Understanding Economic Slowdown

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lowdown could be explained as either a cutback in activity or a delay in progress. Slowdown of an economy is described just similar to this explanation as it is the reduction or slowdown of economic activity of any state.

The economy of any body politic would not be in an equilibrium state always. Of course, there will be ups and downs. There would be instances of enhanced investments, production, high employment and aggregate demand and such like as well as there are equally opposite situations where every activity is in its downswing. When the economy moves towards either of the two extreme points, the economic actors also move along. Here we will look at the most important aspects of a slowdown.

Structural or cyclical?

The most important debate that follows on the topic of slowdown is whether it is cyclical or structural. Cyclical means, it is a gradual movement in the business cycle that happens at regular (not equal) time intervals and structural slowdown happens due to a shift in existing economic factors (e.g. policy shift, demography, opening up of market etc.). The reasons for a recessionary trend may be either of the two or a combined effect of both. Be it any of the two, there is no much choices on the immediate policy response. The primary aim of the government would be to revive the economy and reach to moderate growth numbers 

Consequences of the slowdown

Even though the slowdown causes backlashes for an economy, equally important is what it does to the vulnerable sections of the population. 

The general economic downswing affects most section (if not all) of the population badly. Moreover it affects the poorer section more disproportionately than the better off ones. Those people who are living with daily wages; once they lose their jobs, have nothing to spend for. Immediately they will fall into a state of extreme poverty.

As visible in every other economic situation, suffering disadvantages caused by a recessionary economy is not equally affected by everyone. There is other section of the population who actually benefits from such a recessionary economic situation. For instance, the stock brokers, financial speculators, hoarders etc. actually gains from this. Hence it is equally important to consider the inequality while making policy decisions to get out of the slowdown.

How to get out of a recessionary economy?

I. Need of fiscal stimulus

In a demand constrained economy, showing recessionary trends, the most important thing has to be done for its revival would be the creation of aggregate demand. For this the government has to put money in the hands of people through various activities. Aggregate demand is created/ boosted only when people have the necessary funds to demand goods and services. When people demand more commodities, more production happens in response and thereby overall economic activity increases.

These are the section of population who spend every penny they get on basic necessities. Availability of more disposable income with them, whose propensity to consume is way higher, and constitutes a larger share in the economy, will have multiplier effect in the economic activity.

Further, such policy measures help in creating employment opportunities to the poor people. As a result the consumption increases so does the capabilities of people. Government spending if directed towards hiring more workers and direct transfers, boost the demand conditions of the economy. Supported by Keynes’ famous example from General theory-The government should pay people to dig holes in the ground and then fill them up. This means nothing but the degree of importance of a direct injection of money, rather than monetary or supply side policies. 

II. Why supply side policies do not work?

Supply side policies works from the opposite direction, which do the desired task only indirectly. Suppose a considerable reduction in interest rates has been done to stimulate the economy in hope of putting more money in the hands of people through cheaper credits. This is done so as an incentive to invest more. Since now the interest rates are so low and it is hoped that more investment will happen which lead to more production and higher level of employment, thereby improves profits and then savings and so on; thus the economy could be lifted from depression. However, all of this flow will not happen if the linkage is broken somewhere in between. For instance, the demand for credit will not happen if the expectations of capitalists (Marginal efficiency of capital) are low despite nearly zero interest rate

Moreover, for instance, compare the difference between the above mentioned direct injection of money to a cut in corporate tax (done with a view of giving incentive to invest for the corporates) - Which would have more immediate as well as multiplier effect? Of course the former; it is the demand for goods and services by millions of people which creates a sense of optimism in the investors and thereby signal them to invest and produce more.

When people start getting money, first they consume necessary items like food and groceries, then move on to next level-stationary, furniture, it will incentivize the producers to invest more. This will further lead to consume more raw materials and capitalist goods necessary for production; this is how the overall consumption demand increases at a higher rate. One will definitely link to other through the working of backward and forward linkages in the economy.

Concluding that these all are the important points discussed primarily on the occasion of a slowdown, it is important that these are to be well thought of. Every economy might go through a recessionary phase at any point of time. The importance of understanding the nature of the slowdown and what all responses should be followed is really important to boost the economic activity. Moreover, while doing these, the primary concern should always be the vulnerable (mostly primary/informal) section of the population who indirectly forms the backbone of any economy.

Bibliography

1. Business Standard.(2020).Retrieved from Economic Slowdown: https://www.business-standard.com/topic/economic-slowdown
2. Georgieva, K.(2020, April).Retrieved from IMF: https://www.imf.org/en/News/Articles/2020/04/07/sp040920-SMs2020-Curtain-Raiser
3. Heather Boushuy, S. P.(2019, May).Economic Policy Institute. Retrieved from Working Economic Blog: https://www.epi.org/blog/fighting-inequality-is-key-to-preparing-for-the-next-recession/
4. J.M Keynes(1936)General Theory of Employment Interest and Money./
5. Lahiri, A.(2020, December 24).The Indian Express. Retrieved from https://indianexpress.com/article/opinion/columns/the-policy-way-out-indian-economy-slowdown-gdp-growth-6064974//

Author bio (Guest Author)

Meenu Azad is a student of economics currently pursuing Masters from Jawaharlal Nehru University (JNU), New Delhi and have qualified the National Eligibility Test in the subject. She is also the second runner-up of the EconEssay contest organized by team economiga.