In the 1990's all was going well for the United States of America. Prosperity was once again teeming in the United States. At this time the country was seeing the largest growth it had ever seen since the 1920's. And like the 1920's, Americans become more and more numb to the possibility of a recession. In fact some Americans believed that maybe even the business cycle was obsolete. Of course some people in our nursing homes today may have recalled a time when people thought that business cycles and depressions were obsolete and that time was the 1920s. Of course we all know what happened after the 1920's. The unthinkable- A great depression that lasted nearly a decade! But what is a recession, how do they occur and how does society try to stop recessions. In this paper I will give you my personal observation of what was going on during late 2001 early 2002 when it was said by many that we were in a recession. I will give a brief explanation of what a recession is. I will go on to talk about some things that were tried to pull us out of a "recession" and I will give my opinion on what will result from these different policies using logic based on previous theories of how economies work.
	What is the definition of a recession? Well one can say for sure what the definition of a recession is because no one can agree on a definition. Most economists say that a recession is two consecutive quarters of negative growth.
	Some of the reasons I believe why the economy may go a recession are the human attitude of need, natural disaster and consumer confidence. Contrary to popular belief, I don't believe that anyone can rationalize or come up with equations to predict very accurately what goes on in the economy. The reason for this is because the economy can be affected by improbable occurrences and human attitude and decision. One of these human attitudes is that of need. The human attitude of need is what people perceive as items that they desire on a continual basis. For instance since we always need water, therefore there will always be a market for water. But we many not always need a better computer every year. Thus if people believe that once people buy an item and it is suffice for them, they may not buy again for a very long time. This, I believe, can be a cause a recession because many firms that produce no essential items (items not essential for basic life functions) may not accurately anticipate the amount of demand. In light of the early 21st century depression, the demand for many goods had gone down. People began to buy less because they may not see a need to buy more than what they need.
	Natural disaster or other types of disasters are another factor that can contribute to recessions. During the 1920’s there was a famine in the Midwestern United States that may have caused the country to go into deeper recession then to depression. This can be further seen in another example in the 21st century when terrorist attack on the United States in 2001 worsened the recession that they were in. The reason why non-natural disasters hurt the economy is because it creates a sense of fear and unpredictability in the world that causes people to restrict spending on only essential items. This is part of consumer confidence.
	Consumer confidence is a big factor in causing depressions. Consumer confidence is basically the consumer’s confidence in the overall economy and future health of the economy. What I mean by this is that if a consumer believes that he or she will lose a job or that the political system is falling apart or that fuel prices will rise then they may restrict their spending on only essential items.
	Notice that in my paper I have spoke about the causes of recession are that of human decision except that of natural disasters. Most internal problems of recession are caused by human behavior and politics (a form of human behavior which is governance) or external problems of human behavior or politics. Ignoring natural disasters, many of the problems posed are of human nature then human behavior is truly the cause of recession. This would lead people to think that someone is at fault. But who is at fault?
	During that “recession” of 2001-Present the United States has been working hard to stop the recession from getting worse. The government has approached this recession in two ways. One way was to boost spending. The other way was to lower the interest rate. 
	There are two economic theories of which explain how to deal with a recession. The first is the classical theory. The classical theory states that if you reduce the wage (or salary) of the workers then the cost of productivity will go down which can reduce and stabilize the price. This leads to profit going up which entices expansion for investment that will increase GDP, which in turn increases employment. This is looking at the employee as a cost. Classical Theorist also believes in the dichotomy of money, which is the separation of the real and monetary sectors meaning that money does not affect the real sector. They believe that the interest rate is determined by supply and demand for savings.
The second theory is the Keynesian Theory. The Keynesian Theory argues that if wages fall then GDP falls then demand falls and price falls. When prices fall, profit begins to fall, which discourages investment. This further causes GDP to fall resulting in a rise of unemployment. According to Keynesian Theory, the monetary sector has an impact on the real sector. Keynes theorized that if you lowered the interest rate, then investment would go up and this would entice people to open up jobs that would in turn give people money to spend. He also believed that a decrease in tax and increase in government spending could also have an impact on helping to get out of a recession. 
Before the great depression most economists believed in the classical view of economics, but because of the great depression, economists and government political leaders began to see the Keynesian model as the ideal on how the economy works. In the recession of 2001, the United States being more educated in economic theory, has gone to put some of the Keynesian laws into practice by lowing taxes and lowing the interest rate. Noticing that consumer saving can cause economic slowdown has caused the government to blame consumers for the economic slowdown. Even in the mists of higher than usual unemployment rates, the government and media continue to tell consumers to spend even if they don’t have money to spend. But if consumers don’t have money to spend, how can they spend? Well, the Fed lowered the interest rate so that people could borrow at a lower interest rate. This is what the government is doing to try to get us out of a recession but I don’t believe it will work as easy as the government believes that it will.
First of all let us look at Monetary Policy. For some reason people believe that lowing the interest rate will somehow magically get people to borrow and spend to the point where it will get us out of a recession. This works: sometimes not all the time. Like I stated before, I don’t believe that anyone can rationalize or come up with equations to predict very accurately what goes on in the economy all the time. It works sometimes but not in all cases. I believe that lowing the interest rate only works to help get us out of a recession when the real wage is high and is increasing faster than inflation. If real wage is low and decreasing slower than inflation, then people will borrow money that that is valued more than their capacity to pay it back.  
For example:
 Someone was making nominal $10,000/year and the real wage was $10,000. (we assume inflation is fixed or is growing too slow to notice a huge change in one year)
Then 10 years that same people was making $10,000/year and a real wage of $5,000. Understanding that the dollar can only buy half as much as it could before, the consumer will spend less. This causes a recession that sparks to government to lower the interest rate down and the media to tell them to spend, spend, borrow and spend. Also banks get into the act of being very lenient offering fixed rates and higher creadit limits. The consumer then borrows and spends up to (let’s say for the sake of example) $10,000. To the consumer this is a great deal because he only has to pay back one year’s wages. 
The next year, the consumer is still making $10,000/year but the real wage is now $2,500, again the same thing happens, the government reacts in the same way. The consumer then borrows and spends up to $10,000. To the consumer this is an okay deal because now it seems like 2 years wages relative to last year. 
The next year, the consumer is still making $10,000/year but the real wage is now $1,250, again the same thing happens, the government reacts in the same way. The consumer then doesn’t borrow $10,000 because to the consumer this is a bad deal because now it seems like 4 years wages relative to 2 years ago.  You see, inflation did not rise for everybody, neither did everybody’s real wage fall. Only that single consumer’s real wage fell because everyone around him was making money (off of his borrowing). This is what I believe has been happening throughout the 1990’s. It is now, that we are staring to get the effect of it. The reason for this is because the consumer is borrowing less and less because he feels can’t pay the bank back because his real wage is falling or his debt is too big. There will come a time where the consumer will not borrow or buy unessential goods at all and this I believe will be one of the causes for a future depression.

Why don’t the tax cuts work?
	The tax cuts don’t work because they are given to the wrong people. The people that the tax cuts are given to are the upper class and rich people who already have lots of money and so do not spend it but save it in different forms such as buying securities. The tax breaks are not given to the lower classes whom need them and would spend them.


Why is the growth and spending still found even though the unemployment rate is rising?
	Growth is still found because people are still in the “borrowing and spending” stage. It is not until the borrowers become exhausted from borrowing and going into unbearable debt that you will see a huge drop in growth. I believe that growth for consumers is increasing at a decreasing rate. The make-up for the “decreasing rate” is that fact that the government is spending more money on defense and the like so this causes GDP to seem to be rising.

	Conclusion:

	If employers don’t give higher wages or salaries or the government doesn’t help the lower classes, the result will be a loss in consumer demand that will be so dramatic that it will cause a whole breakdown of the entire economic system that will have lots of unpredictable consequences and problems and will ultimately lead to a depression. The monetary policy and other tools will be of little help in this depression because banks will find themselves lowering interest rates into a liquidity trap with no people willing to borrow. If we do get into a depression, even lowering the taxes for the lower classes will be too late because they will be so in debt that they will use the extra money to pay off debt, which leads to nothing.

UPDATE August 13, 2002 for people interested in Wall Street

What do you mean by stock prices are an illusion of demand and supply?

What I mean is that the stock prices do not accuratly show the "real worth" of the stock. Rather the stock price is inflated because of the theory of supply and demand which states that as demand goes up supply goes down and the price goes up. For instance:

Company A's real worth is $10 a share but because of rumors or the like, people believe that the stock is worth more than it really is so let's say the demand goes up 100% (profit and all else held constant). Soon the price will go up 100% to $20 a share. Now that the price has gone up, even more people want to buy because now they believe that the company has made huge profits because the price jumped so fast, but in reality, the company's profits did not jump just the price of the stock jumped. Soon the company will see this mess and realize that sooner or later the shareholders will find out the real worth of the shares that they are buying so the company does some unethical business to make profits yield the 100% increase in dividend that people expect to see. 

But sooner or later the law catches up and you end up observing like what happened to Enron. Think about it. What people are buying is nothing but paper that is worth whatever the company's true profit says its worth. If there is no increase in profit or there is imaginary profit, than the stock is not worth its face-value. Enron will not be the last there will be many more companies as you will see.

Wall Street doesn't determine the Main Street Economy, rather the Main St. Economy determines the profit that determines true stock value. As you have read, there are many problems with main st. that are caused by the simple fact that the real wage of workers is not going up and so therefore as the underclasses approach their maximum credit limit, in the near future, profits will continoue to slide because people will buy less and less. Soon even the upperclasses will feel the financial pain as their profits decrease. The only way out of this mess is to just pay the worker more so that his/her real wage will go up then their confidence will go up. If the upperclasses and owners are stubburn to pay workers more they will find themselves with a large money supply (from borrowing so much ) and in a liquidity trap just like Japan and the value of the dollar will then start to decrease.... But that's another story.