Research (NBER) in the United States decides when a recession occurred.  According to them, there was a recession over 2000-2001.  However, if you check the numbers, not only was there not 2 quarters of negative economic growth, there was not even a single quarter of negative economic growth.  The lowest it got was one quarter of 0.5% annualized growth (in real terms, i.e net of inflation.)

So, this means, according to what most people think is the definition of a recession: two quarters of negative economic growth, there was no recession from sometime in 1991-1992 to sometime in 2008, or approximately 16 years of continued expansion.

2.The 'credit freeze' recession.  This occurs when a large number of loans go bad via the bursting of an asset bubble.  This is essentially what happened in 1929 and 2008.  This causes credit markets to freeze up as banks aren't certain of their financial positions or even whether they'll face a run.  It tends to take a long period to overcome these recessions as market confidence needs to be regained before people are willing to get loans again.

There are two other theoretical possibilities
1.A recession caused by declining population (though that wouldn't necessarily be a GDP decline per capita)

2.A decline caused by a ceasing of innovation which would obviously lead to a lack of new investment.  Though this is hypothetical, many economists have argued that the increase in oligopoly in the United States combined with the seemingly increasing cost of innovation along with the worker skill mismatch is one of the main reasons, if not the main reason, why economic growth has slowed down for the last 20 years or so.  I would include tariff barriers and excessive government regulation as part of this theoretical possibility.

[Cassandra]

I'm not an economist, what causes recessions? Politicians don't create jobs, but they lay out the economic landscape.

Why is the second sentence immediately after the first? I feel like we're missing something here....

[America Needs a 13-6 Progressive SCOTUS]

Right-wing economic policy.

[Kingpoleon]

[Beet]

Traditionally, the main cause of an economic disturbance was an agricultural drought. Thus many peasants' revolts of the Middle Ages, and surely before. Even today this is a cause of food shortage in North Korea.

From the 19th century, the causes diversified to, including, currency shortages, shortages of gold bullion (that backed currency), banking panics, economic disturbances in other parts of the world, debt-deflation (as during the Great Depression), embargoes (such as the Arab Oil Embargo), monetary policy, and the industrial inventory cycle. The industrial inventory cycle was notable during the 20th century and is probably the model for what is traditionally thought of as a recession. This is thought to occur when businesses overestimate consumer demand and acquire too much inventory that they cannot sell. They then reduce orders from factories, when in turn lay off workers. This reduction in workers further reduces consumer demand, and the cycle continues until a drop in the price level restores it.

With the deindustrialization of the economy in the late 20th century, the business cycle became less pronounced. Beginning in the 1960s economic expansions began to get longer, although this trend was somewhat hidden by the oil crises. The 1991-2001 economic expansion was the longest in history, to be surpassed only now. The basic reason for this lengthening is (relative) deindustrialization, which has shifted output to the less volatile service sector, where demand is more stable. Of the last 5 recessions, fully 3 of them were caused by the Federal Reserve raising interest rates to get a handle on inflation.

[DINGO Joe]

TRUMP!

[Person Man]

Traditionally, the main cause of an economic disturbance was an agricultural drought. Thus many peasants' revolts of the Middle Ages, and surely before. Even today this is a cause of food shortage in North Korea.

From the 19th century, the causes diversified to, including, currency shortages, shortages of gold bullion (that backed currency), banking panics, economic disturbances in other parts of the world, debt-deflation (as during the Great Depression), embargoes (such as the Arab Oil Embargo), monetary policy, and the industrial inventory cycle. The industrial inventory cycle was notable during the 20th century and is probably the model for what is traditionally thought of as a recession. This is thought to occur when businesses overestimate consumer demand and acquire too much inventory that they cannot sell. They then reduce orders from factories, when in turn lay off workers. This reduction in workers further reduces consumer demand, and the cycle continues until a drop in the price level restores it.

With the deindustrialization of the economy in the late 20th century, the business cycle became less pronounced. Beginning in the 1960s economic expansions began to get longer, although this trend was somewhat hidden by the oil crises. The 1991-2001 economic expansion was the longest in history, to be surpassed only now. The basic reason for this lengthening is (relative) deindustrialization, which has shifted output to the less volatile service sector, where demand is more stable. Of the last 5 recessions, fully 3 of them were caused by the Federal Reserve raising interest rates to get a handle on inflation.

So basically people spend money they don't have and then they don't have any money to buy more things. As a result, people have to try harder to sell things to people who don't have money any more. When people are finally able to sell enough things, people are then able to buy enough things until they buy too much again. The main economic debate between Labour/Democrats/Liberals/SocDems/"Socialists"(real socialists think this all can be avoided by telling everyone exactly how much they should buy and sell and when) and Republicans/Liberals/Conservatives/Tories/Christian Democrats is whether economic conditions are lead by people buying enough things or selling enough things with the respective former and latter believing them. This is based off of observation, the editorial section of newpapers, getting As in elective-level micro and macro econ classes, getting As in American and Modern World History (got a B in Western Civ I because I took it when I was 15) and a 4 year degree of Poly Sigh at a small public university. Probably wrong.

[Kingpoleon]

In all seriousness, a combination of factors, chiefly: unemployment rate(rising); labor participation rate(declining); consumption rate(bubble rising to pop or declining); inflation(spiking or crashing, sudden movement); widespread, exposed corporate malpractice; market uncertainty(growing/large); growth stalling(usually due to consumption/employment/inflation); and sudden economic changes that “shock” the system(especially in the savings/consumption balance, or in a large scale supply/demand ratio).

[Del Tachi]

Over-investment.  When a certain sector of the economy gets too hot (housing in the 2000s, tech right now) there's bound to be a correction.   

[HisGrace]

They happen whenever the lizard people say.

[Southern Senator North Carolina Yankee]

In the most simplest of terms demand cannot keep up with supply. This could be in the form of over investment as stated above or in the form of credit based consumption occurring against a backdrop of falling/stagnant wages/outsourcing and people finally exhausting their available credit leading to a demand pull back.

Both were factors in the 2007 recession.

[Person Man]

In the most simplest of terms demand cannot keep up with supply. This could be in the form of over investment as stated above or in the form of credit based consumption occurring against a backdrop of falling/stagnant wages/outsourcing and people finally exhausting their available credit leading to a demand pull back.

Both were factors in the 2007 recession.

That doesn't sound very Republican.

[John Dule]

The debt cycle. When American consumers are confident, they borrow money, which basically means they're taking out a loan at the expense of their future self. When they begin to pay down the debt, their spending in the rest of the economy decreases, and if a lot of people do that at the same time, we see a contraction.

[Devout Centrist]

Broadly speaking, there are two types of recessions: Balance sheet and Boom/Bust.

Let's talk about 'boom and bust' first. These are caused by rapid economic growth, resulting in a rising inflation rate. Central banks react by increasing interest rates. This makes it more difficult to finance projects, as the supply of money in the overall economy grows slower. This reduces economic growth. At the same time, higher interest rates mean some firms cannot meet their outstanding obligations; they fail as a result. Workers get laid off as companies react to this environment.

Also, sidenote: unemployment goes up because of 'sticky wages'; people are less willing to take a pay cut. This results in workers getting laid off during recessions in order to meet lower labor demand.

Balance sheet recessions occur when firms and households accumulate a large amount of debt. This leaves them with little liquidity and these entities start saving to pay off their existing obligations. Some of these entities cannot meet their obligations and they default. This puts further strain on the other firms and households. Consumer spending falls and economic growth falls. The 2007-2008 recession was a balance sheet recession, influenced by an oversaturation of consumer debt and bad mortgage lending.

There are also supply shocks and demand shocks. Supply shocks happen when a factor of production becomes significantly harder to obtain or significantly more expensive. Think oil and the 1970's.

Demand shocks occur when aggregate demand falls suddenly. This is caused by fear or panic on the part of firms and households. These happen from time to time, but they're relatively rare overall.

[Southern Senator North Carolina Yankee]

In the most simplest of terms demand cannot keep up with supply. This could be in the form of over investment as stated above or in the form of credit based consumption occurring against a backdrop of falling/stagnant wages/outsourcing and people finally exhausting their available credit leading to a demand pull back.

Both were factors in the 2007 recession.

That doesn't sound very Republican.

I am an anti-supply side, fiscal conservative. Basically what fiscal conservatism meant before the 1980's, actually paying for your spending.

[Saint Milei]

Almost all recessions are caused by interest rates being too low. There have been other instances of recessions being caused by other conditions

[Pericles]

The US President being from the opposite political party to my preferences.

/s

[Kingpoleon]

In the most simplest of terms demand cannot keep up with supply. This could be in the form of over investment as stated above or in the form of credit based consumption occurring against a backdrop of falling/stagnant wages/outsourcing and people finally exhausting their available credit leading to a demand pull back.

Both were factors in the 2007 recession.

That doesn't sound very Republican.

I am an anti-supply side, fiscal conservative. Basically what fiscal conservatism meant before the 1980's, actually paying for your spending.

You’re basically a Rockefeller Republican but weak on crime, right?

[un]

In the past thirty years, it can be two things. One, when people that run the Federal Reserve have zero idea what they are doing, like Alan Greenspan and Ben Bernanke failing to drop interest rates fast enough, during a time when they needed to be dropped to deal with the ever growing sub-prime mortgage crisis, and the growing deficit from the Bush Jr administration certainly didn't help either. Two, one of many policies of Reaganomics, bank de-regulation. The best example of that can be seen in the late 1980's and early 1990's recession, which can be attributed to piece a legislation signed by Reagan in 1982, known as the Garn-St. Germain Depository Institutions Act. Essentially, this act removed restrictions on loan-to-value ratios for savings and loan banks, as well as other things, like reducing the number of regulatory staff at the Federal Home Loan Bank Board, making it way easier for banks to invest in very risky real estate ventures. That would later contribute to the savings and loan crisis of 1989, which later ushered into the recession in 1990. Some other bank de-regulation bills also haven't helped when it comes to protecting the economy, such as the repeal of Glass-Steagall during the Clinton administration, which to a minor extent, made the recession in 2008 worse than before.

[OSR stands with Israel]

In the most simplest of terms demand cannot keep up with supply. This could be in the form of over investment as stated above or in the form of credit based consumption occurring against a backdrop of falling/stagnant wages/outsourcing and people finally exhausting their available credit leading to a demand pull back.

Both were factors in the 2007 recession.

That doesn't sound very Republican.

I am an anti-supply side, fiscal conservative. Basically what fiscal conservatism meant before the 1980's, actually paying for your spending.

You’re basically a Rockefeller Republican but weak on crime, right?

He’s too much of a cultural conservative to be a Rockefeller Republican

[Kingpoleon]

He’s too much of a cultural conservative to be a Rockefeller Republican

Many Rockefeller Republicans weren’t pro-choice, and he is pro-SSM but staunch~ish on immigration