237The bottom line
The stumble from recession to depression
The sleek-looking guy asked a second question. ‘What happens
to a government during a slump?’
‘Unemployment rates rise, so a government has to spend more
on benets. And, in a classic double-whammy, they receive less
money from income tax because fewer people are working. The
take from corporation tax also falls because companies nd it
harder to make a prot. Some even go bust. Everybody in the
economy – individuals, companies and government – becomes
profoundly pessimistic.’
Another woman, pencil thin and with a Russian accent, put up
her hand. ‘Is there a formal denition of a recession?’
‘One denition of a recession is two successive quarters of falling
GDP (GDP, roughly speaking, is our dotted line). If you see the
general trend is down for six months or more, you know that a
country is in a slump.’
‘What’s the difference between a recession and a depression?’
she asked.
‘A depression follows a big drop in GDP
and is prolonged. It can have a terrible
psychological impact on individuals and
the nation as a whole. General expectations
about employment and wealth will drop
and people will start to save money rather
than invest in the economy. This tendency
actually reinforces the cycle.’
I pointed to the bottom edge of the mega-graph.
‘If these two lines – changes in the economy and lending –
continue to bump along the bottom the depression will last. Banks
don’t want to lend, consumers don’t want to spend, businesses
don’t want to hire any more people, and the government doesn’t
want to build any new infrastructure projects. Unemployment
then rears its ugly head.’
‘‘
A depression
follows a big drop
in GDP and is
prolonged
’’

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