notebook # 21- economics 14-1 business cycles and fluctuations pages 375-380

Notebook # 21- Economics 14-1

Business Cycles

And

Fluctuations

pages 375-380

Business Cycles & Fluctuations

ESSENTIAL QUESTIONS:• What are the two main phases of the business cycle?

• How can the Great Depression be compared to other recessions?

Business Cycles & Fluctuations

GPS STANDARDS:

SSEMA1- Describe the means by which economic activity is measured.

e.) Define the stages of the business cycle, as well as recession and depression.

l Business Cycles & Fluctuations

• Economic growth is something that is beneficial to almost everyone.

• The term “business cycle” refers to alternating increases and decreases in the level of economic activity.

• Another way of saying this is that economic growth is interrupted by business cycles–largely systematic ups and downs of real GDP.


• Either way, economic growth—even the record setting expansion that took place during the 1990s— always comes to a halt before it begins to take off again.

• The inevitable ups and downs of the economy are among the reasons why economists have developed economic measurement tools like GDP and the Consumer Price Index (CPI), etc.


• Up until now, the average recession in the United States lasted 15 months and reduced output by 8.7 percent.

•Up until now, the average expansion lasted 46 months and increased output by 22.5 percent.

•


The business cycle consists of two phases:

1. expansion

2. recession


• Expansion is the recovery from a recession.

•If a recession becomes very severe, it can turn into a depression.


• As you know, the worst depression in U.S. history was the Great Depression, which began in 1929.

•The Great Depression was caused by various factors, including excessive borrowing in the 1920s and global economic conditions.

•Since the Great Depression, the United States has experienced several recessions, but each was short compared with the recovery that followed.

Business Cycles in the United States

Figure 14.1

A recession begins with a peak and ends with a trough.


• What happens during a depression?

The following takes place:

1. production slows

2. output declines

3. unemployment rises

4. the standard of living falls

Causes of the Business Cycle

• Businesses reduce their capital expenditures once they decide they have expanded enough.

•Businesses cut back their inventories at the first sign of an economic slowdown.

•Businesses cut back on investment after an innovation takes hold.

• Tight money policies of the Federal Reserve System slow the economy by shrinking the money supply and increasing the interest rates for borrowing money.


• Internal shocks, such as the banking crisis and the housing crisis can cause business cycles.

•External shocks, such as increases in oil prices and international conflicts (wars), can cause business cycles.


• Why do businesses cut back on their inventories when they think the economy is turning down?

•Because they fear sales will decline and they will be stuck with inventory that they cannot sell as consumer demand for products declines.


• Why is it important to predict business cycles?

• Businesses and the government are better able to plan their actions if they know how the economy is likely to perform.

•A business that had planned to expand its plant, for example, might delay construction if it believed the economy was about to enter a recession.


• How does the Great Depression compare to other recessionary periods?

• The Great Depression was more severe than the other recessionary periods.

•It was the worst economic decline in U.S. history.

Pages 375-380

1920's had been a period of good economic times 1920's had been a period of good economic times Tues. Oct. 29th, 1929Tues. Oct. 29th, 1929 - NYC Stock market crashed, - NYC Stock market crashed,

causing a depression that would last until 1942causing a depression that would last until 1942

The stock market:The stock market: the public invests in the public invests in

cos. by purchasing cos. by purchasing stocks; in return for stocks; in return for this they expect a profitthis they expect a profit

b/c of booming 1920's b/c of booming 1920's economy, $ were economy, $ were plentiful, so banks were plentiful, so banks were quick to make loans to quick to make loans to investors investors

also investors only had also investors only had to pay for 10% of the to pay for 10% of the stock's actual value at stock's actual value at time of purchasetime of purchase this was known as this was known as

BUYING ON MARGINBUYING ON MARGIN, , and the balance was and the balance was paid at a later datepaid at a later date

this encouraged this encouraged STOCK STOCK SPECULATIONSPECULATION - people would - people would buy and sell stocks quickly to buy and sell stocks quickly to make a quick buckmake a quick buck

b/c of all this buying & selling, b/c of all this buying & selling, stock value increased (Ex: stock value increased (Ex: G.E stock $130 G.E stock $130 $396/share) $396/share)

this quick turnover didn't aid this quick turnover didn't aid cos. cos. they needed long term they needed long term investments so they could investments so they could pay bills (stock value was like pay bills (stock value was like an illusion)an illusion)

unscrupulous traders would unscrupulous traders would buy and sell shares buy and sell shares intentionally to inflate a given intentionally to inflate a given co.'s stock valueco.'s stock value

all of this gave a false sense all of this gave a false sense of security/confidence in the of security/confidence in the American marketAmerican market

beginning in Oct. beginning in Oct. 1929, investors’ 1929, investors’ confidence dropped, confidence dropped, leading to a leading to a market collapsemarket collapse

all tried to sell at all tried to sell at once and bottom fell once and bottom fell out of market = out of market = panic panic sellingselling… (many … (many bankruptcies as bankruptcies as banks called in loans)banks called in loans)

only a tiny minority of only a tiny minority of people traded on the people traded on the stock exchange, but stock exchange, but they possessed vast they possessed vast wealth, and the crash wealth, and the crash had a had a ripple effect ripple effect on on the economy the economy

For the poor.......For the poor....... mass consumption mass consumption

was already low was already low (poor could afford to (poor could afford to buy little)buy little)

unemployment rose unemployment rose no gov't no gov't assistance at firstassistance at first

since people could since people could not buy, not buy, productivity was cut productivity was cut back = further back = further unemp.unemp.

so w/ additional so w/ additional unemployment unemployment purchasing power purchasing power declined again declined again reduced reduced productivity yet productivity yet again (= again (= ECONOMIC ECONOMIC CYCLECYCLE))

UnemploymentUnemployment

Purchasing PowerPurchasing Power ProductivityProductivity

in 1920's U.S. Eco. was based on the productivity in 1920's U.S. Eco. was based on the productivity – purchasing power - employment cycle– purchasing power - employment cycle

for many goods to be produced , purchasing for many goods to be produced , purchasing demand had to be there: demand had to be there: this resulted in high this resulted in high employment and a healthy economyemployment and a healthy economy

b/n 1924-27, U.S. productive capacity doubled but b/n 1924-27, U.S. productive capacity doubled but it was b/c of technological innovationit was b/c of technological innovation electricity and mechanical advances made for electricity and mechanical advances made for better production, but no new jobs were added to better production, but no new jobs were added to the economythe economy

so more consumer goods were available, but so more consumer goods were available, but there weren't nec. more people to buy them there weren't nec. more people to buy them ((OVERPRODUCTIONOVERPRODUCTION))

a 2nd major problem: a 2nd major problem: uneven dist. of wealthuneven dist. of wealth

0.1% at top owned as much 0.1% at top owned as much as bottom 42% of as bottom 42% of American families (42% American families (42% below below poverty linepoverty line))

of the 58% above the of the 58% above the poverty line, most fell into poverty line, most fell into the the middle class middle class category - category - they were not wealthy; they they were not wealthy; they had jobs b/c of the had jobs b/c of the industrialization & industrialization & consumerization of the consumerization of the American market placeAmerican market place

this middle class depended this middle class depended on their salaries and when on their salaries and when productivity declined they productivity declined they lost their jobslost their jobs

and b/c of low savings, and b/c of low savings, they had to cut back on they had to cut back on their purchasestheir purchases

this decline in this decline in consumption among the consumption among the middle class ruined the middle class ruined the whole countrywhole country

Pres. Hoover’s responses…Pres. Hoover’s responses… he didn't believe that the gov't he didn't believe that the gov't

should play an active role in the should play an active role in the economyeconomy

he persuaded bankers/business to he persuaded bankers/business to follow his policy of follow his policy of VOLUNTARY VOLUNTARY NON - COERCIVE COOPERATIONNON - COERCIVE COOPERATION where he gave tax breaks in return where he gave tax breaks in return for private sector economic for private sector economic investmentinvestment

Hoover also organized some private Hoover also organized some private relief agencies for the unemployedrelief agencies for the unemployed

he worked out a system with he worked out a system with European powers that owed U.S. European powers that owed U.S. money as a result of WWI debts = money as a result of WWI debts = HOOVER MORATORIUMHOOVER MORATORIUM - put a - put a temporary stop to war debt & temporary stop to war debt & reparations paymentsreparations payments

Euro. countries were to purchase Euro. countries were to purchase American goods instead to American goods instead to stimulate American economystimulate American economy

in early 1931 these measures in early 1931 these measures appeared successful, but appeared successful, but then......the then......the TARIFF WARSTARIFF WARS

Democrats in Congress passed Democrats in Congress passed a high tariff (a high tariff (SMOOT HAWLEYSMOOT HAWLEY) ) to protect U.S. industry (hoped to protect U.S. industry (hoped to stimulate purchasing of U.S. to stimulate purchasing of U.S. goods)goods)

this turned out to be a fatal this turned out to be a fatal error...error...

Congress did not understand Congress did not understand that the world had become a that the world had become a GLOBAL ECONOMYGLOBAL ECONOMY

in retaliation other countries in retaliation other countries passed high tariffs and no passed high tariffs and no foreign markets purchased foreign markets purchased American goods, so U.S. American goods, so U.S. productivity decreased againproductivity decreased again

also in 1931, the Soviets also in 1931, the Soviets flooded the world market flooded the world market with cheap wheat (1/2 U.S. with cheap wheat (1/2 U.S. price) in an attempt to get price) in an attempt to get money to pay back money to pay back Austrian banks ( but price Austrian banks ( but price was too low and they was too low and they couldn't)couldn't)

this resulted in the this resulted in the BANKERS’ PANICBANKERS’ PANIC

Austrian banks borrowed Austrian banks borrowed from German banks and from German banks and appealed to the appealed to the BANK OF BANK OF INT'L SETTLEMENTINT'L SETTLEMENT (Fr (Fr veto)veto)

Austrian banks and Austrian banks and loaning German banks loaning German banks therefore were forced into therefore were forced into bankruptcybankruptcy

and b/c German banks and b/c German banks had borrowed from had borrowed from Americans, U.S. banks Americans, U.S. banks began to go bankrupt, began to go bankrupt, wiping out life savings of wiping out life savings of thousands of Americansthousands of Americans

Hoover was increasingly Hoover was increasingly unpopular, but he unpopular, but he continued to try... continued to try... he he persuaded Congress to persuaded Congress to establish the establish the RECONSTRUCTION RECONSTRUCTION FINANCE CORPORATIONFINANCE CORPORATION

had power to make had power to make emergency loans to emergency loans to banksbanks

but it was too little too but it was too little too late…late…

and Hoover wouldn't and Hoover wouldn't involve himself in any involve himself in any programs of direct gov'tal programs of direct gov'tal aid to individuals -didn't aid to individuals -didn't want to erode Americans want to erode Americans sense of sense of "RUGGED "RUGGED INDIVIDUALISM"INDIVIDUALISM"

people were frustrated - isolated protest movements people were frustrated - isolated protest movements EX: Dairy farmers frustrated w/low price of milk EX: Dairy farmers frustrated w/low price of milk

refuse to sell (dump it)refuse to sell (dump it) EX: WW1 veterans (pensions discontinued by EX: WW1 veterans (pensions discontinued by

congress) march on Washington = congress) march on Washington = BONUS MARCHBONUS MARCH (by (by BONUS ARMYBONUS ARMY))

they reached Washington by 1931, set up they reached Washington by 1931, set up shantytowns = shantytowns = HOOVERVILLESHOOVERVILLES (food scraps = (food scraps = HOOVER-MEALSHOOVER-MEALS, hitchhiking journeys = , hitchhiking journeys = HOOVER HOOVER RIDESRIDES))

after one year they were forcibly dispersed by the after one year they were forcibly dispersed by the Army (MacArthur/Eisenhower)Army (MacArthur/Eisenhower)

1932 ELECTION1932 ELECTION 1 out of 4 was 1 out of 4 was

unemployed…unemployed… nat'l income was nat'l income was

50% of what it had 50% of what it had been in 1929been in 1929

Repubs. Repubs. nominated Hoover nominated Hoover no hope no hope

winner by a winner by a landslide = landslide = FRANKLIN FRANKLIN DELANO DELANO ROOSEVELTROOSEVELT (Dem (Dem - N.Y. governor) - N.Y. governor)

this was the name FDR gave to his this was the name FDR gave to his new program to fight the new program to fight the DepressionDepression

it was a it was a revolutionrevolution in American in American society - changed completely the society - changed completely the way the gov't functionsway the gov't functions

the first phase of the New Deal the first phase of the New Deal dealt exclusively w/ eco. reform - dealt exclusively w/ eco. reform - unlike Hoover, FDR believed gov't unlike Hoover, FDR believed gov't legislation/involvement was legislation/involvement was crucial to stimulate the economy crucial to stimulate the economy

step 1 - dealt w/ the banking crisis step 1 - dealt w/ the banking crisis - - BANKING HOLIDAY-BANKING HOLIDAY- banks shut banks shut down and subject to gov't down and subject to gov't inspection, allowed to open when inspection, allowed to open when "healthy"- people's confidence "healthy"- people's confidence returned returned they redeposited, they redeposited, allowing banks to invest in the allowing banks to invest in the economyeconomy

step 2 - stock market step 2 - stock market reform- reform- Security Security Exchange CommissionExchange Commission est. to police the NYSE est. to police the NYSE (first chmn. was (first chmn. was Joseph Joseph P. KennedyP. Kennedy)- practice of )- practice of buying on margin was buying on margin was regulatedregulated

step 3 - to put more $ in step 3 - to put more $ in circulation, FDR went circulation, FDR went off the off the GOLD GOLD STANDARDSTANDARD (gov't could (gov't could print more $ than Fort print more $ than Fort Knox gold reserves Knox gold reserves would allow)- w/ more $ would allow)- w/ more $ in circulation, wages in circulation, wages and prices increasedand prices increased(= inflation), causing (= inflation), causing dollar value to lower- dollar value to lower- gave gov't spending gave gov't spending power (power (Keynesian Keynesian economicseconomics))

NATIONAL INDUSTRIAL NATIONAL INDUSTRIAL RECOVERY ACT (NIRA) and RECOVERY ACT (NIRA) and NATIONAL RECOVERY ADMIN NATIONAL RECOVERY ADMIN (NRA)(NRA) were established to end were established to end animosity b/n labour and business animosity b/n labour and business all was redirected to industrial all was redirected to industrial growth growth fair labour codes fair labour codes established - wages, no child established - wages, no child labour, shortened work hours- labour, shortened work hours- business people challenged the business people challenged the NRA, claiming it was communistNRA, claiming it was communist

they formed the they formed the LIBERTY LEAGUELIBERTY LEAGUE - at LL's urging, the Supreme Ct. - at LL's urging, the Supreme Ct. overturned the NIRA & NRA, overturned the NIRA & NRA, claiming that fed. gov't was claiming that fed. gov't was exceeding its authority (by exceeding its authority (by interfering in state interfering in state jurisdiction)jurisdiction)

TENNESSEE VALLEY AUTHORITY (TVA)TENNESSEE VALLEY AUTHORITY (TVA) - used - used to promote hydroelectric power, control to promote hydroelectric power, control flooding - lower rates flooding - lower rates private industry, private industry, manuf. fertilizer manuf. fertilizer fed. gov't. took ownership fed. gov't. took ownership ((nationalization v. privatizationnationalization v. privatization))

Kansas CityKansas Cityfrom Politics, from Politics, Farming, & the Farming, & the LawLaw

Thomas Hart Thomas Hart Benton,Benton,19361936

The Annual MoveThe Annual Moveby Otis Dozier, 1936by Otis Dozier, 1936

The Annual MoveThe Annual Moveby Otis Dozier, 1936by Otis Dozier, 1936

Construction of the Construction of the DamDam

by William Gropperby William Gropper

Construction of the Construction of the DamDam

by William Gropperby William Gropper

AGRUCULTURAL ADJUSTMENT ACT AGRUCULTURAL ADJUSTMENT ACT (AAA)(AAA) - passed in 1933 to aid formers- - passed in 1933 to aid formers- its objective was to restore farmers' its objective was to restore farmers' purchasing power and to restore the purchasing power and to restore the family farm - AAA had farmers cut back family farm - AAA had farmers cut back on crop production by paying them on crop production by paying them equivalent equivalent SUBSIDIESSUBSIDIES (paid not to (paid not to produce) - bad side: produce) - bad side:

1) food production down when millions 1) food production down when millions were starvingwere starving

2) Black sharecroppers were hurt: white 2) Black sharecroppers were hurt: white landowners paid not to farm so they got landowners paid not to farm so they got rid of Black tenant formersrid of Black tenant formers

in 1935, AAA was declared in 1935, AAA was declared unconstitutional by courts (too much unconstitutional by courts (too much control over individual states), so it was control over individual states), so it was revised and introduced as new revised and introduced as new legislationlegislation

EX: EX: Food Stamp Act of 1939Food Stamp Act of 1939 - gave - gave away surplus food to poor, also away surplus food to poor, also guaranteed (small) farmers a marketguaranteed (small) farmers a market

UNEMPLOYMENT - still a UNEMPLOYMENT - still a major problemmajor problem

FDR like Hoover was wary FDR like Hoover was wary of gov't handouts - he of gov't handouts - he wanted people to earn their wanted people to earn their keep so gov't agencies were keep so gov't agencies were created - temporarily - to created - temporarily - to address the unemp. address the unemp. problemproblem

CIVILIAN CONSERVATION CIVILIAN CONSERVATION CORPS (CCC)CORPS (CCC) - in 1933 - set - in 1933 - set to establish work for young to establish work for young men (18-25) in areas of men (18-25) in areas of reforestation, soil reforestation, soil conservation, flood control, conservation, flood control, road construction - also road construction - also took them out of urban took them out of urban labour markets - but Blacks labour markets - but Blacks not permitted to enrol not permitted to enrol

other agencies had specific mandates other agencies had specific mandates too...too...NATIONAL YOUTH ADMIN. (NYA)NATIONAL YOUTH ADMIN. (NYA) - - created jobs for young in urban areascreated jobs for young in urban areas

FED. EMERGENCY RELIEF ACT (FERA)FED. EMERGENCY RELIEF ACT (FERA) - - aimed at older workers- these and other aimed at older workers- these and other similar agencies worked well, but unemp. similar agencies worked well, but unemp. was still at 6 million in 1941(solution for was still at 6 million in 1941(solution for this would be the ind. boom of WW2)this would be the ind. boom of WW2)

NEW DEAL - SOCIAL REFORM ASPECT- NEW DEAL - SOCIAL REFORM ASPECT- after 1935, w/ immediate economic relief & after 1935, w/ immediate economic relief & reform addressed, New Deal turned to reform addressed, New Deal turned to Social Welfare - more legislation...Social Welfare - more legislation...

National Labour Relations ActNational Labour Relations Act (aka (aka Wagner Act)- it legitimized unions and Wagner Act)- it legitimized unions and labour tactics such as collective labour tactics such as collective bargaining & collective action (strikes, bargaining & collective action (strikes, etc...) - it outlawed etc...) - it outlawed BLACKLISTSBLACKLISTS & other & other anti-union practicesanti-union practices

Social Security ActSocial Security Act (1935)- (1935)- feared by opponents as feared by opponents as ""creeping socialismcreeping socialism"- this "- this act typifies the act typifies the WELFARE WELFARE STATESTATE - unemployment - unemployment insurance, old age insurance, old age pensionspensions

Problem: it took some $ out Problem: it took some $ out of circulation (payroll of circulation (payroll deductions) at a time when deductions) at a time when purchasing power was purchasing power was already low- also, it only already low- also, it only covered the unemployedcovered the unemployed

1936 - "Soak The Rich" tax1936 - "Soak The Rich" tax

ELECTION OF 1936 - FDR won ELECTION OF 1936 - FDR won easily (v Repub. Alf Landon - easily (v Repub. Alf Landon - Kansas governor) Kansas governor)

this victory gave FDR a this victory gave FDR a mandate to continue his New mandate to continue his New Deal policies Deal policies

first objective: to reorganize first objective: to reorganize the Supreme Court - they the Supreme Court - they disallowed some New Deal disallowed some New Deal legislation legislation

FDR wants # of judges FDR wants # of judges changed from 9 changed from 9 15 (to "15 (to "pack pack the courtthe court") - great opposition, ") - great opposition, so FDR w/drew this proposal so FDR w/drew this proposal

but judges retired & FDR got but judges retired & FDR got to appoint new ones to appoint new ones they they approved all New Deal approved all New Deal legislationlegislation

the late 1930's – new Qs arose…the late 1930's – new Qs arose… FDR concerned w/ int'l issuesFDR concerned w/ int'l issues in 1939 he proposed no new in 1939 he proposed no new

major domestic reform major domestic reform measures (1st time in his pres.)measures (1st time in his pres.)

ELECTION OF 1940ELECTION OF 1940 - FDR broke - FDR broke with tradition & ran a 3rd time with tradition & ran a 3rd time

FDR v. FDR v. Wendell WilkieWendell Wilkie - the big - the big issue here was American issue here was American support of the support of the AlliesAllies (G.B.) (G.B.), now , now embroiled in WWII v. embroiled in WWII v. Nazi Ger.Nazi Ger.

both U.S. pol. parties wanted to both U.S. pol. parties wanted to support G.B. but to remain support G.B. but to remain neutralneutral - in fact a CONSENSUS - in fact a CONSENSUS had developed b/n the Dems. had developed b/n the Dems. and Repubs. and Repubs.

both parties approved of (most) both parties approved of (most) New Deal legislation & wanted New Deal legislation & wanted an an isolationistisolationist foreign policy- foreign policy- FDR won in 1940 (and again in FDR won in 1940 (and again in 1944)1944)

a a 3rd revolution3rd revolution in American in American culture and politics- more gov't culture and politics- more gov't involvement but w/in the context involvement but w/in the context of traditional U.S. democracy (not of traditional U.S. democracy (not socialist…) socialist…)

New Deal helped in stimulating the New Deal helped in stimulating the U.S. economy, but only WWII U.S. economy, but only WWII would solve any lingering would solve any lingering problems problems unemployed found unemployed found jobs in munitions factories and jobs in munitions factories and the military as the U.S. became the the military as the U.S. became the ARSENAL OF DEMOCRACYARSENAL OF DEMOCRACY

New Deal saw expansion of U.S. New Deal saw expansion of U.S. gov't in :gov't in :1) 1) eco. - constant gov't eco. - constant gov't intervention/deficit spending intervention/deficit spending 2) social reform - welfare state - after this 2) social reform - welfare state - after this

pt the U.S. gov't was expected to pt the U.S. gov't was expected to play a role in any economic crisis play a role in any economic crisis

so FDR fundamentally reformed so FDR fundamentally reformed (not transformed) American (not transformed) American society…society…

notebook # 21- economics 14-1 business cycles and fluctuations pages 375-380

Documents

business cycle businesses

term business cycle

business cycle internal

great depression

economic growtheven

economic slowdown

worst depression

level of economic activity