Saturday, 3 October 2009

Recessions get rid of lame ducks?

Those opposed to the measures being taken to deal with the 2008-9 recession sometimes claim that recessions are desirable in that they get rid of uneconomic firms, or “lame ducks”. An example of this flawed idea appears in a blog by Dr Madsen Pirie of the Adam Smith Institute.

There are two reasons for discounting this idea: one theoretical and one empirical. Taking the former first, if a firm has gradually declining profits or mounting losses, closure or bankruptcy is inevitable at some point, even given no recession. As to empirical evidence, this very much backs up the theoretical point. That is, during recessions, bankruptcies do rise, as would be expected. But they don’t multiply by ten or a hundred. They rise by fifty percent or in relatively bad recessions double or treble. But that’s it.

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