Lecture 5: The evolution of economic thinking through the New Deal Flashcards
Economic Reality before the Great Depression
Prior to the stock market crash of 1929 Americans subscribed to a "boom and bust" school of economics the economy overheats, speculation runs rampant and a crash is unavoidable “panics" had occurred in the 1830s, 1850s, 1870s and 1890s under 4 different presidents None of these presidents did much to - stem the deflation in prices - contraction of investment - loss of jobs
It was not understood or believed that
government could do anything.
What can and should government do?
America’s political and economic system remained
largely laissez-faire from the
establishment of the
country through the Great Depression
it was widely believed that the economy would grow
and prosper if market forces were left to their own
the demand and supply of goods would regulate the
marketplace with individual actors pursuing their own desires
and trading their labor for wages
until the Great Depression, monetary policy
in modern terms did not exist
Economic Backdrop
The Great Depression of the 1930’s signifies a crisis to the nation’s economic life, surpassing previous downturns in severity, depth and magnitude bank foreclosures high unemployment drop in GDP price deflation loss of family farms
The evolution of economic reasoning…
This is an important theme
as Cochran and Malone note, the Great Depression called into
question the very viability of the market-based system
it was not clear that the chaos and lack of stability of the
economy could be managed
the theory of cycles, boom and bust and eventual recovery were
no longer acceptable
Keynesian Economic Theories
John Maynard Keynes’ (1883-1946) theories
represent his effort to deal with and properly
understand the economic conditions underlying the
Great Depression
FDR’s New Deal force the government into
uncharted territory and establishes the government
as responsible for the economic well-being of the
nation
Classical economics to Keynes
the idea that individuals acting in their own self-
interest, would lead to a stable system has it’s roots
in Adam Smith’s work
assumes markets are inherently stable
Keynesian macroeconomic theory represents a sharp
departure from classical economics in that it
assumes market economies
are inherently
unstable
and that there is
no self-correcting
property in the market to return a depressed
economy to growth and full employment
What, then, does this mean government should do?
the Keynesian solution to the inherent instability of the market
is for government to actively manage the economy through
fiscal and monetary policy
government should intervene with fiscal and monetary policy
to promote full employment, stable prices and economic
growth
Fiscal policy
government taxing or spending to stimulate or slow
the economy
Monetary policy
The term “monetary policy” refers to what the
Federal Reserve, the nation’s central bank, does to
influence the amount of money and credit in the U.S.
economy.
What happens to money and credit affects interest
rates (the cost of credit) and the performance of the
U.S. economy.
Government as central in the economic life of the
nation
attempting to figure out how to respond to the Great
Depression opened the door to Keynes’ theories which
ushered in a markedly different understanding of
governments ability to directly affect the economy
Challenges to Keynesianism
The endorsement and use of Keynesian tools were
accepted and used by both parties for decades after
WWII.
tensions about the proper size, role and function of
government are on-going over time
periods of reform are often followed by periods of
retrenchment
Significance of the New Deal
the rapid expansion of the federal government into
social welfare
New Deal and a collection of programs to deal with the many difficulties of the Great Depression
New Deal as the beginning of the modern
welfare state
the changing nature of the office of the president as a
policy-making entity under FDR
whether New Deal policies, or, more likely the
massive spending needed for WW II build up, the
country enjoyed a strong economy post-WW II
What happens to the New Deal…
During WWII, many of the social programs of the
New Deal are dismantled
unemployment dropped and it became difficult to justify
programs that focused on jobs
war gave conservatives more power and they would leverage
cooperation in foreign policy with cuts in the New Deal or the quashing of domestic legislation
war time deficit made it difficult to fund programs
as we have discussed, “guns and butter”
”I’ve got to get legislation passed by Congress to save America.
The Southerners… occupy strategic places on most of the
Senate and House committees. If I come out for the
antilynching bill now, they will block every bill I ask Congress
to pass to keep America from collapsing. I just can’t take that
risk.“ (FDR, 1938)
What you should do…
How to keep your eye on the “policy” ball and not
become distracted?
How to divine what candidates might do once in
office on fiscal, tax and budget policy?
Search out their policy positions and use what you
have learned to arrive at a reasonable estimation of
potential policies.
Marginal Tax Rates for 2016
Marginal Tax Rates for 2016
7 Brackets
- 10%, 15%, 25%, 28%, 33%, 35%, 39.6%
4 filing status, rates vary by these
Based on taxable income not gross income
Taxable income = Gross income– deductions/exclusions
