Monday’s Mtg: Causes and Lessons of the Great Depression

When the U.S. economy teetered near collapse due to 2008’s financial crisis, the panicked debate over what to do about it scratched an old wound: What caused the similar-in-many-respects Great Depression and did government policies cure it or made bring it on? The debate quickly divided into two ideological camps. The neo-Keynesians, lead in the popular press by Paul Krugman, said the situation was pretty simple. Just like in the Great Depression, private economic activity and credit had dried up, so the government and the federal Reserve should stimulate the economy temporarily by as much as necessary to fill the hole in aggregate demand. Once growth resumed, the stimulus could be withdrawn and budget deficits would fall. The other side, conservatives, opposed fiscal stimulus (except tax cuts), arguing that austerity would reassure investors to kick start growth again.   After an $800 billion stimulus package, 40% of which was tax cuts, budget austerity has largely prevailed and the federal budget deficit has shrunk drastically.

The other tool of government economic management is the Federal Reserve, under its chairman, Ben Bernanke. Bernanke, an academic expert on the Great Depression, took the opposite approach to austerity. The Fed quickly lowered interest rates to near zero based on the consensus position that the Fed had done a lot to bring on the Great Depression by tightening the money supply when the crisis first hit.  When touching the “zero lower bound” interest rate in 2008 failed to work, the Fed increased the money supply further via an unprecedented program of buying bonds, known as “quantitative easing.”  Only recently has it begun to taper off that extra monetary stimulus.

Six years later, the debate still rages on whether the Fed and the Congress should have done more, or less, or different things. Krugman and others scream that we need to have large-scale spending stimulus and continued loose money. Conservatives all want to slash government spending and taxes and many also want interest rates raised to head off potential inflation. These approaches are polar opposites, really. One thing we can be certain of is that, since the United States regularly has financial crises, something like all of this will happen again and the same arguments will be trotted out.

So, what are the right lessons to take out of the Great Depression and the Great Recession? This topic can become really complicated really fast and it challenges my economic knowledge to try to do so. But, on Monday I will open us up by outlining the main theories about what caused and prolonged the Great Depression and which lessons policymakers tried to apply when they faced the abyss in 2008-09. Then, we can discuss the matter. There are several good non-technical angles we should be sure to get into, including how and why ideology seems to influences people who comment on economics in the news media and punditry.

DISCUSSION QUESTIONS –

  1. What are the main theories on what caused the Great Depression?   How did government policy help to cure (or prolong) it?
  2. How similar and dissimilar was the crisis of 2007-09? How did the policy response differ based on lessons learned 80 years ago?
  3. Who is right: Austerians or Keynesians?
  4. How/why does political ideology drive economics, especially lately on this issue? How can we know what’s right and wrong?

LINKS –

ABCs of the issue –

Liberal POV –

Conservative POV –

Next Week: Political Bias In Academia

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