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Recessions, defined as a decline of no more than 10% in GDP for at least two consecutive quarters, have far-reaching effects beyond the short-term impact on spending and employment. Governments can borrow to reduce the impact, but this can lead to future cuts in vital programs. “Scarring” from a recession can have a lasting impact on education and social services, exacerbating the problem for future generations.
There are many ways to assess the impact of a recession on a country. Some argue that the impact is likely to be smaller because the duration of a recession is shorter than a depression. This claim is disputed, and some believe that a recession, generally defined as a decline of no more than 10% in gross domestic product for at least two consecutive quarters in a year and less dramatic than the circumstances of a depression, still has far-reaching effects . Recovering from a recession does not mean that all businesses, governments or individuals recover, and sometimes the interventions that stimulate recovery lead to undesirable consequences.
The immediate impact of a recession is felt on several levels. It can affect average spending and/or luxury spending, and can drive home prices up or down. Workers’ wages typically go down and some jobs are lost permanently. Economists have noted that even as the country is recovering, some areas of spending may remain unstable, and there is instability in the market with sudden spikes or dips in the values of stocks and other investments.
Governments are often directly involved in reducing the impact of a recession on a country. They can borrow to shore up markets or offer more assistance to negatively affected individuals or businesses. This borrowing could mean future cuts in vital programs, or it could be something that then becomes the taxpayer’s responsibility. The loan ultimately comes at a cost to the country, the government and its people.
The latter example is something called “scarring,” and experts are increasingly recognizing that, along with the costs that ultimately have to be paid, sometimes far in the future, are major impacts of a recession. Some financial experts have debated the long-term impact of the recession on education, from kindergarten to college education, where enforced cuts minimize educational opportunities for others, for life. These can come in the form of cuts that schools have to make or reductions in access to programs, but they also occur because people with less money cannot invest as much in their children’s education.
Based on the example of education alone, it is easy to understand how a recession can have a lasting impact on a country. Fewer educational opportunities mean fewer chances of moving into well-paying career fields, meaning some people remain in the lower middle class for life. This can then burden the state with increased demand for social services, which can lead the government to borrow additional funds or make decisions to ignore the needs of a cross section of society, exacerbating the problem. Such an example suggests that the impact could last well beyond a current recession and become multi-generational in scope.
In the short term, the impact of a recession on a country is usually a change in the prices of goods and services, which can go up or down. Less work is another common element. Market stability, companies holding money instead of investing it, and most people and industries having less to spend can result. While these characteristics may improve over time, in the long run, a country could be scarred by its lapses. For some, lives and opportunities change dramatically, and political and economic emphasis also shifts to accommodate the new dynamics.
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