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ECONOMIC SCARRING: Report Examines Long-Term Impacts of an Economic Recession on Education, Opportunity, Investments, and Entrepreneurial Activity

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"Not only does college attendance yield higher earnings, lower unemployment, and other benefits to the individual, it also conveys myriad social benefits as well, including better health outcomes, lower incarceration rates, [and] greater volunteerism rates."

A new report from the Economic Policy Institute (EPI) argues that an economic recession can lead to long-lasting damage to individuals’ economic situations and the economy more broadly, which it dubs “scarring.” The report, Economic Scarring: The Long-Term Impacts of the Recession, examines the long-run consequences of recessions in four areas-educational attainment, individual and family opportunities, private investments and technology, and entrepreneurial activity. It argues that any evaluation of the American Recovery and Reinvestment Act (ARRA) must include the benefits of avoiding these long-term consequences, in addition to the short-term boost to gross domestic product and jobs and the interest costs of adding to the national debt.

“A recession … should not be thought of as a one-time event that stresses individuals and families for a couple of years,” the report reads. “Rather, economic downturns will impact the future prospects of all family members, including children, and will have consequences for years to come.”

In its analysis of ARRA, Economic Scarring notes that the impact of the stimulus package will likely reach well beyond short-term job creation to stimulate the broader economy and lead to greater economic output, greater national income, and a consequent boost in federal revenue. It also says that ARRA’s investments in transportation infrastructure, energy efficiency, and education will “yield economic dividends in years to come.”

The majority of the report focuses on the costs that accompany recessions. “It is often said that deficits can cause transfers of wealth from future generations of taxpayers to the present,” it reads. “While true, this cost must also be compared with the economic consequences of recessions that are also passed to future generations.” Some of these economic consequences include obvious liabilities such as higher unemployment and lower wages and incomes, as well as less visible ones such as reductions in educational attainment, decreased private capital investments, and less economic opportunity.

The report cites several examples of how a recession can negatively impact educational attainment. Specifically, it points out how lower family incomes and tight budgets can lead to decisions at both ends of the educational spectrum, with fewer children enrolling in early education programs and decisions to delay or abandon plans for continuing education after high school. It cites a 2009 study in which 20 percent of eighteen- to twenty-nine-year-olds have left or delayed college. “This delay or reduction in college attendance is costly,” the report argues. “Not only does college attendance yield higher earnings, lower unemployment, and other benefits to the individual, it also conveys myriad social benefits as well, including better health outcomes, lower incarceration rates, [and] greater volunteerism rates.”

A recession can also impact a family’s ability to provide their children with adequate nutrition and health services from prenatal care to dental and optometric care, the report finds. It also points out that 13 million U.S. households, including 12.7 million children, faced difficulty providing enough food for all family members in 2007, adding that these numbers will “almost certainly increase” throughout 2009 as unemployment rises and incomes fall.

Greater educational attainment also leads to better educational outcomes for offspring; higher-income parents are more likely to have children who complete college. “As such, the economic downturn will have an impact lasting not just for years, but for generations.”

In addition to education, Economic Scarring argues that the loss of investment, research and development, and skills generally can “undercut” the United States’ global competitive advantages. It stresses that “righting the ship as quickly and completely as possible” is essential to limiting long-term damage. “The American Recovery and Reinvestment Act has and will add to the fiscal deficit, but those costs-in terms of added interest payments-should be viewed as necessary to provide a short-term boost that allows us to avoid even greater long-term damage to families and to the economy.”

The complete report is available at http://epi.3cdn.net/25f9881466fb1c55cd_i9m6bnlcc.pdf.

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