Former Finance Minister Chatib Basri: Pessimism Can Increase Risk of Recession

Former Minister of Finance of the Republic of Indonesia, Chatib Basri. (Photo: Instagram @catibbasri)

JAKARTA - Former Minister of Finance, Chatib Basri revealed, pessimism can increase the risk of a recession. According to him, if consumers think a recession will lead to a recession if they reduce their spending, a recession is even more risky.

This was conveyed by Chatib Basri through an upload on his Instagram account, quoted Monday, October 24. He writes about why pessimism can make a recession really happen: animal spirits, the paradox of thrift.

Chatib Basri explained the work of economist John Maynard Keynes' seminar entitled The General Theory of Employment, Interest, and Money. There, Keynes who is the greatest economist of the 21st century introduced the concept of animal spirits.

According to him, economic decisions are determined by rational and psychological factors, one of which is expectations. Chatib explained that in the current context, if people have expectations that a recession will occur, then they will decide not to invest.

"As a result, aggregate demand has decreased. When demand decreases, people will not be interested in investing, so what happens is that economic growth slows down, there is a backwash effect, which can eventually lead to a recession," Chatib said in an Instagram account. @chatibbasri.

According to him, the same behavior also occurs on the consumer side. When consumers think that a recession will occur, people will increase their savings and spending or consumption has the potential to decrease.

Furthermore, said Chatib Basri, if spending decreases, aggregate demand will also decline. Under these conditions, there was an economic slowdown, which if it continued could lead to a recession.

"This is called the paradox of thrift," he said.

Chatib conveyed Keynes's recommendation, that in that condition the government needs to increase its spending to increase people's purchasing power. One of them is by providing social assistance to vulnerable groups.