Managerial Economics in the Globalized Environment

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The United States governments spending habits has also been an intriguing question that no one man or body has been able to find a solution. Many would think that their overall goal is for the country to get out of debt, but the actions of the country’s leadership speak otherwise. It would lengthy task to describe every detail of the U.S. government’s spending during the entire Classical Period (1776-1930’s; 1970’s-1980’s) therefore, I will narrow it down. There is an immediate focus on the period of the 1920’s through the 1930’s, which was fused into the Keynesian Period, and the 1980’s which was still a part of the classical period. These three decades were the most influential and detrimental to the U.S. as a result of governmental spending, and putting those in charge with poor spending habits. A more impactful and relatable timeframe to current results is that of the Keynesian period of 2008-2010. The time of the 1930’s results in the most undecorated depression in our history and it shepherded in all-encompassing changes in the role of government. Economists and historians have appropriately named and specified an abundant amount of attention to those decade. With all of the concerns lately, in regards to increasing debt and questionable current leadership, and about the growing and developing role of government in economic activity that is relatable to the 1930’s, the decade of the 1920s often gets disregarded. This is unfortunate because the 1920s are a period of strong, dynamic economic growth.

This decade symbols the first up-to-date decade and the most histrionic economic developments of this country are found in those years. There was a swift embracing of the automobile due to the disadvantage of passenger railroad travel. Though suburbs, and inner cities were on a rapid incline since the late nineteenth century it was tied to the success of the railroad or trolley access and this was limited to the major cities. The mobility of car access changed this, and it allowed for the growth of outside neighborhoods and the suburbs began to fast-track to increased size. The demand for trucks and cars led to a quick and large amount of opportunities in the construction of all-weather surfaced roads to help with their drive. The fast expanding electric companies led to new consumer appliances and new types of lighting and heating for homes and businesses. The introduction of the radio, radio stations, and commercial radio networks initiated the break up rural segregation, as did the expansion of local and long-distance telephone communications, similar to that of the mobile craze presently.

During this time recreational activities such as traveling, going to movies, and professional sporting events became major businesses. This particular period saw major innovations and improvements in business organization and manufacturing technology. Farnham writes, 'Monetary policies adopted by a country’s central bank that influence the money supply, interest rates, and the amount of funds available for loans, which, in turn, influence consumer and business spending.' (Farnham, 2014, pg.12) During this time the Federal Reserve System first tested its powers, and the United States progressed and positioned itself into a dominant position in international trade and global business realm. These things make the 1920s a period of significant importance free of what happened in the 1930s.

The Great Depression was a fusion of the 1920’s and the 1930’s. This is also titled the Great Crash. In the autumn of 1929 the economy was in a deep depression. A stock market crash didn’t help the economy at all, amidst the other reasons for the concluding market downfall were low wages, the spread of debt, a struggling agricultural division and an excess of amount of bank loans that could not be liquidated. Stock prices began to fall in September and October of 1929. On October 18 the descent began. Many people in today’s era would relate to this feeling as of present. Murray N. Rothbard writes, “In sum, businessmen were misled by bank credit inflation to invest too much in higher-order capital goods, which could only be prosperously sustained through lower time preferences and greater savings and investment; as soon as the inflation permeates to the mass of the people, the old consumption/investment proportion is reestablished, and business investments in the higher orders are seen to have been wasteful. Businessmen were led to this error by credit expansion and its tampering with the free-market rate of interest. The 'boom”, then, is actually a period of wasteful misinvestment. It is the time when errors are made, due to bank credit’s tampering with free market. The “crisis” arrives when the consumers come to reestablish their desired proportions. The “depression” is actually the process by which the economy adjusts to the wastes and errors of the boom, and reestablishes efficient service of consumer desires. The adjustment process consists in rapid liquidation of the wasteful investments.” (Rothbard, p.19, 1975)

This description of the “Boom” and “Depression” is similar to that which goes on today, but it is not as relatable as that of the Keynesian period of the 1930’s and 1980’s. Keynesian economics was established by the British economist John Maynard Keynes during the 1930’s. This establishing was done in an attempt to comprehend the Great Depression, and find a root solution. Economists Keynes encouraged for amplified government payments and lower taxes to motivate demand and pull the global economy out of its current state of depression. The New Deal in the U.S. in the 1930’s was the start of Keynesian economic policies in the US. President Franklin D. Roosevelt is responsible for initiating the New Deal, but did not always believe in the New Deal theory. He initially believe that governmental spending could pull the country out of economic debt. His skepticism would fade by the time he took Presidential office in 1933, and one of the most prominent advocates.

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During this time from 1929 to 1933, the unemployment rate in the United States was estimated at less than 5%. By 1932 this once small amount had increased to over 20%. President Herbert Hoover’s methods were ineffective, and the country’s future looked bleak until President Roosevelt took the oval office in 1933. He boasted plans for a new deal. He called it “A new deal for the forgotten man.” Roosevelt fully reversed the traditional methods of economic power through methods of Keynesian economics. President Roosevelt introduced stern government-regulated economic policies to reinstate order and balance to the American people, starting with the unemployed. Keynes strongly advocated for government involvement in economic affairs, especially during periods of high unemployment and recession. To decrease unemployment, Keynes recommended increasing spending along with providing government programs with the sole purpose of job stimulation.

U.S. Senator Tom A. Coburn, M.D. with John Hart write in their book, the Debt Bomb, “The reality is, the debt bomb was built by a culture, and it will be defused by a culture. As a nation, we have to make a decision to live within our means and embrace a government we can afford, not one we want.” (Coburn & Hart, p. 278, 2012) U.S. government spending is much higher during the Keynesian period than the Classical Period. After the end of World War II concluded up to the mid-1970s, the majority of economists were Keynesians. Nevertheless during the 1970’s, Keynesian economics came under attack when it was unsuccessful at explaining how high inflation and unemployment might, or could, coincide as they did or had been doing at the end of that period. Economists withdrew to traditional ideas, which they recalculated using math. Through that stretch, the Great Depression had been over and done, and the confidence in free markets had been restored and was once again the main view.

Reaganomics came to power as a result of President Ronald Reagan. While President Reagan was in office in the 1980’s he included Keynesian Economics into his strategies for the country, he incorporated these beliefs into his future planning. Reaganomics, President Ronald Reagan's conservative economic policy, attacked the 1980 recession and stagflation. Stagflation was an economic reduction combined with double-digit inflation. Stagflation promised to reduce governmental influence on the economy. President Reagan supported hands-off, or relaxed type of economics. Reagan believed that the free market and capitalism would solve the country's afflictions. His policies matched the 'greed is good' mood, or “all money is good money” way of thinking of the 1980’s in America. Reagan's position was radically different from the normality of society. Preceding presidents: Johnson and Nixon, had prolonged the government's role and stances for the economy. This position is not the outcome of anything like flawless execution of policies. The President Reagan envisioned balance to the budget by the end of his first term. However, he failed to get Congress to decrease further spending, and he insisted on a three-year’s worth of tax cuts which led to huge deficits. Reagan’s plan was to use the deficit as a weapon to force Congress to cut total spending, but it did not work. The ending result was a budget that fell short and kept the interest rates high. These increased and high rates attracted an outrageous amount in foreign capital, which strengthened the dollar and freed up domestic savings to finance an economic recovery.

So the economy has blossomed, but not according to the design. Truly the President's opponents believe the current strength of the economy is mostly the result of a huge dose of traditional Keynesian stimulus and not the effect of some supernatural new economic formula invented by the Reagan White House. The Reagan accomplishment, to undisclosed small amount, offers comparison to and is metaphorically referenced with the observation of the Frenchman who, witnessing the charge of the Light Brigade, stating, ''It's magnificent, but it is not war.'' I am sure the American business community is happy with the results of Reagan’s work to some extent. After-tax corporate profits are solid, capital investment is now the most important power behind the economic recovery, and the rate of wage increase is the lowest it has been in a long period of time. Samuel writes:

  • Classical economics emphasizes the fact that free markets lead to an efficient outcome and are self-regulating.
  • In macroeconomics, classical economics assumes the long run aggregate supply curve is inelastic; therefore any deviation from full employment will only be temporary.
  • The Classical model stresses the importance of limiting government intervention and striving to keep markets free of potential barriers to their efficient operation.
  • Keynesians argue that the economy can be below full capacity for a considerable time due to imperfect markets.
  • Keynesians place a greater role for expansionary fiscal policy (government intervention) to overcome recession.” (2019)

In all seemed well and fine until 2008. In 2008 when a financial crisis of grand magnitudes reminded us that market economies can sometimes go dramatically wrong without notice. The 2008 recession caused economic theorists to rethink their points of emphasis in their arguments. We are now likely to enter a new era that pulls on the notions from both sides of the spectrum. In 2008, the world experienced a financial crisis as oppose to just the United States. In 2008, the stock market lost 40 percent of its value and worth, and the world entered the worst recession since the 1930’s. The United States unemployment rate went from 4.5 percent to 10 percent. Between September of 2008 and September of 2009 the United States economy lost half a million jobs a month, this time frame was detrimental to the economy. Following the 2008 crisis, there was a fierce debate in the news between classical economists and Keynesian economists. Eugene Fama, University of Chicago, and Robert Barro, Harvard University, both of which were Classical economists, and Paul Krugman, Princeton University, and Brad Delong, University of California at Berkeley, both Keynesian economists each shared ideas and arguments. Classical and Keynesian ideas have been vigorously debated by economists for more than seventy years. When one side or the other, classical or Keynesian, gains more credibility, the outcome on all of our lives is extensive.

Policy makers are directed by economic principles. It is documented that in the 90’s and early 2000s that classical economists argue that markets should be given free reign. Their thoughts managed to deregulate the financial markets in the late 90’s, and rescinding of legislation that had been put in place during the Great Depression. Classical thinking soared for thirty years, beginning in the 1970s and ending with the beginning of the financial crisis in 2008. The reaction to the Great Depression, the 2008 crisis, and any economic struggles in the future is a pendulum of economic concepts that will swing back towards regulation. Policy creators in the Obama administration were inclined by the ideas of economist Keynes. His argument that free markets need to be controlled and that government should be held responsible for ensuring that everyone who wants a job has one.

There questions that will probably never truly be answered: Why is there such disagreement amongst economists, politicians, and journalists about economics? Who are the classical and Keynesian economists and what did they say? Most importantly, how has economic history influenced the development of classical and Keynesian ideas? Regardless of how many questions are asked or pondered, there will probably never really a single solution. The notion that the government must keep in mind is the people they are spending on, and spending for.

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