Economics of a Recession

We are in a great period of Expansion. To understand Expansions and Recessions we first must understand the Business Cycle.

As Adam Smith said in the Wealth of Nations, there is a term known as the “Invisible Hand.” This invisible hand is key to understanding the wealth of nations. It will be described in detail in future blogs.

This theory held till 1929 or Black Friday. After Black Friday, the stock market would not clear on its own. Therefor Franklin D. Roosevelt (FDR) turned to John M. Keynes. He devised that Government spending should take the place of private investment spending, when Gross Domestic Product= Private Consumer Spending +Private Investment Spending + Government Spending + (Exports – Imports). Next, FDR initiated the new deal. This deal, had the government, hire people instead of corporations. This along with World War II pulled the United States out of the Great Depression.

In 1980 the US saw something new called Stagflation or inflation along with a sluggish economy. President Ronald Reagan took action along with sharp tax cuts across the board. Reagan found that if you cut taxes, corporations would pay the taxes instead of looking for loop holes in the tax policy; in an attempt to not pay taxes. This lead to the next great expansionary period in American history.