Well-being and the Recession

Recession, as defined, is a shrinkage in the GDP lasting 2 or more consecutive quarters.  The usual pattern in the Economy is for economic growth for an extended time (about 57 months) followed by about a 10-month shrinkage, creating a 67 week "business cycle" (see Article Database).  Directly preceeding a recession, current recession included, there is a period of what economist Kimberly Amadeo calls "irrational exuberance" (on her about.com blog).  The irrational exuberance period signifies the point at which the GDP has risen above the point of comprimise, and recession is the only way that it will be able to reach a point of rational growth again.

For example, the mortgage crisis occured when interest rates were too low and credit was being granted by banks too freely.  This caused a huge increase in GDP- as buying houses is an increase in capital investments.  Those involved must have been incredibly thrilled: What city bus driver wouldn't be thrilled to have a $250,000 home with no down-payment and "creative financing"? What financer wouldn't be excited to be handing out morgages and turning around to market securities using creative speculation?  (This was the situation as described by economist and noted author and housing bust expert Thomas Sowell.)  This was the point at which the GDP had risen too high for its own good, and people were getting far too carried away to realize that there was no sound basis for the economic growth.  Think of GDP growth vs irrational exuberance as being happy vs being happy on cocaine: one is an emotion based on reality and experience and may steadily grow through time, while the other is an instant, over-the-top manic happiness that has an artificial basis and is setting you up for a harsh comedown.

One of the principal lessons from this is that the GDP can't tell you whether or not the economy is actually headed in a good direction.  The periods of economic growth or even irrational exuberance show that for the most part people do believe in the economy and do value economic well-being as a meaure of fulfillment.  While volunteering or being a stay-at-home parent is not counted in the GDP, these pursuits are personally gratifying and represent that people are financially secure enough to afford doing those things, and therefore are silently tied to GDP.  However, when the government increased spending to clean up the aftermath of Hurricane Katrina, that increased the GDP but was a national tragedy.  And we are all aware of the pork projects that politicians are so fond of- workers were ready and willing to build the Bridge to Nowehere, but what is it really contributing to well-being?  US weapons dealing (notably Iran/Contra but debateably any and all other exports) is also increasing GDP but not necessarily making a positive contribution to well-being.  Maximizing the GDP, in essence, means that well-being may be high and many types of spending are contributing to GDP at high levels, although there is no indication whether this spending is helping society in the long run or whether it is leading us directly to another intense recession.