When a country’s economy expands for two or more quarters in a row after a recession, it is said to be in economic recovery. As a recovery continues, the economic cycle is described as being in a time of prosperity. It is important to realize that growth is measured in comparison to the last time it was measured. Therefore, periods of prosperity are not periods of economic stagnation. During prosperity, the economy gets stronger all the time. However, we have now, technically, been in a period of economic recovery for more than a year. So, why does the economy not seem to be improving? In this article, we will examine this question.
Just as an economy gets better all the time when it is in prosperity, it gets worse all the time it is in recession. This is because, just as prosperous times are times of continued improvement, recessions are times of compounding negative growth. If the first-quarter growth of any year was -3%, it means the economy contracted 3% of its total output compared to the quarter that ended December 31 of the prior year.
So, if the economy were to grow at .5% during the next quarter, it would still be a much slower recession time that it had been six months before. In other words, the economy must grow at 3% to be equal to the time it had slowed at a rate of -3%.
When we take this into consideration as we analyze what has happened in the period prior to the first sign of growth in the year 2010, we can see that the economy has still not reached its capacity prior to the recession in 2008. As recoveries go, this is quite unusual.
Most times, a recession will bring the country down at a pace of -6 to -9% before it is through. In the first quarter following a recession it usually jumps up a good 6% or so immediately. In other words, the first sign of recovery usually goes a long ways toward erasing the recession that preceded it. This recovery has not done this. When analyzed this way, one could say the recovery we are now in is not really a recovery at all.
Many say too much government intervention, such as the stimulus package has stifled our recovery. Furthermore, they say, when left to its own resources, a capitalistic economy will experience ebbs and flows and when the government steps in to try to squelch a recession, it usually will not slow it down very much, but it seems to always put a damper on the growth that follows.
It is the opinion of many economists that our government should step aside and stop trying to incentivize people as to the types of cars they should buy, how much health insurance they should have and how much money people should be able to make without being seen as the enemy. Doing so would put the “free” back in the free market economy and the end result would be true economic growth at long last.