Free Essay - the Great Depression and the Great Recession of 2006-2007

In a recession, the gross domestic product reduces for almost two quarters. There are still many indicators signaling a recession because the growth of the GDP is slow until it goes negative. The negative GDP is because of slow consumer demands. On the other hand, depression is an extended recession going on for years, where there is reduced economic activity. The depression is more severe compared to the recession. The Great Depression was the worst decline of the economy of the United States and in the history of the industrialized world, which lasted a decade from 1929 to 1939 (van Bergeijk 20). It started after the crash of the stock market in October 1929, where Wall Street was sent into panic and subsequent wiping out of millions of investors. In the following years, the spending of consumers and the investments declined, leading to steady declines in industrial products with companies laying off workers. During the depression, unemployment rates reach 25%, the prices of housing fall by 30%, and the prices reduced by 10% (van Bergeijk 20). The effects of the Great Depression continued for many years after it came to an end.

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Similarities and Differences

Causation

The major causes of the Great Recession and the Great Depression are from the federal government's actions. For the Great Depression, the Federal Reserve raised the rates of interest in 1929 to stop the impending boom after long periods of keeping the rates low during the early 1920s. At the same time, President Hoover signed into law the Smoot-Hawley Tariff that hampered trading activities and damaged the exports in the 1930s (Coen-Pirani, and Wooley 5). The President also signed into law a large increase of taxes in 1932, which stopped entrepreneurship. The Great Recession happened after the government, in the 1990s, started pushing for homeownership even for people who did not deserve it (Nevo, and Arlene 25). The securities backed by mortgages were toxic, with the housing sector experiencing declined growths and many American banks collapsing. The urgent desire of the American government to bail out different banks and organizations led to uncertainties and instabilities, which widened the recession.

Massive Spending by the Federal Government

Both President Obama and Roosevelt responded in the same ways to the crises. They deliberated on striking a balance in the federal budget but instead opted for massive spending. Before interventions, earlier presidents such as Harding and Cleveland reduced spending after the country was at significant risks of economic hardships. Hoover was the president during the transition, operating deficits with record spending on the public works, introducing the first federal welfare program, and also establishing the first large-scale federal farm program. The outcomes of these initiatives were 25% unemployment and huge budget deficits (Coen-Pirani, and Wooley 7). President Roosevelt made good the policies of Hoover. Roosevelt and the advisers, regardless of the earlier moves of cutting spending and controlling the deficit left behind by president Hoover, chose to focus on larger spending in the federal government would increase economic expansion and also help the country out of its economic downturn. Therefore, Roosevelt started the Agricultural Adjustment Act (AA) that paid farmers not to engage in production.

FDR also expanded the Reconstruction Finance Corporation of Hoover that gave bailout funds to large organizations and banks. Roosevelt also increased spending on public works, targeting the large subsidies for different special interests. President Obama, who often refers to Roosevelt, followed the examples where he targeted the spending on interest groups. For example, President Obama signed into law a $787 billion stimulus package where tax dollars were sent to different cities and voter groups in the country (Dominguez 15). President Obama then backed up the expensive "job bill" which sent money to different congressional districts. President Obama also advocated for the universal health coverage and the cap-and-trade bill that promised increased federal debt (Matysiak, and Tomas 50). The increased federal debt under Roosevelt and Obama are the same. The national debt increased twofold in the first two terms of President Roosevelt, and it was expected to increase within a decade.

Failed Spending

After the significant increments in federal spending under both Obama and Roosevelt, the unemployment rates remained high. During the 1930s, unemployment increased, but there was no recovery. In 1939 April, at the end of the second term of President Roosevelt, unemployment rates were 21% (Ghosh, and. Qureshi 5). Henry Morgenthau, the Treasury Secretary, claimed that the government was spending more than it spends before while it did not work. However, the programs of Roosevelt continued, with a yearly increase in budgets. President Obama took to the office when the rates of unemployment were at 8%, which rose steadily to 10% in the subsequent years (Ghosh, and. Qureshi 5). President Obama and the advisers were amazed that the increased large spending failed to reduce unemployment, and they argued that the spending saved on jobs that would have been lost entirely. The critics of both Obama and Roosevelt claimed that it was difficult to spend their waves from the recession. During the New Deal, the spending on public works damaged many jobs as it created. Each dollar that the government spent was obtained from taxation. For all the public jobs created, a private job was destroyed somewhere else.

Raising Taxes

In the period of the Great Depression, Roosevelt increased both excise and income taxes. Roosevelt set the tax prices at 79%, with few citizens capable of paying the rates (Ghosh, and Qureshi 5). Facing the disincentives in making capital investments, most entrepreneurs used their wealth carefully, investing in foreign banks, art collections, and tax-exempt bonds. Little wealth was going into the creation of jobs, which led to sustained unemployment. During the Second World War, President Roosevelt increased taxes further. Most of the increased taxes under the Obama administration were planned for the future. There have been proposed hikes on taxes on products such as liquor, cigarettes, soft drinks, and plane tickets. Obama wanted the tax cuts that were introduced during the era of President Bush to expire. The result was increased taxes of capital gains, income, and estate taxes. The tax increments followed increased spending.

Scapegoats

The massive federal spending sequences alongside the lack of recovery and hikes of taxes are poison. To this end, Roosevelt identified scapegoats in explaining his failures. Roosevelt used the Wall Street bankers are his favorite scapegoats. Roosevelt termed the Wall Street bankers the "economic royalists," blaming them for the reasons of the Great Depression. Roosevelt also laid blame on the top businessmen in the United States for causing a capital strike. The American businessmen declined to invest in making FDR look bad (Ghosh, and Qureshi 6). In response, President Roosevelt launched investigations of key Republicans, even using newspapers to promote hostility towards the targets. The administration of President Obama followed in the footsteps of President Roosevelt by attacking different organizational leaders and Wall Street bankers.

Obama condemned the raises received by these bankers and the profits that were earned by some big oil companies and health insurance organizations. The focus on class welfare is unavoidable in the redistribution of wealth among different groups. Both Obama and Roosevelt believed that through increasing resentment and envy to some American citizens, they were able to capture the larger groups' votes and winning the re-elections (Dominguez 25). The approach guaranteed that most affluent Americans would attack presidents using class welfare. However, the redistribution campaigns always provide large amounts of funds for subsidizing favored groups. After the reelection of Roosevelt in 1936, Carter Glass, a senator, claimed that the elections would be successful if the campaign had many funds. The administration of President Obama hoped that the health insurance bill and stimulus package would generate the same support among Americans who received federal benefits.

Conclusion

As shown, the Great Depression was the worst decline of the economy of the United States and in the history of the industrialized world. There are some similarities and differences in the causes and handling of the two events. This paper identifies that some of the major causes of the Great Recession and the Great Depression are from the federal government's actions. Also, the urgent desire of the American government to bail out different banks and organizations led to uncertainties and instabilities, which widened the recession. Both President Obama and Roosevelt responded in the same ways to the crises. Both Presidents deliberated on striking a balance in the federal budget but instead opted for massive spending. After the significant increments in federal spending under both Obama and Roosevelt, the unemployment rates remained high. The result was increased taxes of capital gains, income and estate taxes. The tax increments followed increased spending

Works Cited

Coen-Pirani, Daniele, and Michael Wooley. "Fiscal centralization: theory and evidence from the Great Depression." American Economic Journal: Economic Policy 10.2 (2018): 39-61. Retrieved from http://www.pitt.edu/~coen/research/coen_pirani_wooley.pdf

Dominguez, Kathryn, ME. "International Dimensions of the Great Recession and the Weak Recovery." Confronting Policy Challenges of the Great Recession: Lessons for Macroeconomic Policy (2017): 107. Retrieved from https://books.google.co.ke/books?hl=en&lr=&id=DO49DwAAQBAJ&oi=fnd&pg=PA107&dq=Compare+and+Contrast+the+Great+Depression+to+the+Great+recession+of+2006-2007&ots=YPVS7O1tcm&sig=TZZAc1KkHIRPGQvAHo9h4_5Ls9U&redir_esc=y#v=onepage&q&f=false

Ghosh, Mr. Atish R., and MissMahvash S. Qureshi, eds. From Great Depression to Great Recession: The Elusive Quest for International Policy Cooperation. International Monetary Fund, 2017. Retrieved from http://akb.africa-union.org/auc/bitstream/AKB/2746/1/from-great-depression.pdf

Matysiak, Anna, Daniele Vignoli, and Tomas Sobotka. The Great Recession and fertility in Europe: A sub-national analysis. No. 02/2018. Vienna Institute of Demography Working Papers, 2018. Retrieved from https://www.econstor.eu/bitstream/10419/184849/1/WP2018_02.pdf

Nevo, Aviv, and Arlene Wong. "The elasticity of substitution between time and market goods: Evidence from the Great Recession." International Economic Review 60.1 (2019): 25-51. Retrieved from https://onlinelibrary.wiley.com/doi/pdf/10.1111/iere.12343

Van Bergeijk, Peter AG. Deglobalization 2.0: Trade and Openness During the Great Depression and the Great Recession. Edward Elgar Publishing, 2019. Retrieved from https://books.google.co.ke/books?hl=en&lr=&id=zC6UDwAAQBAJ&oi=fnd&pg=PR1&dq=Compare+and+Contrast+the+Great+Depression+to+the+Great+recession+of+2006-2007&ots=tlsb8FZ08k&sig=nhpuxfs51TJbHGuOMX9RLdwWgb0&redir_esc=y#v=onepage&q&f=false