Self-Correcting Mechanisms Create Uncertainty

From 1910-1959, the U.S. economy was in recession about 33% of the time. From 1960-1982, the economy was in recession only about 23% of the time, and from 1983-2007 the percentage of time the U.S. economy was in recession fell to 6% (see chart above).

Bottom Line: Economic instability has decreased significantly over time, but columnist Robert Samuelson writes in the Washington Post that "It's curious that people seem to feel more economically insecure even though the economy has become more stable."

"Since 1982, there have been only two recessions, lasting 16 months. In the past 10 years, unemployment has averaged 4.9%; in the 1970s, the average was 6.2%. Yet in 2006, only about half of workers were satisfied with their job security, reports a poll from the Conference Board. In 1987, when unemployment was higher, about 60% were satisfied.

One explanation of the paradox is that the uncertainties and insecurities that assault workers, investors and firms actually foster overall economic stability. There are constant upsets -- business expansions and closures; greater competition from emerging technologies and foreign economies; shifting prices for stocks and bonds. These put people on edge. But many small adjustments may smooth out the business cycle, and they may minimize deep recessions, stock crashes and panics."

Bottom Line: A market economy has effective self-correcting mechanisms that result in a continual series of small minor adjustments that prevent major problems like recessions. The continual adjustments create uncertainty for some groups, but act as shock-absorbers to prevent greater problems.