Redistribution and Economic Decline

Abstract

Economic activity is kept stable by means of explicit and implicit contracts. These contracts, in turn, carry the confidence of economic decision makers as far into the future as the free market will trust them. A change in the trust of an implicit contract leads to a decline in economic activity; if that decline, while unexpected, is manageable, the resulting macroeconomic downturn will be a recession. If, on the other hand, the negative changes are beyond what the present system of explicit and implicit contracts can manage, the recession can escalate into a depression. The line between a recession and a depression is more easily crossed when government fails as an above-market carrier of confidence.