The federal government responded to the recession by significantly expanding UI eligibility, increasing TANF allocations, and expanding the EITC and CTC. During the slump, other government safety net spending surged as the population eligible for services grew. These limited increases of the social safety net were critical in keeping families and children from falling deeper into poverty. However, the economic downturn had a significant impact on earnings and employment, pushing more families into poverty and leading to a rise in intimate partner violence.
Policymakers should consider a number of options for ensuring that the social safety net is prepared to respond properly in the event of the next economic downturn:
- Oppose the White House’s proposed “public charge” rule, which would restrict immigrant access to the social safety net even more. In fact, unauthorized immigrants, particularly children of immigrants, should be allowed to participate in direct assistance programs. 14
- Reduce the amount of discretion that states have over programs like TANF by requiring expenditure and accountability mechanisms to guarantee that money are spent as intended.
- 15
- Prepare to enact a stimulus plan that strengthens the social safety net sufficiently amid an economic downturn.
- Investigate measures to improve social services for low-income familiesthis would necessitate countercyclical public investment rather than cutting funding for social programs as demand rises.
M. Bitler and H. Hoynes (2016). Isn’t it true that the more things change, the more they remain the same? During the Great Recession, the safety net and poverty were both impacted. S403-S444 in Journal of Labor Economics.
M. Bitler, H. Hoynes, and E. Kuka (2017). In the United States, child poverty, the Great Recession, and the social safety net are all discussed. 358-389 in Journal of Policy Analysis and Management.
D. Schneider (2015). Evidence from the United States on the Great Recession, fertility, and uncertainty. 1144-1156 in Journal of Marriage and Family.
D. Schneider, K. Harknett, and S. McLanahan (2016). Demography 52:2, 471-505, Intimate Partner Violence in the Great Recession.
This is the second in a series of policy briefings on the Great Recession based on IRLE academic research. The first brief looked into what caused the Great Recession. The third session will look at employment and salary trends before, during, and after the Great Recession, and the fourth session will look at recovery initiatives.
What impact does the economic downturn have on families?
The escalating economic crisis is having a significant impact on children, youth, and families. Its impacts are reverberating throughout the various contexts in which children and youth find themselves. Stressors such as job loss, home foreclosure, or a loss of family savings put a pressure on parental relationships and the family as a whole inside the nuclear family.
Basic necessities such as food security, healthcare, and housing may be unmet, exacerbating the shock for already low-income households. Increased rates of family conflict, child neglect and abuse, and intimate partner violence are all linked to poverty. On a larger scale, the worsening economy may have an influence on funding for public schools and community health centers, which are facing budget cuts at a time when their services are most needed by our nation’s children, youth, and families.
Children and adolescents are especially vulnerable at crucial developmental transitions, such as graduation from high school. Adolescents at this age may be obliged to postpone their ambitions for higher education in order to contribute to the household economy, which is becoming increasingly scarce. All of these changes can have a significant and long-term impact on the mental health of our country’s children and youth, producing anxiety, low self-esteem, and other emotional/behavioral issues.
Psychology has built a body of knowledge in study and practice to assist families in coping with financial stress and preventing mental health issues, child abuse, and intimate partner violence in children. Children, teenagers, and families can effectively cope with the stress caused by the economic crisis when given the right skills for positive parenting, preventing child abuse and neglect, and developing resilience, according to research. To counteract these pressures, psychologists are advised to participate in educational activities in schools and community forums such as parent teacher association meetings or YMCAs.
What is the impact of a recession on the typical person?
When manufacturing slows, demand for products and services falls, financing tightens, and the economy enters a recession. People have a poorer standard of life as a result of job insecurity and investment losses.
What are the effects of a recession on low-income families?
The poor are always the hardest hurt by recessions. Low-income families not only have the smallest budgets, but their incomes are also more vulnerable during economic downturns. In each of the last four recessions in the United States, the bottom 20% of earners fared significantly worse than the typical American.
However, new study shows that the most recent recession, the severe slump produced by the global financial crisis in 2007 and 2008 (often referred to as the Great Recession), was especially hard on the poor. According to economists from the University of Minnesota, the University of Toronto, and the University of Michigan, the average working-age adult in the bottom 10% of earners lost two-and-a-half times as much money as those in the top 10% a disparity much greater than in the previous three recessions.
How did people fare throughout the Great Recession?
The poverty rate in the United States grew from 12.5 percent in 2007 to more than 15 percent in 2010, as millions of individuals lost their homes, jobs, and savings.
How did the pandemic effect families?
The study’s lead coinvestigators, psychology professors Melissa Sturge-Apple and Patrick Davies, expect acute negative impacts on family functioning and cohesion to linger for years, especially in families who already had a lot of problems before the pandemic.
While scientifically sound, pandemic-prevention methods including stay-at-home orders, remote training, and limiting public gatherings have detrimental consequences for families.
“The pandemic has been extremely stressful for families, with significant concerns about family members’ health, financial instability, food insecurity, social isolation, and increased caregiving burdens associated with having children at home,” says Sturge-Apple, who is also the University’s vice provost and dean of graduate education. “The goal of the study is to uncover factors that helped families survive so that the optimal solutions for at-risk families may be developed.”
How and why COVID amplifies family conflict
Domestic violence in the United States increased dramatically during the pandemic, with estimates ranging from a 21 to 35 percent rise. These figures are especially alarming in light of the fact that, even before the epidemic, there were already high levels of harsh parenting, as demonstrated by Davies and Sturge-research. Apple’s
“We will be able to analyze more exactly how and why COVID-19 may intensify tension between parents, which then spills over into how they care for their children, by observing families before, during, and after the pandemic,” adds Davies. “Our research will look into a variety of factors at the neurological, familial, and extrafamilial levels.”
The availability of a recent three-year family study at Mt. Hope Family Center just prior to the commencement of the pandemic, which offers a baseline against which the additional COVID-19 stresses and effects may be studied, helped obtain the NICHD funding. Three more annual data gathering waves are planned by the teams.
In order to design evidence-based therapies and interventions that aid struggling families, developmental scientists, physicians, and public policy advocates must first understand the public health implications.
What impact did being economically disadvantaged have on the families’ lives?
Poverty is not a fixed state. According to new data, many low-income families’ lives are insecure. Poverty is a roller coaster for them, marked by erratic employment, erratic work schedules, fluctuating public benefits, shifting household composition, frequent housing moves, and other changes that jeopardize not only their precarious finances but also, evidence suggests, their children’s health and well-being.
The Social Service Review’s September 2017 edition focuses on the subject of economic instability, its effects for low-income families, and its policy implications. The researchers shed light on families’ daily challenges to feed themselves using SNAP (Supplemental Nutrition Assistance Program) payments that run out before the end of the month and to find child care that fits around their irregular and unpredictable work schedules. Finally, they assess how public policy and the social safety net both alleviate and exacerbate instability, as well as how they may improve.
The SSR hopes that by dedicating a full issue to economic instability, it would bring attention to a facet of poverty that has been neglected and unappreciated, according to experts. Marybeth Mattingly, Director of Research on Vulnerable Families at the University of New Hampshire’s Carsey School of Public Policy and one of the issue’s guest editors, said, “We think a lot about how people don’t have enough.” “We don’t have a lot of information on how that changes over time.”
Jonathan J. Morduch, Professor of Public Policy and Economics at New York University’s Wagner Graduate School of Public Service, and Julie Siwicki, now at the Aspen Institute’s Financial Security Program, found that almost all households with an annual income that lifted them above the federal poverty levelbetween 100 and 150 percent of itfell back into poverty for at least one month of the year; a third of househoods with an annual income that lifted them above the federal poverty levelfell back into poverty for “In and Out of Poverty: Episodic Poverty and Income Volatility in the U.S. Financial Diaries,” their article claims that the main source of this volatility is the variation in compensation within employment. Low-wage workers are increasingly subjected to not only changing work schedules but also wildly fluctuating hours within each pay period, according to academics.
The scarcity of data has been a stumbling block for researchers interested in studying economic volatility. Family data is frequently based on yearly averages or a single point in time, both of which obscure week-to-week and month-to-month variations.
month-to-month variation Morduch and Siwicki use the U.S. Financial Diaries, an innovative survey that tracked households for a year to observe how they managed their finances. The diaries provide a detailed look at monthly spending and earning trends, as well as formal and informal coping mechanisms used by families to moderate consumption and compensate for income fluctuations.
Borrowing from relatives and friends is the most typical approach, according to Morduch and Siwicki. Families also seek assistance from non-profits or use public benefits, such as SNAP, child care subsidies, and Social Security for disabled people.
The relationship between government subsidies and economic instability is complex. Consider SNAP (Supplemental Nutrition Assistance Program) benefits. According to research, they play a critical role in lowering economic insecurity for low-income families. The program, however, causes its own instability because the monthly payments are insufficient to cover a family’s monthly needs. Anika Schenck-Fontaine, a researcher at Duke University’s Sanford School of Public Policy; Anna Gassman-Pines, an associate professor at the Sanford School; and Zoelene Hill, a post-doctoral researcher at New York University, found that as time passed, families turned increasingly to their social networks for help. According to their study, “Use of Informal Safety Nets During the Supplemental Nutrition Assistance Program Benefits Cycle: How Poor Families Cope with Within-Month Economic Instability,” families were six times more likely to borrow money three weeks after receiving SNAP benefits than they were one week after. The total level of “food difficulty,” as defined by the authors, remained consistent over the month, but at a high level. “SNAP benefit amounts may not be adequate to lift families out of food hardship, especially when combined with earned income and the utilization of informal services,” they warn.
Another significant issue is the link between economic insecurity, child care, and child care assistance. Child care allows parents to work, but arranging it has become increasingly difficult for low-income parents due to irregular and non-standard work hourshours outside of the conventional work and school day. A team of researchers from the University of California, Berkeley, and the University of California, San Francisco, conducted in-depth interviews with 25 parents in the San Francisco Bay area and discovered that parents used three major tactics.
Some two-parent households used “tag-team” child care, with one parent working typical daytime hours and the other working non-standard hours.
The insecurity of job was mirrored in the insecurity of child care for other families. Parents were compelled to adapt, relying on family, neighbors, and friends for assistance.
Economic insecurity is important not simply because it makes life difficult for low-income households. It has the potential to harm children by upsetting family routines and influencing parenting. According to one study, the longer their families have been without SNAP benefits, the lower their test results get.
Sharon Wolf, Assistant Professor in the Graduate School of Education at the University of Pennsylvania, and Taryn Morrissey, Associate Professor in the School of Public Affairs at American University, write in “Economic Instability, Food Insecurity, and Child Health in the Wake of the Great Recession” that economic instability can harm children by jeopardizing their health and food security.
Changes in the social safety net are a common theme in the special issue, and they may assist lessen economic instability. “There is a way we could approach our programs differently to encourage stability if stability is a goal,” Mattingly says. For example, she claims that disbursing SNAP benefits at less-than-monthly intervals could help reduce the week-to-week insecurity that many families today face.
Researchers also believe that administrative reforms at agencies that distribute federal child care subsidies could make it easier for parents to secure quality child care.
The special issue of the SSR aims to shift the focus of the discourse about poverty to its episodic nature. It also gives us a taste of a topic we’ll likely hear more about in the future. According to Mattingly, economic volatility is piqueing the interest of researchers, who are looking for new ways to evaluate and comprehend it.
Who is the most affected by a recession?
The groups who lost the most jobs during the Great Recession were the same ones that lost jobs throughout the 1980s recessions.
Hoynes, Miller, and Schaller use demographic survey and national time-series data to conclude that the Great Recession has harmed males more than women in terms of job losses. However, their research reveals that men have faced more cyclical labor market outcomes in earlier recessions and recoveries. This is partly due to the fact that men are more likely to work in industries that are very cyclical, such as construction and manufacturing. Women are more likely to work in industries that are less cyclical, such as services and government administration. While the pattern of labor market effects across subgroups in the 2007-9 recession appears to be comparable to that of the two early 1980s recessions, it did have a little bigger impact on women’s employment, while the effects on women were smaller in this recession than in previous recessions. The effects of the recent recession were felt most acutely by the youngest and oldest workers. Hoynes, Miller, and Schaller also discover that, in comparison to the 1980s recovery, the current recovery is affecting males more than women, owing to a decrease in the cyclicality of women’s employment during this period.
The researchers find that the general image of demographic patterns of responsiveness to the business cycle through time is one of stability. Which groups suffered the most job losses during the Great Recession? The same groups that suffered losses during the 1980s recessions, and who continue to have poor labor market outcomes even in good times. As a result, the authors conclude that the Great Recession’s labor market consequences were distinct in size and length from those of past business cycles, but not in type.
Is there going to be a recession in 2021?
Unfortunately, a worldwide economic recession in 2021 appears to be a foregone conclusion. The coronavirus has already wreaked havoc on businesses and economies around the world, and experts predict that the devastation will only get worse. Fortunately, there are methods to prepare for a downturn in the economy: live within your means.
What are the two most serious issues that come with a recession?
Readers’ Question: Identify and explain economic elements that may be negatively impacted by the current economic downturn.
- Output is decreasing. There will be less production, resulting in reduced real GDP and average earnings. Wages tend to rise at a considerably slower pace, if at all.
- Unemployment. The most serious consequence of a recession is an increase in cyclical unemployment. Because businesses are producing less, they are employing fewer people, resulting in an increase in unemployment.
- Borrowing by the government is increasing. Government finances tend to deteriorate during a recession. Because of the greater unemployment rate, people pay fewer taxes and have to spend more on unemployment benefits. Markets may become concerned about the level of government borrowing as a result of this deterioration in government finances, leading to higher interest rates. This increase in bond yields may put pressure on governments to cut spending and raise taxes to reduce budget deficits. This could exacerbate the recession and make it more difficult to recover. This was especially problematic for many Eurozone economies during the recession of 2009. See also the Eurozone budgetary crisis.
- Depreciation of the currency.
- In a recession, currencies tend to depreciate because consumers predict reduced interest rates, so there is less demand for the currency. However, if there is a worldwide recession that affects all countries, this may not happen.
- Hysteresis. This is the claim that a rise in cyclical (temporary) unemployment can lead to a rise in structural (long-term) unemployment. During a recession, someone who has been unemployed for a year may become less employable (e.g. lose on the job training, e.t.c) See hysteresis for more information.
- Asset prices are declining. There is less demand for fixed assets such as housing during a recession. House price declines might exacerbate consumer spending declines and raise bank losses. A balance sheet recession (such as the one that occurred in 2009-10) is characterized by a drop in asset prices. Balance sheet recession is a term used to describe a period in which a company’s financial
- Rising unemployment has resulted in social difficulties, such as increasing rates of social isolation.
- Inequality has risen. A recession tends to exacerbate wealth disparities and poverty. Unemployment (and the reliance on unemployment benefits) is one of the most common causes of relative poverty.
- Protectionism is on the rise. Countries are frequently encouraged to respond to a global downturn with protectionist measures (e.g. raising import duties). This results in retaliation and a general fall in commerce, both of which have negative consequences.
Evaluation can recessions be beneficial?
- Some economists believe that a recession is required to address inflation. For example, the recessions of 1980 and 1991/92 in the United Kingdom.
- Recessions can encourage businesses to become more efficient, and the ‘creative destruction’ of a downturn can allow for the emergence of new businesses.
These factors, however, do not outweigh the recession’s significant personal and social costs.
US house prices
House prices decreased just before the recession began in 2006, and declining house prices contributed to the recession’s onset. However, as the recession began, property prices plummeted much worse.
Great Depression 1929-32
The Great Depression was a significantly more severe downturn, with output dropping by more than 26% in three years.
It resulted in a substantially greater rate of unemployment, which increased from 0% to 25% in just two years.
What was the economic impact of the 2008 recession?
When the decade-long expansion in US housing market activity peaked in 2006, the Great Moderation came to an end, and residential development began to decline. Losses on mortgage-related financial assets began to burden global financial markets in 2007, and the US economy entered a recession in December 2007. Several prominent financial firms were in financial difficulties that year, and several financial markets were undergoing substantial upheaval. The Federal Reserve responded by providing liquidity and support through a variety of measures aimed at improving the functioning of financial markets and institutions and, as a result, limiting the damage to the US economy. 1 Nonetheless, the economic downturn deteriorated in the fall of 2008, eventually becoming severe and long enough to be dubbed “the Great Recession.” While the US economy reached bottom in the middle of 2009, the recovery in the years that followed was exceptionally slow in certain ways. In response to the severity of the downturn and the slow pace of recovery that followed, the Federal Reserve provided unprecedented monetary accommodation. Furthermore, the financial crisis prompted a slew of important banking and financial regulation reforms, as well as congressional legislation that had a substantial impact on the Federal Reserve.
Rise and Fall of the Housing Market
Following a long period of expansion in US house building, home prices, and housing loans, the recession and crisis struck. This boom began in the 1990s and accelerated in the mid-2000s, continuing unabated through the 2001 recession. Between 1998 and 2006, average home prices in the United States more than doubled, the largest increase in US history, with even bigger advances in other locations. During this time, home ownership increased from 64 percent in 1994 to 69 percent in 2005, while residential investment increased from around 4.5 percent of US GDP to nearly 6.5 percent. Employment in housing-related sectors contributed for almost 40% of net private sector job creation between 2001 and 2005.
The development of the housing market was accompanied by an increase in household mortgage borrowing in the United States. Household debt in the United States increased from 61 percent of GDP in 1998 to 97 percent in 2006. The rise in home mortgage debt appears to have been fueled by a number of causes. The Federal Open Market Committee (FOMC) maintained a low federal funds rate after the 2001 recession, and some observers believe that by keeping interest rates low for a “long period” and only gradually increasing them after 2004, the Federal Reserve contributed to the expansion of housing market activity (Taylor 2007). Other researchers, on the other hand, believe that such variables can only explain for a small part of the rise in housing activity (Bernanke 2010). Furthermore, historically low interest rates may have been influenced by significant savings accumulations in some developing market economies, which acted to keep interest rates low globally (Bernanke 2005). Others attribute the surge in borrowing to the expansion of the mortgage-backed securities market. Borrowers who were deemed a bad credit risk in the past, maybe due to a poor credit history or an unwillingness to make a big down payment, found it difficult to get mortgages. However, during the early and mid-2000s, lenders offered high-risk, or “subprime,” mortgages, which were bundled into securities. As a result, there was a significant increase in access to housing financing, which helped to drive the ensuing surge in demand that drove up home prices across the country.
Effects on the Financial Sector
The extent to which home prices might eventually fall became a significant question for the pricing of mortgage-related securities after they peaked in early 2007, according to the Federal Housing Finance Agency House Price Index, because large declines in home prices were viewed as likely to lead to an increase in mortgage defaults and higher losses to holders of such securities. Large, nationwide drops in home prices were uncommon in US historical data, but the run-up in home prices was unique in terms of magnitude and extent. Between the first quarter of 2007 and the second quarter of 2011, property values declined by more than a fifth on average across the country. As financial market participants faced significant uncertainty regarding the frequency of losses on mortgage-related assets, this drop in home values contributed to the financial crisis of 2007-08. Money market investors became concerned of subprime mortgage exposures in August 2007, putting pressure on certain financial markets, particularly the market for asset-backed commercial paper (Covitz, Liang, and Suarez 2009). The investment bank Bear Stearns was bought by JPMorgan Chase with the help of the Federal Reserve in the spring of 2008. Lehman Brothers declared bankruptcy in September, and the Federal Reserve aided AIG, a significant insurance and financial services firm, the next day. The Federal Reserve, the Treasury, and the Federal Deposit Insurance Corporation were all approached by Citigroup and Bank of America for assistance.
The Federal Reserve’s assistance to specific financial firms was hardly the only instance of central bank credit expansion in reaction to the crisis. The Federal Reserve also launched a slew of new lending programs to help a variety of financial institutions and markets. A credit facility for “primary dealers,” the broker-dealers that act as counterparties to the Fed’s open market operations, as well as lending programs for money market mutual funds and the commercial paper market, were among them. The Term Asset-Backed Securities Loan Facility (TALF), which was launched in collaboration with the US Department of Treasury, was aimed to relieve credit conditions for families and enterprises by offering credit to US holders of high-quality asset-backed securities.
To avoid an increase in bank reserves that would drive the federal funds rate below its objective as banks attempted to lend out their excess reserves, the Federal Reserve initially funded the expansion of Federal Reserve credit by selling Treasury securities. The Federal Reserve, on the other hand, got the right to pay banks interest on their excess reserves in October 2008. This encouraged banks to keep their reserves rather than lending them out, reducing the need for the Federal Reserve to offset its increased lending with asset reductions.2
Effects on the Broader Economy
The housing industry was at the forefront of not only the financial crisis, but also the broader economic downturn. Residential construction jobs peaked in 2006, as did residential investment. The total economy peaked in December 2007, the start of the recession, according to the National Bureau of Economic Research. The drop in general economic activity was slow at first, but it accelerated in the fall of 2008 when financial market stress reached a peak. The US GDP plummeted by 4.3 percent from peak to trough, making this the greatest recession since World War II. It was also the most time-consuming, spanning eighteen months. From less than 5% to 10%, the jobless rate has more than doubled.
The FOMC cut its federal funds rate objective from 4.5 percent at the end of 2007 to 2 percent at the start of September 2008 in response to worsening economic conditions. The FOMC hastened its interest rate decreases as the financial crisis and economic contraction worsened in the fall of 2008, bringing the rate to its effective floor a target range of 0 to 25 basis points by the end of the year. The Federal Reserve also launched the first of several large-scale asset purchase (LSAP) programs in November 2008, purchasing mortgage-backed assets and longer-term Treasury securities. These purchases were made with the goal of lowering long-term interest rates and improving financial conditions in general, hence boosting economic activity (Bernanke 2012).
Although the recession ended in June 2009, the economy remained poor. Economic growth was relatively mild in the first four years of the recovery, averaging around 2%, and unemployment, particularly long-term unemployment, remained at historically high levels. In the face of this sustained weakness, the Federal Reserve kept the federal funds rate goal at an unusually low level and looked for new measures to provide extra monetary accommodation. Additional LSAP programs, often known as quantitative easing, or QE, were among them. In its public pronouncements, the FOMC began conveying its goals for future policy settings more fully, including the situations in which very low interest rates were likely to be appropriate. For example, the committee stated in December 2012 that exceptionally low interest rates would likely remain appropriate at least as long as the unemployment rate remained above a threshold of 6.5 percent and inflation remained no more than a half percentage point above the committee’s longer-run goal of 2 percent. This “forward guidance” technique was meant to persuade the public that interest rates would remain low at least until specific economic conditions were met, exerting downward pressure on longer-term rates.
Effects on Financial Regulation
When the financial market upheaval calmed, the focus naturally shifted to financial sector changes, including supervision and regulation, in order to avoid such events in the future. To lessen the risk of financial difficulty, a number of solutions have been proposed or implemented. The amount of needed capital for traditional banks has increased significantly, with bigger increases for so-called “systemically essential” institutions (Bank for International Settlements 2011a;2011b). For the first time, liquidity criteria will legally limit the amount of maturity transformation that banks can perform (Bank for International Settlements 2013). As conditions worsen, regular stress testing will help both banks and regulators recognize risks and will require banks to spend earnings to create capital rather than pay dividends (Board of Governors 2011).
New provisions for the treatment of large financial institutions were included in the Dodd-Frank Act of 2010. The Financial Stability Oversight Council, for example, has the authority to classify unconventional credit intermediaries as “Systemically Important Financial Institutions” (SIFIs), putting them under Federal Reserve supervision. The act also established the Orderly Liquidation Authority (OLA), which authorizes the Federal Deposit Insurance Corporation to wind down specific institutions if their failure would pose a significant risk to the financial system. Another section of the legislation mandates that large financial institutions develop “living wills,” which are detailed plans outlining how the institution could be resolved under US bankruptcy law without endangering the financial system or requiring government assistance.
The financial crisis of 2008 and the accompanying recession, like the Great Depression of the 1930s and the Great Inflation of the 1970s, are important areas of research for economists and policymakers. While it may be years before the causes and ramifications of these events are fully known, the attempt to unravel them provides a valuable opportunity for the Federal Reserve and other agencies to acquire lessons that can be used to shape future policy.