Wednesday, July 15, 2009

Are depressions bad, or just necessary?

Mark Thoma, over at Economist's View, bemoans the argument that financial crises are a normal and healthy part of any economy. I agree that this is a tired view, and have argued before that they are not as beneficial as one may think, at least for everyone but the top 20%.

Regulation may slow growth, but it also decreases the incidence of huge downturns. This recent one was a lot bigger than anyone would have thought, and is a good argument for a more cautious approach to avoid, as Nassim Taleb calls them, future black swan events. (For an interesting discussion with Taleb on this problem, check out his interview on Econ Talk)

While deregulating certain sectors can have positive benefits, like labor laws in India, it also means an increase in the likelihood of crises. As I argued yesterday, there is good reason to believe human society prefers a more cautious approach.

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