Negative Impact of Economic Recession - Literature review Example

Negative Impact of Economic Recession Instruction Word count 1766 Negative Impact of Economic Recession Introduction The recession is the fall of a country’s National output or GDP resulting to the loss of jobs, low incomes, high government borrowing, and high inequality levels (Irons, 2009). For instance, the recession that occurred in 2008 to 2012 had many negative impacts on many citizens especially in the US. The purchasing power of the country’s citizens goes down due to poor salaries from their employers and production of goods and services goes down. Many producers sell their products at throw away prices as the economy suffers due to the declining GDP. There is a lot of suffering of families during a recession as people work hard hoping that things will improve. Recessions affecting the economy are short-term although the consequences may have a devastating effect on the industry and the consumers. There are many negative impacts of economic recession such as unemployment, low purchasing power, falling incomes, and low economic development. Economic Damage Recession results to massive loss of jobs leading to instability in many families as many people lose their self-worth and wellbeing. There are many individuals who suffer depression and results to alcoholism and self-denial due to difficulties in the provision of basic needs Murphy, & Athanasou, 1999). Individuals who lose jobs due to the recession can look for short-term solutions such as borrowing from friends or getting a lower paying job to meet the family needs. Other long-term solutions may be furthering education and relocating to places with less inflation. Unemployment and loss of income may lead to a reduced educational achievement and poor nutrition in many families as Dahl & Lochner (2008) assert. Some other adverse effects of lack of employment are poor health, delayed education, and family conflicts. There will be reduced investment and innovation due to reduced adoption of the advance technology. Another sector affected under economic damage due to the recession is education due to reduced human capital resulting to slow economic growth. Lack of funds for parents with children in the early years of education may affect the quality of education the children receive as they cannot take them to good schools. Improved nutrition impacts on the cognitive development of young children especially in developing countries (The Connecticut Commission on Children, 2004). Recession reduces the ability of parents to provide good nutrition to their children leading to poor performance in schools and poor income later in life. Education is also affected by such things like health services since unhealthy individuals cannot perform well in schools. The number of people subscribing for insurance cover will also be low due to lower levels of income. In the 2008 recess, the number of without health insurance was 46.3 million in which over 7 million were aged below 18. Some families also delay or abandon any education plans for their children. A survey in Colorado showed that some parents with children colleges taking two-year courses had planned earlier to take them to four-year, but the recession disrupted their plan (Kahn, 2009). The result of such failed plans is poor earnings and lower level of employment in the future. Loss of opportunity Recession and high levels of unemployment result in reduced economic opportunities for families and individuals such low earnings for graduates who enter the job market during the recession (Card, 1999). When children lose opportunities to attend good schools, due to the effect of the recession, they end up with high levels of poverty and may later engage in crimes affecting the economy negatively. Poverty has long-term consequences especially for small kids as they can develop serious problems such as cognitive, emotional, and behavioural challenges. Wealth helps in shaping economic opportunities providing a good life for families and more investment in the economy. Poor families have fewer opportunities and worse economic outcomes for their children and dependants. There are several ways in which people lose life opportunities such as educational attainment, poor nutrition, and other health challenges leading to future challenges in life (Hoddinott, Maluccio, Behrman, Flores, & Martorell, 2008). A recession may last two years, but its consequences may be experienced by many generations to come. Economic outcomes especially wealth distribution resulting from a recession are always affected by any form of economic recess. Decline in private investment Recession leads to slow economic growth due to low investments which in turn leads to poor technology advancement. Recessions always result in a decrease in investment, spending, and development of new technology. Demand for firms products reduce since the customers spending power is low due to the reduced incomes. Consumers and firm owners have limited access to credit facilities limiting their ability to invest. The other factor is uncertainty to during the recession periods leading to retrenchment and suffering of many. The firms may also reduce their production capacity due to low demand for their manufactured products. The human and physical interaction hinders technological equipment leading to less purchase of newer equipment. Workers cannot utilize all their skills leading to poor development. Less capital investment leads to lower levels of production especially in the future and hence lower wages for employees. Recession can also hamper formation of small businesses and entrepreneurship (Greenberg, & Keating, 2008). Business formations are important as they lead to innovation through the implementation of new technologies. Since new businesses require new customers, a recession means that there are less spending power and people wanting to start new businesses may delay and wait for the right time. Banks will also stop lending loans to customers since for fear of default by the customers due to low profits. For instance in 2008, a report by the US showed that the freezing of credit for short-term funding affects the economy, as there is a reduction in the production of goods and services (Irons, 2009). The initial Public Offering activity is also affected by the recession as some firms utilize funds from IPOs for investment and its decline results to severe losses. Impact on the children Changes in the household income and employment for parents affect children especially during the recession when their incomes are very low. He children experience low levels of wellbeing especially in cases of financial insecurity experienced by their parents according to Heckman & Masterov (2007). Parents will always like to take their children to good schools but with the onset of a recession, they end up taking them to low-cost schools. The children receive unequal education outcomes, which affect their employment and future salaries. The early years are the most difficult for children especially in children centres and childcare centres as they receive poorer services compared to the time when there is no recession. The family courts are now full of cases concerning children welfare and inadequate support. According to Ruel and Hoddinott (2008), families are worrying too much because of the high cost of living neglecting their children. Reducing childrens poverty requires the government to lay out strategies and find out its effect on the childrens wellbeing then take measures for increasing family income. The government budget for the children might reduce during the recession period leaving them to suffer under the care of their unable parents. Impact on business The recession will lead to reduced sales and profit in large businesses, which will make the manufacturers cut back employing new workers or stop buying new equipment. The other areas affected the recession will be research and development leading to low technological innovations. The manufacturers may also decide to reduce marketing and advertising expenditures affecting the entire business world. The manufacturers stock declines and lower the rate of dividends upsetting the shareholders (Irons, 2009). There may be many changes in the organization such hiring new management staff at lower pay and reduce the advertisement and marketing activities. The fall in the dividends will automatically lead to the withdrawal of many shareholders and finally the collapse of the company. The accounts receivable also suffer due to low payment of money by the borrowers or simply total default. If borrowers do not pay on time and in full, the company activities will be impaired. The other challenge that can face a business due to the recession is the productivity per employee, and they may be a force to work for longer periods and harder to keep the business afloat. There is the possibility of cutting the quality of goods and services. For instance, transportation companies may decide to lower maintenance costs, overload the passengers, or drive at high speeds to make several rounds. Other companies may charge more for the same package making the commodities very expensive. There might be reducing consumer access to valuable information concerning the products as companies shy away from advertising. Some small businesses may shut down due to low sales and low profits leading to bankruptcy. If the business is the main supplier to the smaller businesses, the smaller businesses will also feel the hitch and may close down. Effect on the government A period of recession leads to government spending such as unemployment benefits and income support for the vulnerable groups. Taxation is always affected by an economic recession as firms make fewer profits leading less corporate tax. Employees receive lower wages and salaries making the government collect less tax and lower stamp duty from houses (Irons, 2009). The other form of tax affected by the recession is the VAT payments for instance Greece revenues reduced by 18% as 60,000 businesses went bankrupt (Irons, 2009). The falling tax revenues collected by the government and the high welfare payments lead to a budget deficit and government debt. There is also a decline in the yields on government bonds as it happened in the US and UK in 2008-2012 (Irons, 2009). All these problems worsen the economy as inflation sets in making lives very difficult. Conclusion Recessions have a lasting effect especially long-term investment can and do have a lasting impact. Recess is not good for the economic growth of any state as it slows the economy by scaring away investors. The producers also cannot produce as per their capacity due to lack of markets for their products. The recession affects employment as many people lose jobs, and others receive low wages and salaries. The business sector is another one that suffers due to the recession because of low sales and low profits that make some business wide up. The governments earnings decrease due to low tax and high spending on providing essential services to citizens. The tecession has a negative impact on the entire economy and leads to long-term effects such as low education and health standards. References Card, D. 1999. The Causal Effect of Education on Earnings. In O. Ashenfelter and D. Card, eds., Handbook of Labor Economics, Vol 3. Elsevier-North Holland. The Connecticut Commission on Children. 2004. “Children and the Long-Term Effects of Poverty. 2004, at http://www.cga.ct.gov/COC/PDFs/poverty/2004_poverty_report.pdf. Dahl, G., & Lochner, L. 2008. The Impact of Family Income on Child Achievement: Evidence from the Earned Income Tax Credit. National Bureau of Economic Research, December. http://www.nber.org/papers/w14599 Greenberg, Anna, & Jessica Keating. 2008. Young Adults: Trying to Weather a Recession. Greenberg Quinlan Rosner Research, April, at http://qvisory.org/cms/0000/0141/Trying_ to_Weather_a_Recession_Study.pdf. Heckman, J. J. & D. V. Masterov. 2007. The Productivity Argument for Investing in Young Children. National Bureau of Economic Research, Working Paper No. W13016. Cambridge, Mass.: NBER. Hoddinott, J. A Maluccio, J. R., Behrman, R., Flores, and R., Martorell. 2008. Effect of a nutrition intervention during early childhood on economic productivity in Guatemalan adults. Lancet. Vol. 371, pp. 411–16. Irons, J. 2009. Economic Scaring: The Long-term Impact of Recession. http://www.epi.org/publication/bp243/ Kahn, L. B. 2009. The Long-Term Labor Market Consequences of Graduating from College in a Bad Economy.Yale School of Management. (forthcoming Labour Economics), at http://mba.yale.edu/faculty/pdf/kahn_longtermlabor.pdf. Ruel, M. & Hoddinott, J. 2008. Investing in Early Childhood Nutrition. IFPRI Policy Brief 8, November at http://ageconsearch.umn.edu/bitstream/48929/2/bp008.pdf. Murphy, G. C., & Athanasou, J. 1999. The effect of unemployment on mental health. Journal of Occupational and Organizational Psychology. Vol. 72, pp. 83–99. Oreopoulos, P., Page, M., & Stevens, H. 2005. The Intergenerational Effects of Worker Displacement. National Bureau of Economic Research, Working Paper No. 11587: Cambridge, Mass.:NBER. Read More