Consumption And Its Impact On Recession Essay Sample

Explanations of economic recession are different however many economists link recession to consumer spending failure. For this reason the governments try to put money in the hands of consumers providing them with unemployment insurance as they think this money will be involved in the economy anyway. However the level of consumers’ ability to buy is a result but not the reason of the crash or prosperity of the economy. Because first of all people have to make wages to be able to spend so the most important factor is the source of money or in other words it is an investment made to create new job positions and money.
Americans quite feel afraid of recessions however they don’t stop getting credits and loans for their living. Everything would have been good if they got credits to make an investment so this capital would create new jobs or bring money. However when people buy furniture, cars or something like this for credits they have less residual income and for this reason they can’t spend money freely even if they want to help revive the economy during crisis. This situation proves that consumer spending is just an outcome of economic situation but not the reason of it. So the old solution “spend, spend, spend” should be overviewed and explained to the population before debt bubble shall burst again because the size of the consumption sector is not the evidence of economic efficiency. Consumers tend to spend more when they feel that their future is successful and they spend less when the economy is getting worst. It shows that consumer spending is the first symptom of economic condition but not the root cause of recession.
One of the main reasons of the recessions is the failure of private investment as we can see after the second quarter of 2007 when gross private domestic fixed investment remained passive the global recession get started. In contrast when it recovered slightly in 2010 and was higher than its peak failure in 2006 the economy started managing the crisis. Creating new jobs without adding new capital doesn’t help to improve the economy. The point that customer spending is a driver of the economy is wrong as the real driver is domestic fixed investment. Moreover in my opinion another important thing is properly distribution of taxes. As long as the rich don’t not pay right taxes and the poor pay more than the rich the economy will not be stable. Warren Buffett such a rich man says that he is still paying lower tax rate than his secretary and encourages the government to pay more attention on correctly distributing tax rates. All people should pay the equal tax rate based on their income. Of course it means that a businessman which earns $20000 a month should pay much more than a worker which gets $2000.
In conclusion consumer spending is an excellent barometer of the economy but it is not a root reason of the recession. Crises are the results of the fixed investment reluctance however it shouldn’t increase its normal level. The surplus of investments will cause another economic disadvantage. In order to avoid recessions the government should cure the labor market disease, try to slow inflation rate, keep equality between supply and demand, and of cause give opportunities for private investments. Consumer spending is a reflection of the economic condition in the mirror.