October 20, 2008
Opinion: In Tough Economy, Simplify
by Tammy Parker, Professor of Economics
As stated in marriage vows, "in good times and in bad, for better and for worse," so goes our economic business cycle.
As with marriage, we really enjoy the good times but the bad times get us stressed and worried. As with marriage, some get through the bad times of an economic crisis better people while others do not.
So, how do you survive economic turmoil?
First, you need to realize economic ups and downs are as guaranteed as marital ups and downs. They happen to all of us at different times in our life.
Recessions happen. Since World War II, the U.S. has averaged a recession every four to five years. During 1991-2001, the U.S. experienced the longest expansion in American history.
The 1990s were years of expanding output and low inflation. In short, the 1990s were good times. During good times we buy stuff, lots of stuff.
The U.S. had a short recession in 2001, but returned to expansionary times (i.e. good times) 2002-2008. Counting the years involved in these expansionary periods, we had 10 years of good times in the 1990s and six years of good times early 2002 to early 2008.
From 1991 to 2008, we are talking about 17 years. Using our "rule of thumb" of a recession occurs every four to five years, the U.S. should have experienced three to four recessions during that time period. We have beaten the odds, having only had one relatively short-lived recession during that time period.
Second, you need to consider what a recession really does for the economy. In the news, we hear about all of the devastation it brings to businesses and families and it is devastating on a personal basis.
But, a recession also works as an economic fix. A recession slows down the economy by slowing down spending and thereby slowing down inflation.
Consider the following analogy. At different times in our lives, we all have commitments and activities that cause us to pull late-nights or even "all-nighters." College students are famous for this. Homework assignments and exams loom and students respond by staying up late to get the work done.
New parents suffer similarly. As the new baby stays up throughout the night, night after night, the parents get fewer and fewer hours of sleep. Sometimes, just a really good book keeps us up later than we should be.
We are getting fewer hours of sleep, but we are getting extra things taken care of. We begin to survive on adrenaline and we keep going and going.
Well, how long can we keep this up? It would be great if we could forever squeeze extra hours out of the day. However, as experts tell us, the average person needs eight hours of sleep a day. Eventually, you are going to "crash." You are going to have to sleep. You are going to have to catch up on your sleep.
Your sleep cycle isn't that much different than the business cycle. We can keep going, going, going for awhile, but eventually we have to come down or crash.
So, how can we survive the downturn? Planning ahead definitely helps. Much like the college student should have studied weeks before the exam rather than the night before, we as consumers needed to slow down our spending, particularly spending you couldn't really afford.
How about if the planning ahead option isn't available any longer? Well, make wise decisions now. Just like the student needs to access the time remaining before the big test and work out a study and sleep plan, the consumer needs to work out a budget plan given what they have.
For most of us, we need to rein in the spending. We need to simplify. We need to return to more basic values.