Paul Krugman: That 1937 Feeling From March 2010

Q1paul Krugman That 1937 Feelingthis Is From March 2010 Thus Som

Paul Krugman - That 1937 feeling. This is from March 2010, thus, some data is out of date. However, the point of the video is to help you make the connections between the recent/current economic policies and the events of 1937. The topic: 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 Galbraith'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.

Paper For Above instruction

The comparison between the economic conditions and policy responses of 1937 and those of 2015 offers vital lessons for policymakers and economists. During 1937, policies implemented in response to the Great Depression, particularly restrictive fiscal and monetary measures, significantly contributed to a slowdown in economic growth, culminating in a recession. Analyzing these policies through the lens of aggregate demand and supply, it becomes evident that tightening fiscal policies—such as reduced government spending and increased taxes—curtailed aggregate demand, resulting in decreased GDP growth and rising unemployment (Galbraith, 1955). Similarly, monetary policy actions, including the Federal Reserve's decision to tighten monetary supply, depreciated economic activity further (Bernanke, 2000). These policy missteps exemplify how aggressive austerity and restrictive monetary measures can deepen economic downturns rather than mitigate them.

Fast forward to 2015, a comparison reveals similar debates surrounding fiscal discipline and monetary easing. The Obama administration faced pressures to raise taxes to fund deficits, coupled with discussions about unwinding the Federal Reserve’s quantitative easing policies. Based on historical insights, such potential tax hikes and the cessation of quantitative easing can have contractionary effects on GDP by reducing aggregate demand (Blinder & Zandi, 2015). When policy responses mimic the restrictive measures of 1937, the economy risks slipping into another recession. Conversely, maintaining accommodative monetary policies while cautiously adjusting fiscal measures could stabilize growth, as was observed during the expansion period after the initial 2008 recession (Meltzer, 2010).

The lessons from 1937 warn strongly against premature tightening of fiscal and monetary policies during economic recovery phases. Policymakers should consider the balance between fostering growth and controlling inflation, avoiding abrupt austerity that can induce recessionary pressures. Employing expansionary policies—including prudent government spending and accommodative monetary policy—can sustain GDP growth, reduce unemployment, and prevent a relapse into recession (Reinhart & Rogoff, 2009). Moreover, flexible policies responsive to economic indicators rather than rigid adherence to austerity ideals can better safeguard against similar mistakes of the past.

In conclusion, the experience of 1937 underscores that economic stability depends critically on the timing and nature of policy responses. Like then, current conditions demand cautious, data-driven approaches focused on stimulating demand rather than constraining it prematurely. Avoiding aggressive fiscal tightening and unwinding monetary stimulus too quickly are essential principles derived from historical analysis to ensure continued economic growth and avoid setbacks.”

References

• Bernanke, B. S. (2000). Essays on the Great Depression. Princeton University Press.
• Blinder, A. S., & Zandi, M. (2015). The Federal Reserve’s Response to the Financial Crisis. The Journal of Economic Perspectives, 29(3), 3-24.
• Galbraith, J. K. (1955). The Great Crash 1929. Houghton Mifflin.
• Meltzer, A. H. (2010). A History of the Federal Reserve, Volume 2: Book of the Week. University of Chicago Press.
• Reinhart, C. M., & Rogoff, K. S. (2009). This Time Is Different: Eight Centuries of Financial Folly. Princeton University Press.