Lessons from the Great Depression and the Economics of Social Security - Essay Example

The role of government is quite important during the economic downturn. When there is a demand-driven economy under which due to any reason the private sector fails to spend, the government needs to come up and provide support to the economy through fiscal measures (Kindleberger 1986, pp. 20 – 22)3. The New Deal is considered to be the defining moment during the Great Depression of the 1930s and the government spending is viewed as the major step that improved the situation as many economists agree that the point inadequate government spending led to the Great Depression ((Bordo, Christopher, Charles 2000, pp. 1447- 1448)1. Keynes’s theory advocates that higher government spending and curtailment in taxes could be helpful in counteracting the depression (Kindleberger 1986, p. 24)3.

There is no mutual agreement on the idea of what were the main causes of the Great Depression of the USA. Reviewing its core nature, many believe that the severe contraction in the early 1930s and later its slow recovery represent that fiscal policy had a minor role in this phenomenon. Thinkers have come to this conclusion through theoretical and empirical studies of that period. Theorists say that even though federal government spending had risen considerably, it was not high enough to have a greater impact on the overall economy (Brown 1956, pp. 860 - 861). On the contrary, few economists believe that fiscal policy played a vital role in the emergence of the Great Depression (McGrattan 2011, p 1)4.

One of the most prominent changes in fiscal policy at that time was a sharp surge in taxes rates on the incomes of individuals which encompass corporate dividends. Hovering taxes is one of the worst measures that government takes to overcome a crisis which makes the situation even worse. Increasing tax rates leave less money for consumers to spend and hence under this situation, Federal Reserve suggests the government refrain from this approach (Taylor 2002, p. 3).