Econ: Read and write

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timer Asked: Oct 16th, 2018
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Question Description

2+ pages, single spaced, excluding the title page and references

paper Format.

The title page should show your name, the title, and date. The paper must be organized into sections. Each section should start with a substantive section as follows:

Section I. Introduction. …….

Section II. “section title” ….

Section III. “another section title”….

Section IV. “another section title”…

Section V. Conclusion …..

References……

Number of sections can be 4 – 7.

The paper should give a summary of the reading at the minimum. You strengthen the main argument with additional reasoning, analysis and additional sources. You may give critical evaluation of the reading with supporting arguments and sources.

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FOCUS The Great Recession of the US and Lessons from the Past The Great Recession of the US and Lessons from the Past Bong Joon Yoon INTRODUCTION The 2007–2009 recession had devastating effects on income and employment in the US. In 2008, the real GDP growth rate was –2.8 percent, the worst since 1948. In 2009, the quarterly unemployment rate was 8.2–10.0 percent, the second worst figures seen since the 1981–82 recession. The growth rate recorded a hopeful 5.0 percent in the fourth quarter of 2009, but then slowed to 2.0 percent in the third quarter of 2010. The (seasonally adjusted) quarterly unemployment rates in 2010 still linger around 9.7 percent. With dim prospects of a speedy recovery, the 2007–2009 recession has been justifiably called the “Great Recession.” Historically, government actions to fight economic crises have not been helpful. Rather, they have acted to worsen the recovery. The “Great Recession” appears to be no exception. We review the government’s failures in responding to the Great Depression, the “Lost Decade” of Japan, and the “Great Recession,” of the US and suggest policies for a sustainable economic recovery. 48 | www.seriquarterly.com Bong Joon Yoon THE GREAT DEPRESSION It is a popular myth that the “New Deal policies” under President Franklin D. Roosevelt were a major factor in overcoming the Great Depression, which started in 1929. The main purpose of the New Deal was to solve the unemployment problem. However, the rate of unemployment never went below 14 percent through the entire New Deal period from 1933 to 1939.1 Cole and Ohanian (2009) point to categorical evidence that reveals that the facts do not support the New Deal myth.2 Relative to 1929, the total work-hours per adult, including government employees, declined 18 percent during the pre-New Deal period (1930–32), and 23 percent during the New Deal period (1933–39). The decline in work-hours was worse among private employees, declining by 18 percent in 1930–32 and 27 percent in 1933–39, showing that the New Deal failed to improve employment. The New Deal also failed to stimulate consumption and investment. During the New Deal era, per capita consumption remained at 25 percent, 1 Statistical Abstract of the US. 2 Harold L. Cole and Lee E. Ohanian, “How Government Prolonged the Depression,” The Wall Street Journal, Feb. 2, 2009. lower than the trend level, while per capita non-residential investment was on average 60 percent lower. Why did the New Deal fail to rescue the economy despite favorable economic fundamentals— rapid productivity growth, stable prices, low real interest rates, and plentiful liquidity? According to Cole and Ohanian, it was due to anti-market policies which contravened economic logic. Especially damaging was the National Industrial Recovery Act (NIRA) of June 1933, which stifled competition by protecting monopolies and oligopolies in the product markets, as well as monopolies on labor by unions. The NIRA required each of 500 industries to prepare a code of “fair competition” designed to eliminate “excessive competition.” These government-approved codes fixed wages and prices at artificially high levels, restricted output with production quotas, and reduced industrial production capacity by imposing quotas on new investments. NIRA protection increased manufacturing wages by 25 percent according to the estimates of Cole and Ohanian. January 2011 | SERI Quarterly | 49 The Great Recession of the US and Lessons from the Past |Table 1 Recent US Economic Statistics 2006 2007 2008 2009 Latest 4 Quarters Q4 to Q4 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Average Real GDP (% change) 2.4 2.3 -2.8 0.2 3.1 5.0 3.7 1.7 2.0 GDP Price Indexes (% change) 2.9 2.6 2.1 0.5 1.2 -0.2 1.0 1.9 2.3 Unemployment Rates (%) (16+ years, seasonally adjusted) 2004 2005 2006 2007 2008 5.6 5.1 4.6 4.7 6.1 2009 2010 June July Aug. Sept. Oct. 2009 10.3 Nov. Dec. 10.0 9.5 9.4 9.7 9.8 10.1 10.0 Jan. Feb. Mar. Apr. May June 9.7 9.7 9.7 9.9 9.7 9.5 Source: http://www.ustreas.gov/offices/economic-policy/macroecon/quarterly_economic_data.pdf; //ftp.bls.gov/pub/suppl/empsit. cpseea10.txt. Accessed 11/22/10. ssed 7/12/2010. With wage costs growing at a far higher rate than productivity, the unemployment rate could not come down. In 1935, the Supreme Court declared the NIRA unconstitutional. Still, antimarket policies continued. In the same year, the National Labor Relations Act strengthened the collective bargaining power of unions. Many states tolerated “sit-down strikes,” in which workers physically occupy factories to shut down production. As this over-protection of labor rights drove manufacturing wages up, unemployment increased and the economy contracted again in the so-called “recession in a depression” of 1937–38. Finally in 1938, President Roosevelt acknowledged the “cartel system” in America, which led the Justice Department to reinstate antitrust prosecution. Furthermore, the Supreme Court ruled the sit-in strike illegal. With the outbreak of World War II, the National War Labor Board restricted large union wage settlements to cost-of-living increases. The war-time economic boom of the 1940s did not occur only because of enormous military spending. The boom re50 | www.seriquarterly.com flects the erosion of the New Deal’s anti-market industrial and labor policies, which betrayed economic rationality. The New Deal’s anti-market policies delayed economic recovery by seven years according to Cole and Ohanian. By protecting industries and union workers from competition, the New Deal shrank consumption, investment, and employment in the private sector, delaying economic recovery. To encourage these three factors, the government needs to promote competition in the product and labor markets through lower taxes, less regulations, freer international trade, and a stable and predictable regulatory environment. JAPAN’S LOST DECADE Unlike the US during the 2007–2009 financial crisis, Japanese financial institutions did not suffer from a shortage of funds. They had plenty of funds to lend to corporations, large and small. Hayashi and Prescott explain that it was Bong Joon Yoon low productivity growth that caused the low economic growth of the Lost Decade.3 If so, how did the government’s policy mistakes, especially government subsidies for inefficient corporations and declining industries, cause productivity stagnation in the 1990s? Makin (2008) divides the Lost Decade into three parts: the recession of 1991–1993, the short-term recovery of 1994–1996, and the severe recession of 1997–1999. Building on Makin, Japan’s doomed policy responses over the three sub-periods are summed up below.4 The 1991–1993 Recession In 1991–93, as households experienced a precipitous decline in asset value due to the falling prices of stock and land, there was also a decrease in aggregate demand. At the same time, banks, which were exposed to the commercial real estate bubble, cut lending steeply. Unlike in the US, corporations in Japan depend on banks for fund raising. Accordingly, the banks’ loan reductions hit corporations (who were already suffering from decreased demand) especially hard. Along with the decrease, came deflation and yen appreciation, which prompted firms to move their production overseas. During the 1991–1993 recession, the Bank of Japan reduced the discount rate from 6 percent in 1990 to 1.75 percent after successive cuts. Along with the low interest rate policy, the government spent 6 percent of GDP in three rounds of fiscal stimulus programs from 1992– 1993. The effects were disappointing; with growth rates in 1993 and 1994 at a meager 0.20 percent and 0.62 percent respectively. The fiscal stimulus during these two years failed to properly encourage consumption and investment. Most of the stimulus fund was spent for public works and subsidies to small businesses. Many of the public works projects were unproductive, with selection being a political process through which politicians pushed for their own private interests ahead of that of the nation. Economic rationality was ignored in the selection process, while pork barrel politics prevailed. Government subsidies helped sustain inefficient firms, when it is the well-run, efficient corporations in no need of subsidies that should have been encouraged to lead economic recovery. Hence, subsidies to the so-called “zombie companies” from the government delayed recovery. The Short-Lived 1994 – 1996 Recovery From 1994, deflation deepened in Japan. Both corporations and households developed a “liquidity preference,” i.e. a tendency to hoard cash rather than invest it. The main reason was the heightened uncertainty of attaining returns on investments. The Kobe earthquake also added to the uncertainty. Cash hoarding was strengthened by yen appreciation (¥79.8 per dollar in 1995 from ¥123 per dollar in December 1992) as a result of the continued trade surplus. Due to the deflation, the annual real return from cash hoarding reached 2 percent, further incentivizing cash hoarding. This worsened deflation, creating a vicious cycle. To deal with both the recession and deflation, the Bank of Japan continued to drop the discount rate. In September 1995, the discount rate was set at 0.5 percent, opening the so-called “zero-interest” era.5 The government carried out the second fiscal stimulus in 1994–1995, spending another 6 percent of GDP. Despite the stim- 3 Fumio Hayashi and Edward C. Prescott, “The 1990s in Japan: A Lost Decade,” www.minneapolisfed.org/research/WP/WP607.pdf. 4 John H. Makin, “Japan’s Lost Decade: Lessons for the United States in 2008,” Economic Outlook, March 1, 2008, American Enterprise Institute for Public Policy Research. 5 Source: Bank of Japan. January 2011 | SERI Quarterly | 51 The Great Recession of the US and Lessons from the Past ulus, however, the Japanese economy showed very modest growth, recording 0.64 percent in 1994, 1.94 percent in 1995 and 2.82 percent in 1996. The Severe 1997 – 1999 Recession Entering 1997, the decline in land prices and insolvency of real estate-collateralized loans did not stop. Consequently, the financial structure of financial institutions continued to deteriorate, which restrained their lending capacity. On the other hand, the ineffectiveness of fiscal stimulus was being recognized as it became clearer that the public works programs implemented through five rounds of fiscal stimulus were ineffectual. Also recognized was the rapid expansion of fiscal deficits and public debt, which led the government to increase the consumption tax rate from 3 percent to 5 percent in 1997 to help restore fiscal heath. The results of the tax increase were a disaster. In 1998, the GDP growth rate recorded –2.15 percent and the rate of inflation was close to –2 percent, returning the economy to deflation. Adding insult to injury was the Asian Financial Crisis, which precipitated the insolvency of financial institutions as shown in the bankruptcy of the Long-Term Credit Bank of Japan, which was taken over by the government. In 1999, the government gave out ¥700 billion worth of free gift-cards, called “Region Promotion Coupons,” in order to stimulate consumption and the economy. However, recipients spent 68 percent of the gift-cards to purchase necessities, which they would have purchased anyway. As such, the gift-cards failed to create extra consumption demand.6 In 2001, the new administration led by Prime Minister Junichiro Koizumi started privatizing inefficient public corporations, and initiated deregulation. Waste- ful public works to stimulate the economy were to be terminated and bad loans from Japanese banks cleaned up.7 Apparently, Koizumi’s reform drive was effective, as the Japanese economy grew at an average yearly rate of 2 percent during 2003–2007. Japan’s Lost Decade provides the following lessons. First, a zero interest rate policy does not bring about a recovery, but only worsens cash hoarding under deflation. With real investment being too risky amid a financial crisis and recession, if prices fell by 2 percent per year under deflation, savers would hoard cash and reap a 2 percent real return rather than purchase financial instruments with lower yield rates. Low interest also helped prolong the life of troubled corporations. As the Japanese case shows, corporate zombies must be weeded out for a faster recovery. Second, public works are ineffective in stimulating the economy. The stimulus increases public debt and interest rates, especially long-term rates, which raises the costs of long-term investment and hurts the prospects of a recovery. The short-term effects of the stimulus are not convincing either, because of the political decisions involved in public works. Japan’s Lost Decade provides the following lessons. 1. A zero interest rate policy does not bring about a recovery. 2. Public works are ineffective in stimulating the economy. 3. Tax increases during a recession result in the disaster seen during Japan’s 1997 consumption tax hike. 6 Source: 1999 National Life White Paper: Realizing a Discretionary Employment Society. December, 19991, Economic Planning Office http://www5.cao.go.jp/seikatsu/whitepaper/wp-pl/wp-pl99/hakusho-99-2-12.html accessed 11/20/10; also http://ja.wikipedia.org/wiki. 7 Lam Peng-Er, "Structural Reforms in Japan: Promises and Perils," Asian Affairs, Vol. 29, No. 2 (Summer, 2002), pp. 67-82. 52 | www.seriquarterly.com Bong Joon Yoon Third, tax increases during a recession result in the disaster seen during Japan’s 1997 consumption tax hike. Temporary tax cuts or temporary consumption subsidies such as the Regional Promotion Coupons do not help recovery; permanent tax reduction does. THE 2007 – 2009 GREAT RECESSION OF THE US Since the outbreak of the financial crisis in 2007, the late Bush and the current Obama administrations have mobilized enormous amounts of public funds to bail out corporations and stimulate the economy. The government owns, subsidizes, or provides guarantees to troubled financial and other institutions, and has provided stimulus through various bailout programs as of November 16, 2009:8 The Troubled Asset Relief Program has spent (as of November 16, 2009) $356 billion, out of a committed $700 billion of public money, rescuing financial institutions in order to restore liquidity to the financial market. It also bailed out the automobile industry. Federal stimulus programs, which were designed to stimulate the economy and create jobs, committed $1.2 trillion, of which $577.8 billion has already been spent. They include stimulus programs (the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009) which consist of public works, temporary tax cuts for businesses and individuals, and economic transfers like student loan guarantees ($195 billion), unemployment benefit extensions ($8 billion) and the Cash for Clunkers Program ($3 billion). Federal Reserve Rescue Efforts committed $6.4 trillion, almost 10 times the Troubled Asset Relief Program to rescue financial institutions such as the Bank of America ($97 billion), Bear Stearns ($29 billion), Citigroup ($220.4 billion), commercial paper ($1.8 trillion), money market funds ($600 billion), term asset-backed securities loans ($1 trillion), term auctions ($500 billion), and term securities lending ($250 billion). $1.5 trillion has been spent so far. The most expensive bailouts were for the rescue of the housing sector. A total of $11 trillion was committed of which $3 trillion has been spent. The Fannie Mae and Freddie Mac bailouts committed $400 billion ($110.6 billion spent), the FHA housing rescue committed $320 billion ($20 billion spent), and other housing initiatives committed $745 billion ($130.6 billion spent), etc. The fates of Fannie Mae and Freddie Mac are expected to worsen in the future and will require much more than the current $400 billion commitment. The bailout programs appear to have extinguished the financial crisis; however, embers beneath the ashes may ignite new dangers. The reasons are, first, the bailouts only solidify the expectations of financial institutions that the government will bail them out of future trouble, especially if they are large. This moral hazard of “too big to fail” could lead to another financial crisis in the future. Second, to restrain the moral hazard, the government will have to tighten regulations to control the behavior of the private financial sector. This leaves important decisions in financial transactions in the hands of the regulatory bureaucrats, creating all the inefficiencies of a government run business. Third, massive public spending for stimulus programs drains resources from the productive private sector, which would reduce investment 8 David Goldman, “CNNMoney.com's bailout tracker, “ accessed 7/21/2010 http://money.cnn.com/news/storysupplement/economy/ bailouttracker/. January 2011 | SERI Quarterly | 53 The Great Recession of the US and Lessons from the Past It has also been observed that the US government is repeating the failed policies of public works seen during the Great Depression as well as the financial bailouts and zero interest rate policy of Japan’s Lost Decade. and hurt recovery. Finally, astronomical public debt will keep long-term interest rates high and increase the cost of investment, stifling the future growth of the economy. It has also been observed that the US government is repeating the failed policies of public works seen during the Great Depression as well as the financial bailouts and zero interest rate policy of Japan’s Lost Decade. Despite the huge costs of government policies in dealing with the Great Recession, the promised employment growth has yet to arrive. As of July 2010, the unemployment rate lingers at around 9.5 percent. The woes of the housing market also remain, with single-family housing starts numbering 454,000 (seasonally adjusted) in June 2010 compared to 1.47 million in 2006, before the housing bubble burst.9 On July 16, 2010, Congress passed the Financial Wall Street Reform and Consumer Protection Act to “cut the odds of another crisis and better handle one when it arrives.” The legislation, with an expected 533 sets of new rules, transfers enormous power from the financial institutions and the market to government regulators. It “creates a council of regulators to monitor economic risks, establishes a new agency to police consumer financial products, and sets new standards for the way derivatives are traded.”10 9 The Wall Street Journal, July 21, 2010. 10 The Wall Street Journal, July 21, 2010. 11 The New York Times, September 30, 1999. 54 | www.seriquarterly.com This new legislation expands the already abundant number of regulations. However, the outbreak of the 2007 financial crisis was not due to a paucity of regulations. For example, many people, even the New York Times,11 warned of the dangers of increased sub-prime mortgage lending by Fannie Mae and Freddie Mac. However, the warnings were not acted upon by the regulatory agencies including the Office of Federal Housing Enterprise Oversight (OHFEO), which had been directly overseeing Fannie and Freddie. Expanded financial regulations could increase the cost of credit. Still another problem is their ambiguity which leaves the actual application and interpretation of the legislation in the hands of the regulators. This creates longterm regulatory uncertainty, which will also stifle the financial sector. CONCLUDING REMARKS How soon the US economy will fully recover from the current recession is anybody’s guess. Considering the enormity of the government bailouts that have already been implemented, the speed ...
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PhilipTutor
School: Carnegie Mellon University

Attached.

Running head: THE GREAT RECESSION

1

The Great Recession
Student’s Name
Institutional Affiliation
Course
Date

THE GREAT RECESSION

2

The Great Recession of the Us and the Lessons from the Past
Introduction
There were devastating effects that were noticed during the period of 2007-2009 recessions
on the employment and income sectors of America. It was estimated that the GDP growth rate was
at -2.8% which was alluded as the worst form of growth since the year 1948. The percentage of
unemployment increased further in 2009 and recorded a rate of 10% decrease. It is still estimated
that by the year 2010 the rate of unemployment was still lingering at 9.8%. The speedy recovery,
there was high levels of recession experienced in the year 2007-2009. Governments have not been
helpful when fighting issues about economic crises. It is seen that governments worsen the rate of
economic recovery of countries. The great recession is understood to be of no difference and
governments have been unable to respond positively to the emerging financial crisis (Yoon, 2011).
The Great Depression
In 1929m there was an emergence of a new deal that was aimed at reducing the level of
unemployment experienced in the US. Unfortunately, during this period, the rate of unemployment
never dropped below 15% during the implementation of the new deal that took place for six years.
However, the available evidence does not tend to support the actions that were outlined in the new
deal. Among the private organisations, the rate of workers-hour was worse because it declined
considerably. This was due to the fact that the new deal was unable to solve the issue of
unemployment.
Additionally, the new deal failed to improve the levels of work rate and the ability to
stimulate investment and consumption among workers. The new deal failed to cure the...

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