Economic Impact of the Great Recession on the US Economy, Research Paper Example

Abstract

In this paper, I will focus on the effects the great recession has had on the United States economy, focusing on small businesses.  The impact on small companies is adverse. As such, these businesses’ owners need to focus on creating relational, structural, and social capital before a recession so as to guard themselves against the uncertainty that comes with a recession. Through supply chains, these small businesses can grow their social capital very efficiently. This study is critical, seeing as small companies are the leading providers of state employment and local taxes (Sameer Prasad, 2012). I will also look at how these small businesses affect the United States’ economy and their contribution to employment and underemployment. Research shows that small firms and establishments provide more jobs on the net (Neumark, 2011). Small businesses are greatly affected by the local government more than the central government. Local policies that mainly affect the running of small firms and establishments create an accommodating culture between private sectors and the local public and provide regulatory help (Christiana McFarland, 2012).

Introduction

The great recession comes with its bout of mostly negative consequences. The great recession has proved to be a very trying time for the United States’ economy from businesses incurring huge debts and losses to some organizations’ fall or closure. Small firms or businesses are one of the most affected economic sectors. Small firms hold the economy of the United States of America. They provide the highest number of job opportunities in the state. In this essay, I will discuss these effects of the great recession with a specific focus on small businesses. With the help of scholarly sources, I will provide statistical data to prove my findings. I will also focus on the economic impact of the great recession in the country and the financial regression it causes. The point of this paper is to educate on the effects of the great recession to help businesses prepare beforehand to be able to survive this long period. I will also discuss the impact of the great recession on borrowing money from banks. Loaning of money from banks reduced drastically during the great recession (Elizabeth K. Kiser, 2015). These effects are hazardous and long term, so it is tough for a business or firm to bounce back after being hit by the consequences of the great recession.

Literature Review

This literature will be reviewing the sources used in this essay to give information about the impacts of the great recession. According to Duignan (2019), the great recession is the economic recession that was foretold by the financial crisis in 2007-2008. It spread quickly to other nations. The great recession has very dire consequences on the economy, especially on small businesses. Small businesses are a significant employment source and provide many revenues to the government (Sameer Prasad, 2012). According to a researcher named Birch, small businesses are an essential source of job creation in the United States. He claimed that between 1969 and 1976, sixty-six percent of all jobs in America were created by organizations with twenty or fewer employees, while organizations provided eighty-one percent of these jobs with a hundred or fewer employees (Neumark, 2011).

Due to the great recession, most small businesses are adversely affected. Most small businesses obtain loans from small banks. With the recession, these banks are not able to loan the money to these businesses. As such, the small firms cannot get the resources required to keep them running( Elizabeth K. Kiser, 2015). Most of them end up shutting down. This takes the economy of the United States on a downward spiral. When small businesses lose their funding, they cannot keep most of their employees and, as such, have to fire them. According to Burcu Dugyan-Bump (2010), small firm workers had a higher probability of losing their jobs during the great recession of 2007-2008 than workers in large companies. During this recession, the media and policymakers focused a lot of attention on small businesses due to the fact that they are critical controllers of the United States economy (Burcu Dugyan-Bump, 2010).

For small businesses to survive the significant recession period, they need to set up control and mitigation measures, develop skills and management processes, setting up a reserve fund, getting market expansion aid, and find a local government support structure  ( Christiana McFarland, 2012). The local government should also help grow these businesses by setting up policies that benefit them.

Contrary to the popular opinion that economic recessions only stay for a short period, and then things go back to normal, this plague’s effects are long term (Irons, 2009). It takes a long time before the economy can go back up and before businesses that had either fallen or incurred significant losses to build back up.  The long term damage to individuals and the economy at large is known as scarring (Irons,2009; Sher Verick, 2010).

The Impacts of Recession on Small Businesses

A recession is a period of contraction of the economy which occurs after an expansion (Christiana McFarland, 2012). During this period, there are negative economic indicators, the gross domestic product (GDP) is lowered, the earnings for workers reduce, consumer expenditure declines, and eventually, profits for businesses reduce.  Most businesses find that these consequences of a recession are inevitable. In addition to the dire results, there is also long term, and as such, any company that wants to survive in the market has to find ways to withstand recessions, regardless of how long they last (Christiana McFarland, 2012). An excellent example of a recession that lasted for an extended period is the USA’s most recent one, which began in December 2007 and came to an end in June 2009. A crisis in the subprime mortgage caused this recession. During this period, based on data collected by the department of labor in the USA, unemployment rates remained greater than nine percent, and a rise in personal income remained level. After this recession, no one expects the business environment to improve for years to come, and most small firms will not be able to suffice the extended economic downturn (Christiana McFarland, 2012).

During the beginning stages of a recession, consumer demands, and profitability for corporate lower. If the recession persists for an extended period, and a company continuously experiences negative profitability, it will most definitely go through a credit crunch (Christiana McFarland, 2012). This happens due to the fallen economy, making the customers delay or fail to pay for goods and services offered. Consequently, companies with weak financial liquidity positions are unable to pay their bills timely. Late payments reduce a small firm’s loan credibility to their supplier, thus reducing its ability to borrow. In severe credit damage, the afflicted company faces a financial liquidity crisis and has to contend for bankruptcy (Christiana McFarland, 2012).

It is a known fact that during a recession, small businesses are at a higher risk of sinking than large corporations. There are several reasons why this is so. First, because small businesses are more leveraged than large corporations, they face higher credit pressures and have a higher possibility of defaulting during a recession.  Another reason why small businesses are more affected by a recession is that they are young and, as such, do not have the institutional capability to be well prepared prior to a recession.  In addition to that, small business owners do not have the skills necessary to survive in the business world nor the cleverness needed for capital hedging. Most of them work beyond the set levels of debt and do not store enough cash reserves for emergencies (Christiana McFarland, 2012). Small businesses also lack enough accessibility to the credit market and, as a result, depending on secondary financial agencies, specifically community banks, for credit.  This is the complete opposite of large corporations that borrow from the public debt marker, for example, commercial paper, equity, and public debt. During a recession, community banks’ financial state is also negatively affected compared to large banks. Thus, the financial resources available to small businesses again go down (Christiana McFarland, 2012).

Employment With Regards to Small Businesses

David Birch concluded that small businesses are the leading employment creators in the United States economy. He claimed that small firms and businesses were the main engines of jobs’ growth, supporting these facts with statistical data. He claimed that between the years 1969 and 1976, sixty six percent of all new jobs in the United States were provided by firms with twenty or less than twenty employees while  eighty one percent of these jobs were created by businesses with a hundred or less employees. (Neumark, 2011). He also argued that between the years 1981 and 1985, companies with less than twenty employees contributed to job creation by eighty two percent. Birch’s argument of the importance of small businesses to the United States economy is further backed by evidence of the United States tradition of supporting small firms. As a matter of fact, in 1953, the United States congress created an act whose main purpose was to aid, counsel, assist and protect small businesses’ interests. Under this act, a Small Business Administration (SBA) was formed by the federal government to ensure that a particular portion of contacts by the government was allocated to small businesses (Neumark, 2011).

Based on research tests, job creation by small businesses is higher than job creation in higher firms. The growth of a small business dramatically reduces the job creation levels in that firm. This research shows that it is essential to avoid regression fallacy when estimating the relationship between size and growth. First, the smallest firms create an unbalanced gross job creation share: a thirty-five percent share relative to twenty-seven percent. However, the imbalance is less risky (Neumark, 2011).

Financial Restraints During the Great Recession

According to (Siemer 2018), financial constraints during the great recession lowered the employment rates by four to eight percentage points in small businesses compared to large ones and seven to nine percentage points in young firms compared to old firms. The great recession brought about a considerable reduction in employment rates by around eight percentage in small businesses and sixteen percent in young businesses. Moreover, the massive decline in the number of young businesses brought about an unpredicted drop by five percent in the firms through the year 2010. The conditions for credit viability were also very tight. This great recession from 2007 to 2009 marks one of only two recessions from the late 1970s, whereby lending was declined in commercial banks (Siemer, 2018).

From 2008’s second quarter to 2010’s second quarter, loans given to small businesses by commercial banks declined by over forty billion dollars. This was mainly due to the great recession, which brought about changes in credit supply, although a decrease in demand for bank credit by firms also contributed to this issue (Burcu Duygan-Bump, 2014). The decline of small firms’ loan feasibility has become infamous with the media and policymakers mostly because it has brought about a high unemployment rate. This is seen where research shows that higher than ninety percent of all businesses in the United States have less than ninety-nine workers, and they are made up of thirty-five total paid employment. Unlike larger firms, small firms are highly dependent on financing from banks since they cannot access capital markets. As such, any adverse effect on the flow of credit to banks affects the labor market of these small firms (Burcu Duygan-Bump, 2014).

With a tremendous ongoing recession, analysts say that employees are at a higher risk of losing their jobs if they work for highly dependent companies on external financing, which is smaller firms. Contrary to this fact, there are no significant differences in the propensity for unemployment between small-firm workers and workers in large firms located in sectors with a low dependency on external financing. These findings go hand in hand with the shocking supply of credit that disproportionately affected workers in firms experiencing financial constraints during the recession.  This is the reason behind the eight percent rise in the unemployment rate (Burcu Duygan-Bump, 2014).

If the hypothesis for credit supply shock is consistent with these results, there is a demand reduction. Borrowers are unsure about expanding their businesses and may want to down-size due to a decrease in demand for the goods and services produced during the recession. This leads to a reduction in loan demand and increased workers’ layoffs. This research channel could explain these findings if demand reduction only occurs in small firms that depend on banks (Burcu Duygan-Bump, 2014).

Preparation of Small Businesses for the Great Recession

The great recession brought to light the significant and vital role of small businesses in the United States economy. Due to this, the local government is now paying attention to small firms and businesses and finding ways to expand them (Christiana McFarland, 2012). In this sector, I will study how the policies put up by the local government are related to the growth of small businesses in their developmental stages.

The first stage of developing a futuristic small business is the development of skills and management. Most small businesses lack proper management and business skills. Small businesses can be defined as various entity groups comprising different growth inspirations, sizes, outputs, and industries. Studies prove that businesses go through developmental stages, reflecting high uniformity levels of management, financial, technical, and other needs, and challenges despite having all these differences.

All these developmental skills take part in a stage called the self-employed stage. This phase starts with an entrepreneur’s interest in beginning a business and comes to an end with a product or service that is ready for sale to a potential client and revenue generation. The biggest challenge that faces companies in this stage and could lead to the collapse of the business in case a great recession occurs is the ability for business survival. For the business to survive, it has to have cash reserves meant for emergencies, build assets, build a concrete business model, assemble all needed resources, create a feasible marketing strategy and build profitable networks (Christiana McFarland, 2012). Suppose a business carries out these steps carefully and follows them to the latter, with the local government’s support. In that case, they are almost guaranteed that even if the great recession hits, the consequences will not be dire, and the company stands a chance at surviving. In this stage, business owners also have to choose whether they want to grow or remain in their current state.

The local government also plays a massive role in helping small businesses to grow and remain profitable. The local government has to create regulatory processes that favor these small businesses. These processes include; giving permits and zoning, preserving local assets, safeguarding local citizens, and guarding against destructive development (Christiana McFarland, 2012).  However, these regulatory steps also have their downside, especially when it comes to small businesses that lack the time and resources to go through all these bureaucratic steps.

Seeing that the government is a powerful body, it has the ability to influence the process of entrepreneurship by suffocating the efforts of those working towards starting new businesses. There are various ways this could be done; creation of complicated regulations, the formation of complex bureaucratic requirements, or even slow response to a request for requirements needed to start a business (Christiana McFarland, 2012). However, since the great recession of 2007 to 2009, the local government has increased its efficiency, effectiveness, speed, and reduced its regulation’s complexity. This is very crucial to ensuring the growth and development of small firms and businesses. It is expected that counties that have been allowed zoning assistance and permitting will have higher rates of change of small firms and businesses throughout all stages.

Policy Responses for the Great Recession

The government of the United States is setting up policies to mitigate the consequences of the great recession. As I had discussed earlier, the great recession has adverse effects on the economy and could collapse the market and, consequently, the economy if not responded to appropriately. The government has thus set up three responses to this problem; bailouts and pouring of money into the finance system so as to keep the credit taps flowing, reducing rates of interests so as to encourage the borrowing of loans and consequently investments; and ensuring continuous aggregate demand by spending extra fiscal (Sher Verick, 2010). These policies or measures are set up so as to avoid deterioration of the economy and thus keep the employees in their respective jobs where possible while helping in the creation of jobs to create job opportunities for the unemployed. Generally, this method has helped prevent the consequences of the great recession from completely sinking the economy and affecting the people of the United States (Sher Verick, 2010).

Initiatives for Sustainability in Small Firms

Initiatives for sustainability in small firms are different from those in large businesses and corporations. The organizational decline is defined as a wide range of conditions that have the capability to have negative impacts on a business.  Small firms are always facing the risk of organizational decline and have to work extra hard to avoid this. Organizational decline poses a threat to an organization’s viability and may bring about market share reductions, losses financially, and a drop in sales and demand (Panwar, 2015). A decline goes in line with dysfunctions within levels in the firm. Businesses that are declining go through high internal conflict levels, the general morale in the organization is low, and the employees develop self-protecting behaviors. All these negative results of firm declination eventually lead to a firm conserving its resources (Panwar, 2015).

As the organizational decline is terrible for businesses, especially if there is a tremendous ongoing recession, most small firms take up cost-efficient measures due to financial constraints. These measures are given to the name fire-fighters and aim to ensure stable finances by improving the cash flows (Panwar, 2015). However, these cost-efficient measures are not enough to save a company. Due to this fact, the company eventually resorts to an asset retrenchment route. Here, they divest the assets which are low performing. Retrenchment is only possible and efficient in organizations with steady cash flow from any disposal. This is not always easy, based on second-hand market liquidity, exit barriers, and asset specificity. However, a firm chooses to avoid firm declination during the great recession. Whether by cost-efficient or retrenchment methods, it is essential, especially for small firms and businesses, to protect themselves from this dire eventuality.

Conclusion

Most people view economic recessions as just a  passing temporary event. However, research has shown that even though the event is a temporary one, the effects are always adverse and long-lasting. The consequences of the great recession include; increased unemployment rates, reduced incomes, difficult economic times, and the collapse of some businesses, particularly small firms, and the economy at large (Irons, 2009). When credit markets stop and the rate of consumer spending is reduced, small businesses have a low to zero chance of survival. Larger companies could survive this period. However, their market will go down, and they could incur losses that may be hard to bounce back from. In each situation, whether in a small firm or a large, already established corporation, the great recession is a scary and challenging time, which causes a lot of damage to individuals, companies, and the economy at large (Irons, 2009).

Countries affected by the great recession take time to recover from its adverse consequences. The recovery is often uneven and very slow. The more diverse social impacts, that is, increased unemployment rates, low fertility rates, increased student loan debts, lower job prospects for the youth, are expected to last for many years to come (Duignan, 2019). Businesses that collapsed during the great recession and those that incurred severe losses need to set up new ways to ensure the events do not repeat themselves in the future. There are several policies that the local government has come up with. I have discussed them in the subtopics above. These policies are meant to empower small businesses and firms such that if there is another great recession, they will be able to survive it. As seen clearly, these small firms hold the economy of the United States of America. They are the most significant job creators in the country and, as such, need to be protected from collapsing (Duignan, 2019). The great recession is an unavoidable situation. However, its impacts are not. Companies should study and implement the proper methods to ensure their survival during this period.

References

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Christiana McFarland, J. K. (2012). Small Business Growth During a Recession: Local Policy Implications. Economic Development Quarterly, 102-113.https://doi.org/10.1177/0891242412461174

Duignan, B. (2019). Great Recession. Britannica , 1-9.https://www.britannica.com/topic/great-recession/additional-info#history

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Kiser, Elizabeth K, Prager, Robin A, & Scott, Jason R. (2015). Supervisory Ratings and Bank Lending to Small Businesses During the Financial Crisis and Great Recession. Journal of Financial Services Research, 50(2), 163–186.https://doi.org/10.1007/s10693-015-0226-x

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