The Great Depression was a low probability event. It required several negative economic events to occur at the same time and for policy makers to respond poorly to those events. One of the best books on this topic is John Kenneth Gailbraith’s The Great Crash; you might want to read it.
The events of 1937 are largely forgotten, even by economists. But for those who study the relationships between public policy and economic growth, the lessons of 1937 are some of the most important ones from the 20th century.
Table 7.2 on page 232 of your text shows GDP growth of 12.8% in 1936. In 1937 it was 6.9%, and by 1938, it was -5.5 percent. How does an economy go from the strong growth (admittedly from a relatively low base) of 1936 to another recession by 1938? In this case, the answer is government policy.
For this week’s discussion, go on the web or to the UMUC library and learn the specific monetary and fiscal policy changes (don’t forget taxes) that occurred in 1937. Use what you have learned about GDP, production costs and aggregate demand, and aggregate supply to project the most likely results of those changes.
Next view our current economic condition and the recently proposed tax increases, the ending of the Federal Reserve’s quantitative easing and the proposals for increased government spending that may or may not be offset by spending cuts in other areas. Again using the tools you have learned, what do you think is the most likely result?
In other words, compare 2015 to 1937 and explore what lessons and cautions may be learned from that comparison.
Think in terms of an economic policy advisor.