1. A recession makes the survival difficult for new entrepreneurs and traders who have just entered the fray. Most new firms have high set up investments and before they have reached break-eve, a downturn in the economy could make them close down.
2. It breeds Monopolies. As the recession causes smaller and newer firms to go out of business then the larger dominant players will gain substantial monopoly power. In the long run this will lead to lesser choice and higher prices for consumers. This is a definite disadvantage of a recession.
3. It is usually said that the past is a predictor for the future. Basically, if there is high unemployment in present, then it is more likely to have high unemployment in the future. If people are made unemployed in a recession, it may take a long time for them to find work again. When they are unemployed they lose skills, become de-motivated and unproductive. Besides, in spite of getting unemployment benefits if any, many will see a substantial drop in income which makes paying bills and loan repayments difficult. It will force a change in lifestyle for many. The unemployed will spend less causing a further fall in consumption and lower economic growth. This makes economic growth more difficult.
4. In recession, the productivity of an economy is badly impaired. Firms can go out of business and therefore shut down their resources. Furthermore due to recession environment, there will be a significant fall in new investment. It can be detrimental to the long term development of an economy.
5. A recession is unnecessary to increase economic efficiency. The long term future of an economy can be best helped through stable growth, which avoids the extremes of boom and bust economic cycles.
6. Hard times turn spotlight on business ethics. The rising market covers a lot of sins and a falling market exposes one's nakedness. Ethical values take backseat and lack of confidence is witnessed at all levels of dealings. Idiots (politicians and those fed up with prosperity) are shielded for the results of ugly deeds and even encouraged to breed their idiocy further. Those who are engulfed in the mire of poverty are first stranded and then taught lessons about how to combat the tough time. Media and economists, who are basically responsible to send alerts of recession to society, cherish recession which fosters their importance. Great Management Guru Mr. Peter Drucker has rightly quoted, “ In all recorded history there has not been one economist who had to worry where the next meal would come from.”
Can a recession be avoided?
1. If there is a lack of aggregate demand in the economy, various policies to boost demand can be implemented.There are a number of strategies that can be implemented to help an economy to move out of a recession. The strategy adopted and applied varies and depends on the type of economic system and analysis followed by the country’s policy makers.
2. Government and Monetary authorities can try:
- Cutting Interest Rates (monetary policy) to try and boost spending and investment
- Cut income tax and / or increase government spending (fiscal policy) to try and increase Aggregate Demand
- Ensure stability in banking system and financial system and overcome worst impact of credit crunch on lending and housing market
3. Quantitative easing - increasing money supply – should be tried out. This may be necessary if the recession is so severe it creates deflation. Deflation has a powerful negative impact on consumer spending and economic growth.
If the fall in demand is moderate, these policies may be successful in boosting demand and avoiding a recession. However, if this is severe and if it is caused by falling house prices / assets, credit crisis leading to fall in bank lending, and then it is much more difficult to avoid a recession, because these create powerful decreases in economic activity. With falling asset prices, Japan tried everything to boost economic activity such as reducing interest rates to Zero percent, introducing expansionary policy etc., but struggled for many years to get out of a deflationary state of being. In this case the government can at the most minimize the depth and length of the recession. There are also significant time lags in these policies working. The recession still occurs, it can not be avoided. But, the recession may have been even deeper if the one or the other policies had not been implemented. No escape!!!
To be continued....
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