The great depression
Just as modern economists during the latter half of the 20th century predicted would happen, the United States is facing its biggest economic challenge since the Great Depression. A depression is labeled as an extended period of time during which an economy goes through reverse or stagnated growth as a result of higher unemployment rates and lower inflation. Similarly, a recession is defined as a general period of declining economic activity where gross domestic product declines and unemployment rises. Most societies attempt to resolve these economic downfalls by using one of the three basic economic strategies; Keynesian, Classical, and Monetary. Although there is no clear cut way to go about getting an economy back on track, it can be noted that Keynesian economics has been used and proven to be successful. In 1929, the United States faced it largest economic falling ever; the country literally fell into a state of shock. This unfortunate time period was labeled the Great Depression. President Franklin Delano Roosevelt instituted an economic policy that was defined as Keynesian economics which entails massive government spending in order to jump start an economy out of its trough. Current President Barack Obama has instituted a similar economic policy in order to pull America out of its current recession. Both of these presidents have used or is presently using their own method of Keynesian policies to fix their respective problems. The American economy is currently spiraling downwards, and President Obama will have to act quickly in order to prevent further deterioration in what is already the worst financial collapse since the Great Depression, the only thing left to see is if what worked in the past will work in the present.
Unemployment is a very gentle issue when it comes to a countries economy. Regardless of what condition the country is in, there will be some sort of unemployment. Now there are 3 different kinds of unemployment, cyclical, structural, and frictional. Cyclical unemployment occurs when the demand for people in the work place drops, this occurs because the demand for goods has diminished, or the economy is heading towards a depression. (AmosWeb) Structural unemployment is defined as job openings being available in the market place, but all of the skilled labor refuses to fill them. For instance, if a computer engineer refuses a job at a fast food restaurant as a bus boy because he'd rather work in his trained field of work, he would be structurally unemployed. (King, William) People who are simply between jobs, in this sense, are said to be frictionally unemployed. This is a particularly important category, since this category of unemployment can never be eliminated or reduced to zero. Even in the best-functioning market economy, there will be some people who are between jobs. The practical minimum proportion of the work force that is between jobs in given circumstances will be called the frictional unemployment. (King, William) All of these contribute to the unemployment rate, which during recessions, is generally high. Combating this rate can be very difficult, and if handled incorrectly, cause major long term problems. This is why it is said that in any economy, there is unemployment. This is called the Natural Rate of Unemployment and is defined as “The unemployment rate at which pressures on wages are to balance, tending to neither increase nor decrease the rate of inflation.” (Klein 111) With all of this in mind, one can't help but think that there must be some way out of these problems. Keynesian economics has proven in the past to not only combat a recession, but fight high unemployment rates as well; providing jobs and stimulation the economy, it has revitalized modern economics.
Keynesian economics was theorized by John Maynard Keynes in the early 1900's. It is one of the three major economic theories, with classical and monetarists being the other two. It can be said that the idea that the government should spend money it doesn't have, might have saved capitalism. According to Keynesian economics, changes in total spending, also called aggregate demand, will cause the greatest change in the short term, which is why they focus so heavily on extreme immediate spending. The fact that it causes the greatest change means that it wills essentially jumpstart the economy, regardless of any other factors. Keynesian economists believe that aggregate demand, or total output is influenced by private and public sectors, and can act irrationally at times. The public sector would include government taxes, and spending. It argues that private sectors won't generate enough funds in a depression and therefore the public sector has to intervene in order to ensure that the economy continues on the right track. Keynesian economics can be referred to as a “mixed economy” because although there is a large private sector, the government still intervenes.
The majority of American presidents up until Roosevelt had followed the classical economic perspectives. For instance President Hoover followed the classical economic ideology, and his mentality was based much off of Say's law, which states that “Supply creates its own demand.” It wasn't until Roosevelt that Presidents began to use unorthodox methods of economics. It's noted that in Roosevelt's “New Deal” he instituted many emergency measures, including programs that created jobs, and social relief. Included in these social reforms were the Agricultural Adjustment Act (AAA) and the National Recovery Administration (NRA), both were aimed at reducing production and raising wages and prices. This gave jobs to millions of American's who were out of work, and needed a way to pay the bills. This is very similar to what President Obama is doing now with the stimulus packages. For example, Obama has set aside 24.3 billion dollars in emergency relief for those who are hit worst by the depression, and over 15 billion in public works projects. This is absolutely the correct way to go about stimulating the economy because now regardless of what happens, something has to change, and the only way it can change is for the better. The more money in the economy, the more opportunities arise in the sense of jobs and such. Keynesian economics is essentially expansionary monetary policy. The money supply increases because the government has bought bonds from the banks, which therefore lowers the interest rates and that increases spending which in turn increases GDP and aggregate demand. The only difference between the two is that instead of people doing the spending, it's the government doing it for them.
Along with all of the social reforms, each president respectively extended his gratitude to the American public by having a series of tax cuts. A tax cut while an economy is in the middle of expansionary monetary policy allows the money supply to increase as well as keep more money in the pockets of the middle class. Instead of focusing on helping the Wall Street, each of these presidents has focused on Main Street, and that's essentially Keynesian economics. The economy can only grow if the middle class has the funds to let it grow, Roosevelt and Obama are handing them money on a silver platter, the only thing left is for the middle class to spend the money.
President Obama had one of the most ambitious “first 100 days” in office since Roosevelt; he passed a series of stimulus bills that exceeded in one trillion US dollars. This is classical Keynesian economics. Obama hopes that this large spending, which includes, country wide projects, tax cuts, and further job creation wills jumpstart the economy. (Talbott 69) President Roosevelt also did something of this sort when he began his term in office. President Roosevelt's term was called the New Deal; this was because he instituted new ideas and a new form of economic policies. Roosevelt's cabinet understood the ideology behind John Maynard Keynes economic theories.
It's very apparent that the Keynesian economics approach worked for the Roosevelt administration because the unemployment rates went down drastically. When Hoover left office the unemployment had risen by 9% to a staggering 17.2%, but then throughout his term, and when Roosevelt left office, it had decreased by 5.3% to roughly 13% which is a change of 18.31 million jobs. That's an incredible amount of jobs to be created over a president's term. These jobs can be credited towards the fact that the United States was coming out of a recession, and the growth of the economy due to the Keynesian economic approach of President Franklin Delano Roosevelt ensured that the country would not only experience a decrease in unemployment, but an increase in GDP as well. Credit for all of this growth should go towards the policies that Roosevelt instituted. For starters there was The Civil Works Administration which was an institution created in 1933 to create jobs for the unemployed. Its focus on high paying jobs in the construction arena resulted in a much greater expense to the federal government than originally anticipated. The CWA ended in 1934 in large part due to opposition to its cost. Also, The Public Works Administration was a program created to provide economic stimulus and jobs during the Great Depression. The PWA was designed to create public works and continued until the US ramped up wartime production for World War II. It ended in 1941. Last but not least, the Works Progress Administration was created in 1935. As the largest New Deal Agency, the WPA impacted millions of Americans. It provided jobs across the nation. Because of it, numerous roads, buildings, and other projects were completed. It was renamed the Works Projects Administration in 1939. It officially ended in 1943. All of these organizations were created by Roosevelt in order to follow the Keynesian economic fundamentals.
President Obama's current economic policies mirror those over Roosevelt's during the Great Depression. Optimistically speaking, there should be roughly three to four million jobs created with his stimulus package. According to a general rule of thumb, for every one million jobs created there is a 1% increase in GDP. Using this formula, we can presume that the creation of four million new jobs will effectively increase our nation's Gross Domestic Product by four percent. An example of this would be the recent “Cash for Clunkers” program
Given that the Keynesian approach to a recession generally involves the cutting of taxes; we can assume that the flow of events following the implementation of the Keynesian plan would reflect those of the Great Depression. Lower taxes for the average American consumer means a higher income, and therefore a higher demand for consumer goods. With the subsequent increase in goods purchased, companies will likely fall behind in production and find the need to strengthen their labor force, reducing our current unemployment rate. This will also effectively reduce the percentage of specialized unemployment because it will create a higher number of exclusively available jobs, such as those which require forms of higher education.
Essentially, there is no better way to attack this problem of high unemployment than through government assistance; the classical approach would essentially let nature take its course, which has been shown to work in the past, but is not the fastest and most productive way. It generally takes time for the classical approach to begin to work, whereas the Keynesian approach would have immediate effects. Given our current economic distress, we simply don't have the time or resources to wait around for “nature to take its course”. Therefore, President Obama and his ambitious cabinet have take it upon themselves to incorporate John Maynard Keynes's economic strategies of government intervention in order to promptly address the dire need to get this nation's economy back on track. One could argue that these techniques worked (though not without flaws and setbacks) in the 1930s when the United States faced an economic downturn far more severe than that of our present day. Thus, one could further argue that these same techniques, adopted and put into action now, could certainly help if not completely fix the recession as we know it.
In fact, it can be seen that since President Roosevelt institutes the Keynesian economic policy, the rate of change for employment has been steadily nothing but growth up until the George W. Bush administration. Meaning that, while it's not necessary every president since then has used Keynesian economics, it has been essentially still in effect for roughly seventy five years. The jobs that were created at that time were not short term jobs, but in fact long term projects. The same can be said for the Obama administration and the way they've handled themselves. The jobs that Obama has in line for American citizens include: public transportation and highway improvements. Both of which can be seen as long term job expenditures. As previously stated, Obama has said he believes the Stimulus could save up to four million jobs over the course of the next ten years. The jobs that are being created are skill specific jobs, for example, Department of Health and Human Services Enable 1,129 health centers in 50 states and eight territories to provide expanded service to approximately 300,000 patients. The Department of Education Fund 135,000 education jobs, including teachers, principals and support staff and the Department of Justice Hire or keep on the job approximately 5,000 law enforcement officers. (politico). The important thing is that these jobs will be long term, skill specific jobs, and that it won't just be a temporary fix. Roosevelt's many programs allowed for many permanent jobs to be created for example, The Civil Conservation Corps, a program that involved employing 2.5 million unmarried men maintain and restoring forests, beaches and parks. The workers only earned a menial pay of a dollar a day, but they received free housing and job training. From 1934 to 1937, this program funded similar programs for 8,500 women. (Chuck Allen) Also, there was the National Youth Administration, Administered by the WPA. The NYA's main objective was to partake in creating part time work for unemployed youths. As time passed and unemployment decreased, and the war was fast approaching, the emphasis was directed towards training the youths towards military work. It may seem as though this only created a temporary fix but in fact, it inspired many of the youths to join the army, or mature earlier which in turn could ensure for a better future for them. Furthermore, in 1935, Roosevelt's cabinet passed the Resettlement Administration Act, this act loaned out over one billion dollars to farmers to set up work for migrant workers. This allowed for farmers to high more workers because they now had the sufficient funds to do so. With the government putting money in the money supply, the interest rates drop which means the public is more inclined to invest money and based solely off of economic principals of expansionary monetary policy, this is what is required to stimulate the economy.
One can call it a coincidence, or one can call it circumstance, regardless of how its labeled, the time period directly after the depression was WWII and this was the biggest stimulator an economy can go through. It's no doubt that World War II was brought on by the depression, but the massive government spending that an economy does at the time of the war is what causes unemployment to fall. Everyone has some sort of occupation during a war. In fact, it gets to the point that while most men are out on the battlefield in some foreign land, women are hired to do their jobs. It wasn't just the unemployed who were able to get jobs; roughly 10.5 million Americans who were turned down from jobs due to gender, age, or racial issues found jobs. By 1945, almost eight percent of the working American population was black. Roughly 19 million American women, both black and white were employed and working outside of their home. Although they held menial jobs, they were jobs none the less. There was still upwards of 2 million women who held jobs on the military front. Employment did not just increase on the industrial front. Civilian employment by the executive branch of the federal government which included the war administration agencies rose from about 830,000 in 1938 to 2.9 million in June 1945. (eh.net)
Throughout most of modern economic history, unemployment has been the most important variable in determining whether or not a country's economy will succeed. It has the ability to adversely or positively affect Gross Domestic Product, Aggregate Demand, Investments and multiple other key economic factors. Even though history has harnessed many successful approaches to economic turmoil, determining whether or not time alone will fix a market is impossible to know. Extensive evidence suggests that a Keynesian approach is the only surefire way to overcome a recession or depression effectively and in good time. Massive government spending and significant intervention in domestic affairs has a direct impact on virtually every economic infrastructure and has been proven to work in the past. Historical research shows that some of this nation's most intelligent presidents have turned to Keynesian principles in times of need, and it is clear that the majority of their attempts with its ideas have been beneficial to the economy. It's generally accepted that something which has proven itself as valid and accurate should not be tampered with. Keynesianism has proven itself as the single most effective way to restore prosperity to an economy, and should therefore be utilized in any market economy which faces a downturn.
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