Effectiveness of Government Spending in Dampening the Social Impacts of Recession: A Research Proposal

Effectiveness of Government Spending in Dampening the Social Impacts of Recession
A Research Proposal

The business cycle (or economic cycle) is the intrinsic cyclical fluctuation of market economies characterized by alternating periods of sustained rapid growth and periods of slowdown and decline. Observations of a continued reduction in business cycle volatility in America since 1948 had led to speculation that this may be the beginning of a new economic trend (Weber, 1997) while triggering multiple investigations into the cause of this decline (Gordon, 2005; Arias et al., 2007). Steidtmann (2007) proposed in his article that structural changes in America’s economy had made it more resilient to shocks. While this trend seemed encouraging, the ongoing financial crisis and recession of 2007-2009 has unfortunately shown that large cyclical movements in the global economy are still a serious problem persisting into the 21st century.

During a recession, in addition to a decline in economic performance indicators like the Gross National Product and stock prices, a worsening of social standard indicators like health and crime rates is also widely prevalent (Weatherburn et al., 2001; Gaylord & Lang, 1997). The people who are most affected by a recession are arguably the middle and lower income population groups as they have less savings and are more dependent on employment and the state of the economy. Thus, the most pressing issues that governments are concerned with during a recession include implementing methods of halting the recession, stimulating the economy back into growth and just as importantly, the maintenance of the social and living standards of the population.

The various methods of government intervention in the economy are well documented and widely discussed by economists. These solutions mostly include increase in government spending in the form of fiscal policies and the injection of funds into the industries to stimulate growth. The 700 billion dollar bailout of the U.S. financial system is an example of government intervention in the market that aimed to restore confidence in the economy and dampen the economic effects of recession. However, the issue of the social impact of a recession and its specific solutions are much less discussed due to the strong focus on economic recovery during a recession.

There is a lack of literature regarding government efforts during recession that are targeted at social issues. This is probably due to the assumption that any effort serving to improve the economy would go equally towards improving and maintaining social standards, thus leading to an absence of policies to specifically manage the social deterioration during recession. This assumption is potentially flawed as government policy and aid does not reach the whole population equally and the overall impact on the social state of the population may not be accurately reflected by the response of the economy to the policies. In order to verify this critical assumption, a study could be done to investigate the relationship between the degree of deterioration of social standards and the amount of government intervention during a recession in different countries. This will help to determine if increased government spending during recession is linked with a better maintenance of social standards.

The answer to this question is important as the responsibility of the government to society is more than just ensuring economic growth and performance. An important responsibility of the government is to ensure the welfare and well being of the people. During times of difficulty such as during a recession, the restriction on monetary resources makes it even more important for the government to allocate and use these resources efficiently and effectively. The two areas of importance are related to each other and focus should not be solely put on the recovery of the economy but also on the effects that government intervention is having on the recovery of social standards in the country. By studying the different efforts different countries put into dealing with a recession, better and more effective ways of allocating resources towards both economic and social recovery can be derived. Individual governments would also be able to determine if more focus should be shifted onto managing their social recovery.

Sets of economic and social statistics can be collected for different countries after which the amount of money spent on economic policies of each country will be compared with the rate of decline in the social indicators. The relation between the two across the different countries could possibly reveal links between social phenomenon during a recession and actions taken by governments.

In determining the level of social and living standards in a country, main statistical indicators of quality of life can be used. These include health levels where in this study, the number of stress related medical cases can be collected. Crime rates during period of recession could be tabulated and also suicide rates can be used. An aggregate rate of social decline can be calculated from these statistics to be used in a overall comparison against the aggregate efforts of the government in economic recovery policies.

In addition to tabulating the total amount of money the governments spend towards economic policies, breakdown of the main activities and policies that the governments have implemented such as stimulus packages for industries and packages for consumers can also be collected. This will enable us to observe if there is a correlation between the type of policies used and the corresponding impact on social indicators.

If the rate of social decline does not decrease as countries increase their spending on economic recovery policies, the results would go to show that an emphasis on economic recovery might not be the best method of handling a recession. The results of this study can also potentially be used to better understand how resources can be diverted to targeting specific social problems that occur during recession that cannot be solved by a resuscitation of the economy. 

References

Arias, A., Hansen, G. D., & Ohanian, L. E. (2007). Why Have Business Cycle Fluctuations Become Less Volatile. Economic Theory , 43-58.

Gaylord, M. S., & Lang, G. (1997). Robbery, recession and real wages in Hong Kong. Crime, Law & Social Change , 49-71.

Gordon, R. J. (2005). What Caused the Decline in U.S. Business Cycle Volatility. NBER Working Paper Series , 1-78.

Steidtmann, C. (2007, March 7). Economist’s Corner – The Case for Optimism: One Last Time. Retrieved May 14, 2009, from Deloitte Research: http://www.deloitte.com/dtt/article/0,1002,sid%253D15288%2526cid%253D148556,00.html

Weatherburn, D., Lind, B., & Ku, S. (2001). The short-run effects of economic adversity on property crime: An Australian case study. Australian and New Zealand Journal of Criminology , 134-148.

Weber, S. (1997, July). The End of the Business Cycle? Retrieved May 14, 2009, from Foreign Affairs: http://www.foreignaffairs.com/articles/53227/steven-weber/the-end-of-the-business-cycle