The Great Depression and Great Recession - Assignment Example

Question 1

The great depression that occurred about 80 years ago caused severe economic problems. Approximately 13million Americans became unemployed (Brandolini, Micklewright & Nolan, 2012). Production of goods and services slowed down. Inflation hit the roof and there were persistent increases in prices. Nearly all Americans suffered in a way. Businesses became bankrupt and financial institutions collapsed. However, it also led to the end of some old economic policies that focused solely on profit taking and unbridled competition. In addition, the US government increased its participation in economic decisions. The government had to establish strong monetary agents to implement effective monetary policies. More so, it increased its participation in the economy through the application of various fiscal tools. Before the economic depression certain trends occurred.

Business Cycle

There was a period of boom in 1819-1820, 1839-1843 and 1920-1921 (Sobotka, Skirbekk & Philipov 2011). A shocking economic crash emanated from imprudent credit expansion by the Federal Reserve. The Federal Reserve tried to create more credit for the business worth $500million. This expanded the banks credit capacity to $4billion. The short-term effect of this credit creation was beneficial. Nevertheless, this led to the crash of the stock market in 1929 and perpetuated the great depression. During the recession, the government seemed to follow the same trend of creating additional credit. Several financial institutions collapsed during this time. The prices of oil and food rose sharply. Wages increased and thus this increased the cost of production. Eventually aggregate demand reduced and this slowed the economic growth. The government also expanded its expenditure by $787 billion (Brandolini, Micklewright & Nolan, 2012). However, this recession did not last long.

Tax increase

During the great depression, President Roosevelt raised both excise and income tax. The tax rate reached 79 percent by 1935 (Sobotka, Skirbekk & Philipov, 2011). Only few Americans could afford to meet their tax obligations. Businesses had to contribute more than a half of their income as tax. Due to these disincentives, many individuals and businesses invested in bonds that carried no tax and in foreign banks. The goverment raised the taxes further to 94% during the World War 1 on incomes above $200,000 (Brandolini, Micklewright, & Nolan, 2012). President Obama’s administration also increased the tax on products such as liquor, soft drinks and air tickets. He sought to end tax cut that President Bush had enacted. This tax increase resulted in large spending that perpetuated economic recession. Tax increase also discouraged consumption of certain goods hence reducing output and consequently the aggregate demand that would influence economic growth.

Massive spending by Federal Reserve

During the great depression, President Roosevelt responded to the challenge by increasing the government spending. Similarly, the Obama’s administration resorted to increased spending in an attempt to balance the federal budget. Economists argued that the public working spending that Roosevelt undertook destroyed jobs. They contended that every dollar spent on public works had to be raised through taxation of each dollar earned. To meet the amount spent by the government, it ended up increasing the taxes for businesses and individuals. In addition, massive government spending crowded out the spending by the private sector. It was impossible for the economy to grow since the government could not identify accurately the most beneficial projects.

The New Deal

The New Deal was based on weak Keynesian economics policies. The key point that the new deal was based on, was that government spending could stimulate the economy. This led to emergence of black markets and thus resulted in the production of cheap products. Many factories stopped producing and the aggregate demand dropped leading to unemployment. Companies had to lay off workers due to the large payrolls set by the government. During the 2007-2009 recessions, President Obama resorted to deficit spending. Economists have argued that such measures lowered the aggregate demand hence did not lead to economic growth.

Question 2

Fall in spending

After the federal government expanded its spending during President Roosevelt tenure, the unemployment levels remained high. In 1930, the unemployment level dropped though the economy did not recover fully. By 1939, unemployment levels in America were 21% (Brandolini, Micklewright & Nolan, 2012).Even the then Treasury secretary Henry Morgenthau complained that the government had spent a lot yet no meaningful change was experienced. However, the Federal government continued to finance various programs by increasing the annual budgets. President Obama started his term when unemployment was 8% and in the following year, it had increased to 10%. He was prompted to increase the government spending to lower the level of unemployment. However, President Obama was puzzled by the fact that things did not change as expected. This is similar to what happened during the great depression when levels of unemployment and economic growth did not change.

Tax code and welfare spending

This allowed people to pay less tax as their levels of incomes fell. It required that when the economy was doing well, the government could tax more since businesses were also doing well and unemployment level was low. The government would take more in form of corporate taxes and income taxes. When the economy was doing badly the revenue to the government would decline. Welfare spending has an inverse relationship with economic growth. A recession indicates that unemployment is high hence higher welfare payments. The main disadvantage of automatic stabilizers is that it gives a wrong impression on the effect of government finances. When the economy is good, an increase in revenues and a fall in expenditure mean double benefits.

Government programs

During the recession, government spending on programs increased automatically. However, government spending resulted in inflation. When the spending goes to wrong priorities the outcome is less aggregate demand being created hence a negative effect on the economy. It has been seen that during both depression and recession, unemployment and government spending had no great effect on the economy. Unemployment persists since spending is accompanied by increased taxation. On the other hand, Increased taxation discourages businesses and encourage tax evasion hence output in the economy reduces.

Deposit insurance

The government wanted to protect the deposits of consumers in case of recession. This sought to avoid the scenario of 1930 Economic depression when most consumers lost their deposits following the collapse of financial institutions. This would prevent an economic crisis into becoming a disaster. The challenge is that to achieve, a strong financial regulation should be in place.

Strengthening the private industry

The government in the New deal sought to strengthen the private sector instead of replacing it. Having strong private sector can help stimulate economic growth. The disadvantage is that, strengthening this sector could lead to a situation where multinational corporations control the economy even with their related problems of transfer pricing and repatriation of profits. It could also lead to difficulty in planning for the economy because of anticipated actions of the private sector.

Question 3

The concept depicts the view of many people and the government about large banks in America. The government has always bailed these banks when they are bankrupt since it cannot allow them to collapse during the financial crises. More so, the government also bails them when they are unable to settle their debt obligations. Some economists are against this trend, they contend that such measures can lead to crises in the financial market (Clavin, 2000). They have suggested the splitting of these banks to avoid an economic downturn. The collapse of Lehman Brothers for example in 2008 increased the pressure in the financial market for mutual funds and liquid assets thus posing fears among investment banks. Protecting these big banks will prevent them from utilizing the economies of scales.

Question 4

The policy of broken windows policing suggests that enforcing certain laws such as law against trespassing reduces both the crime and discourages additional crimes. In this case, the cost incurred in enforcing law for example fighting illegal drugs can be cut. A criminologist named George Kelling coined this concept. Therefore, if a situation remains unchecked it may result in worse repercussions. The point is that some communities may leave a certain area they perceive inhospitable. For example, the middle class may move to a new area far from the poor. Such an area may remain backward or never recover from economic recessions. In 2008-2009, most policymakers could not come into agreement on the economic policies to execute and control inflation. Even after the president pleaded with them, the congress members still failed to come into a consensus. This led to the shutdown of some government agencies and thus the recession worsened.

Question 5

Globalization

Globalization advocates for a free market structure and the transferring of jobs to the centers of production while incurring s lower cost of production. The process of globalization however has led to wage stagnation and has undermined purchasing power for the America people. This change forced the Americans to cut down their spending since the wages level had fallen. With decreased spending, monetary and fiscal policies became ineffective in an attempt to stimulate economic growth through spending.

Government spending and tax policy

The government has also made structural changes on the manner in which it spends. The spending has been focused on heavy investments such as the energy sector, transport and health. The American tax policy targets the middle class that has the potential of driving the economy forward. The taxes are usually cut down when the economy is doing badly and increased during an economic boom. This change may affect the application of monetary policy since a tax targeted on a certain group may not produce greater results in the economy (Brandolini & Micklewright, 2012)

Question 6

Inefficient pension system

Greece spent approximately 17.5% of its GDP on pensions (Karanikolos, Mladovsky & Cylus, 2013). This was the largest among the European Union countries. The government started struggling with the payment of these pensions and it resulted to borrowing. However, the tax policy implemented on pensions’ spending later dropped to about 16%. During this economic downturn, it became completely difficult to pay pensioners and many banks closed. Greeks suffered financially as the citizens could not withdraw more than 60 Euros from their banks’ ATM.

Early retirement age

The average retirement age in Greece is approximately 63 years for men while the women retire at an average age of 59 years. Police and some military personnel are supposed to retire at 40-45 years of age. There were also unique benefits for a section of Greek workers. Female employees of state-owned banks with children not older than 18 years were allowed to retire as early as 43 years (Karanikolos, Mladovsky & Cylus, 2013). This early retirement age expanded the number of Greeks who depended on pensions hence resulting in an increase in the government expenditure.

Social benefits

The people of Greece were offered a very generous retirement package. For example, unmarried daughters could get a proportion of their father’s pensions. In addition, the workers were given some bonuses every time they reported to their work on time. These benefits largely strained the national budget. As a result, it became almost impossible to pay them. The government could not save its limited resources and extend its coverage to more fields in the public sector. The government offered the workers these benefits to ensure that they did not receive large pensions. Currently, the government does not give out these benefits.

Tax evasion

In Greece, tax evasion had been so common among the citizens. This is similar to what was happening during the depression. Greece national debt rose to 177% of its GDP. The government effort to create an equal tax was quite challenging (Karanikolos & Mladovsky, 2013). Tax evasion denied the government funds to spend in order to stimulate the growth of the economy. The loss in tax revenue forced the government to borrow excessively from external sources to meet its deficit. Currently, Greece is now targeting those wealth individuals evading tax.

Question 7

Economic Stimulus Package

The $800billion stimulus package passed by the Congress failed to do what the American expected. This package was bigger than the Marshall plan. However, this was not enough to close the budget deficit. It was too small contrary to the estimation of the congress. More so, it failed to bring about changes in consumption and unemployment and did not live up to its purpose. If the Congress had provided a more effective stimulus package, it would have resolved the economic problem associated with the recession.

Tax cut

The tax cut amounted to about $116billion during the recession. This did not change the level of unemployment nor did it bring an economic growth as many had expected (Brandolini, Micklewright, & Nolan, 2012).Perhaps if the tax cut was substantial it would have worked as planned. The unemployment rate remained at a higher level for almost two years. In short, the tax cut enacted by the congress was a complete fail.

Hasty Investments

The Congress rushed investments decision without clear picture of the expected return. Projects like clean energy, electric cars and rails that would take several years to implement and complete were started in a hasty manner. The congress had not prior knowledge of the benefits of the projects to the economy.

Audacity to Austerity

The other failures of the US congress relates to audacity and austerity measures. There have been numerous disagreements between the republicans and the democrats on policy issues. These disagreements were not based on any important principles but on mere rhetoric politics. The criticisms from the opposition festered during the recession. If both sides and come into a mutual agreement about a particular policy to counter the effects of the recession, the recession would have ended much earlier.

Question 8

Deporting the undocumented immigrants and the restriction of other immigrants into America will have some great effects on the economy. First, it may cause a variety of economic and social damages. Moreover, it would be costly and would evoke animosity among different races. It is argued that the deportation process would erode the GDP of the country with an amount equivalent to the GDP of the state of Texas. More so, It would cost the government about $400 to $600 billion to deport approximately 11million undocumented immigrants. This is without considering other costs such as enforcement costs. The American labor force would be reduced by about 6.4% (Ewing, Martinez & Rumbaut, 2015). This translates to about $1.6 trillion loss in wages and other economic activities. Some sectors such as construction, hospitality and agriculture would be greatly affected by this mass deportation.