Teachers Edition: Grades 3-6 (Backgrounders)

Hard Times: The Economy

Worth Reading

When Did the Great Depression Receive Its Name? (And Who Named It?)

What Are the Biggest Financial Scandals in U.S. History?

Seeing Red: The Budget Deficit – Past, Present and Future

Background

The economy is bad. In September 2011, the official U.S. unemployment rate stood at 9.1%. That means nearly one person out of every ten can’t find a job. But that’s only the official unemployment rate. That doesn’t count people who do odd jobs or people who’ve given up looking for work entirely. That number is actually 16.2%.

The economy isn’t bad just in America—it’s bad in Europe, too. In England, the unemployment rate is the highest it’s been since 1994, 17 years ago. In Spain, nearly one in two persons under the age of 25 can’t find a job.

Even the people who have jobs are suffering. They’re working longer hours (often because their companies can’t afford to hire additional help) for less money than before the Recession began.

So, people who can’t find a job at all are hurting and people who have jobs are hurting.

Who’s not hurting?

Well, to a great extent, corporations and banks. Corporations are sitting on hundreds of billions of dollars in cash as are the banks. The corporations don’t want to spend the money until demand for their products rises. The banks are loaded with a lot of toxic assets left over from the housing boom, making bankers skittish about loaning money to people and small businesses.

The roots of the Recession are really tangled. Even the immediate cause of the Recession—the banking crisis in 2008—is complicated. These are some of the causes:

Banks lent out a lot of money to people who were buying homes with the encouragement of the government entities (Fannie Mae and Freddie Mac) that back more than 50 percent of U.S. mortgage loans. A lot of those people couldn’t afford to pay back their loans, but the banks and the lenders didn’t check too hard to make that these loans were safe. In fact, they were making a lot of money off of loans they knew to be unsafe, because investors were attracted to the high risks and high reward. When the home owners couldn’t pay back the money they borrowed from the bank (their mortgage), it started a chain reaction that caused the whole thing to come crashing down like a house of cards. (Why didn’t people worry about all those loans going to obviously weak borrowers? Because it was believed that housing prices would keep going up indefinitely.)

China is also thought to have contributed to the economic woes by buying so much U.S. debt – over a trillion dollars – that it encouraged bloat in our economy, contributing to the housing crisis. All that extra money had to go somewhere. It resulted in a housing bubble. The banks on Wall Street, freed in the 1990s from Depression-era regulations that separated commercial banks (that take deposits from consumers) and investment banks (that play on Wall Street), used depositors money to gamble on risky financial products. These included a new form of debt that allowed a bank to sell bundled mortgages on the open market. The bundled debt was problematic because it included both good and bad mortgages that were sold as good mortgages. When the housing boom ended these securities declined dramatically in value.

Ratings agencies like Standard and Poor gave high ratings to a lot of financial products that didn’t deserve them. The ratings misled investors.

Americans went into too much debt, borrowing steeply against their homes, which were rising in value, to finance lavish lifestyles. When the boom ended they couldn’t afford to make payments on their debts and mortgages.

What the Left Says

Liberals believe the best way to bring an end to hard times is through government action. They believe in the economic theory propounded by the British economist John Maynard Keynes. Keynes preached that government needs to take up the slack when other sectors are cutting back on spending. The Left favor government spending now. They believe we should address long-term debt problems once the economy improves.

It’s not surprising that one of the biggest complaints of liberals involves income inequality. The rich, they say, are now richer than ever and are not sharing their gains with the rest of society. Moreover, the rich insist the poor and middle class need to make sacrifices. (One of the complaints of the rich is that the most people in the workforce no longer pay any income taxes, though they do pay other taxes such as Social Security taxes.) The richest 20 percent of Americans now control over 80 percent of the country’s wealth. The last time the country’s wealth was as highly concentrated was in the late 1920s—before the Great Depression. Liberals want to see the wealth spread more evenly. They feel that this would help the middle class and the economy.

When the banks got into trouble many on the Left wanted them to be broken up, with investors taking heavy losses. Instead, they were bailed out and allowed to grow even bigger as they swallowed up weaker rivals.

What the Right Says

Conservatives are focused on the national debt, which has grown enormously over the last few years. The deficit in 2011 is over $1.3 trillion, a little more than in 2010. Conservatives believe the deficit is a drag on the economy. Businesses and investors will hold back until they are convinced that the political establishment in Washington puts the country on a sound fiscal path.

Conservatives believe that government should be doing everything it can to help job creators. They want low taxes on small business and corporations to encourage job growth. Investments drive growth. They argue that as a society we need to reward people who invent products like the iPod and the iPad. That means lowering their taxes. Specifically that means lowering the corporate tax rate.

One of the main targets of conservatives is government spending. They want to cut subsidies to the arts, NPR, Planned Parenthood, and other recipients favored by liberals. But most importantly, they want to cut entitlement programs such as Medicare, Medicaid and Social Security.

Historical Background

This is the third great economic calamity to strike the United States in the last century. The first was the depression of the mid-1890s that drove farmers (who for a generation had been dealing with low prices caused by overproduction) into crisis. In 1929 Wall Street crashed and the Great Depression began during the administration of President Herbert Hoover. At the time Franklin Roosevelt became president in 1933 unemployment had reached 25 percent.

Two key institutions responsible in part for the current crisis – Fannie Mae and Freddie Mac--trace their origins to the Great Depression. Fannie Mae was established in 1938 to help Americans get a mortgage and live out the American Dream by buying their own home.

The Depression ended with the onset of World War II, which dramatically increased the government’s role in the economy and led to a boom that mostly lasted, with a few notable breaks, for the next forty years. Consumer spending became a major part of the economy, accounting for 70 percent. When consumers stop spending the economy goes into a recession.

Stories

With the coming of the Great Depression, the slogan of 1928 – “A chicken in every pot and two cars in every garage” – seemed a bad joke … especially to the reporter who coined the phrase. By 1933 the author of the slogan was out of work and driven to begging to keep his wife and children from starving.

To give businessmen in 1939 a longer Christmas season, FDR ordered that Thanksgiving be celebrated one week earlier than usual.

When one of the Du Ponts was advised by an advertising agency in the middle of the Great Depression to sponsor a radio show on Sunday afternoons, he remarked: “At three o’clock on Sunday afternoon everybody is playing Polo.”

Just a month before the stock market crashed in October 1929, the vice chairman of General Motors wrote an article for the Ladies Home Journal entitled, “Everybody Ought to Be Rich.”

Topics for Discussion

Why is it important for people to have a job?

Do you know anybody who is out of work?

What do Democrats want to do to help the economy revive? Republicans?

How will bad times affect the presidential election?