Transcript business cycle - Cloudfront.net

Supporting standards comprise
35% of the U. S. History Test
17 (C)
Supporting Standard (17)
The student understands the economic effects of
World War II & the Cold War.
The Student is expected to:
(C) Describe the impact of defense spending on
the business cycle & education priorities from
1945 to the 1990s
What is the
“Business Cycle”?
A business cycle is a sequence of economic activity in a nation’s
economy that is typically characterized by four phases—recession,
recovery, growth, and decline—that repeat themselves over time.
Economists note, however, that complete business cycles vary in
length. The duration of business cycles can be anywhere from about
two to twelve years, with most cycles averaging about six years in
length. In addition, some business analysts have appropriated the
business cycle model and terminology to study and explain
fluctuations in business inventory and other individual elements of
corporate operations. But the term “business cycle” is still primarily
associated with larger (regional, national, or industrywide) business
trends.
The term business cycle (or economic cycle or boom-bust cycle)
refers to economy-wide fluctuations in production, trade and
economic activity in general over several months or years in an
economy organized on free-enterprise principles.
RECESSION: a recession—also sometimes
referred to as a trough—is a period of reduced
economic activity in which levels of buying,
selling, production, and employment typically
diminish. This is the most unwelcome stage of
the business cycle for business owners and
consumers alike. A particularly severe recession
is known as a depression.
RECOVERY Also known as an upturn, the
recovery stage of the business cycle is the
point at which the economy "troughs" out
and starts working its way up to better
financial footing.
GROWTH: economic growth is in essence a period of
sustained expansion. Hallmarks of this part of the
business cycle include increased consumer
confidence, which translates into higher levels of
business activity. Because the economy tends to
operate at or near full capacity during periods of
prosperity, growth periods are also generally
accompanied by inflationary pressures.
DECLINE: also referred to as a contraction or
downturn, a decline basically marks the end of
the period of growth in the business cycle.
Declines are characterized by decreased levels of
consumer purchases (especially of durable
goods) and, subsequently, reduced production by
businesses.
Kondratiev
Wave
In economics, Kondratiev waves (also called supercycles, great
surges, long waves, K-waves or the long economic cycle) are
supposedly cycle-like phenomena in the modern world economy.
The Soviet economist Nikolai Kondratiev (also written
Kondratieff) was the first to bring these observations to
international attention in his book The Major Economic
Cycles (1925) alongside other works written in the same decade.
The period of the wave averages at fifty, and ranges from
approximately forty to sixty years, the cycles consist of
alternating intervals between high sectoral growth and intervals
of relatively slow growth. Unlike the short-term business cycle,
the long wave of this theory is not completely accepted by current
current
mainstream economics, although there is empirical support for
it. Recent research employing spectral analysis has
has confirmed
confirmed the
the
presence of Kondratiev waves in the world GDP dynamics at an
acceptable level of statistical significance.
Business cycles in Organization for Economic
Cooperation & Development countries after
World War II were generally more restrained
than the earlier business cycles. This was
particularly true during the “Golden Age of
Capitalism” (1945/50–1970s), and the period
1945–2008 did not experience a global downturn
until the late-2000s recession. Economic
stabilization policy using fiscal policy and
monetary policy appeared to have dampened the
worst excesses of business cycles, and automatic
stabilization due to the aspects of the
government’s budget also helped mitigate the
cycle even without conscious action by policymakers.
In this period, the economic cycle—at
least the problem of depressions—was
twice declared dead. The first
declaration was in the late 1960s, when
the Phillips curve was seen as being able
to steer the economy. However, this was
followed by stagflation in the 1970s,
which discredited the theory. The
second declaration was in the early
2000s, following the stability and
growth in the 1980s and 1990s in what
came to be known as The Great
Moderation.
FACTORS THAT
SHAPE BUSINESS
CYCLES
VOLATILITY OF INVESTMENT SPENDING
Variations in investment spending is one of the
important factors in business cycles. Investment
spending is considered the most volatile
component of the aggregate or total demand (it
varies much more from year to year than the
largest component of the aggregate demand, the
consumption spending), and empirical studies by
economists have revealed that the volatility of the
investment component is an important factor in
explaining business cycles in the United States.
MOMENTUM: Many economists cite a certain
“follow-the-leader” mentality in consumer
spending.
TECHNOLOGICAL INNOVATIONS:
Technological innovations can have an acute
impact on business cycles. Indeed,
technological breakthroughs in
communication, transportation,
manufacturing, and other operational areas
can have a ripple effect throughout an industry
or an economy.
VARIATIONS IN INVENTORIES: variations in
inventories—expansion and contraction in the
level of inventories of goods kept by
businesses—also contribute to business cycles.
FLUCTUATIONS IN
GOVERNMENT SPENDING
Variations in government spending are yet another source of
business fluctuations. This may appear to be an unlikely source, as
the government is widely considered to be a stabilizing force in the
economy rather than a source of economic fluctuations or instability.
Nevertheless, government spending has been a major destabilizing
force on several occasions, especially during and after wars.
Government spending increased by an enormous amount during
World War II, leading to an economic expansion that continued for
several years after the war. Government spending also increased,
though to a smaller extent compared to World War II, during the
Korean and Vietnam wars. These also led to economic expansions.
However, government spending not only contributes to economic
expansions, but economic contractions as well. In fact, the recession
of 1953-54 was caused by the reduction in government spending after
the Korean War ended. More recently, the end of the Cold War
resulted in a reduction in defense spending by the United States that
had a pronounced impact on certain defense-dependent industries
and geographic regions.
The Post War
Economy: 1945-1960
Many Americans feared that the end of World War II and the
subsequent drop in military spending might bring back the
hard times of the Great Depression. But instead, pent-up
consumer demand fueled exceptionally strong economic
growth in the post war period. The automobile industry
successfully converted back to producing cars, and new
industries such as aviation and electronics grew by leaps and
bounds. A housing boom, stimulated in part by easily
affordable mortgages for returning members of the military,
added to the expansion. The nation’s gross national product
rose from about $200,000 million in 1940 to $300,000 million
in 1950 and to more than $500,000 million in 1960. At the
same time, the jump in postwar births, known as the “baby
boom,” increased the number of consumers. More and more
Americans joined the middle class.
The Military
Industrial
Complex
The need to produce war supplies had given rise to a huge
military-industrial complex (a term coined by Dwight D.
Eisenhower, who served as the U.S. president from 1953
through 1961). It did not disappear with the war’s end. As the
Iron Curtain descended across Europe and the U. S. found
The military–industrial
or military–
itself embroiled
in a cold warcomplex,
with the
Soviet Union, the
industrial–congressional complex, comprises the
governmentpolicy
maintained
substantial
capacity and
and monetary
relationshipsfighting
which exist
between legislators,
nationalsuch
armedas
forces,
invested in sophisticated
weapons
the and
hydrogen bomb.
the military
base that supports them.
Economic aid
flowedindustrial
to war-ravaged
European countries
These relationships include political
under the Marshall
Plan, which
also helped
maintain markets
contributions,
political approval
for military
spending,
lobbying
to support
and
for numerous
U.S.
goods.
And bureaucracies,
the government
itself
oversight of the industry.
recognized its central
role in economic affairs. The
Employment Act of 1946 stated as government policy “to
promote maximum employment, production, and purchasing
power.”
The Student is expected to:
(D) 5 Explain the significance of
1957 (Sputnik launch ignites U.S.Soviet space race)
The successful Oct. 4, 1957
launching of a Soviet
artificial satellite sent shock
waves across America.
The event revolutionized
American education,
shifting focus decisively to
math & science, and
accelerated the pace of the
U. S. space program.
National Defense
Education
The National Defense Education Act (NDEA) was signed into
law on September 2, 1958, providing funding to United States
education institutions at all levels. It was one of a suite of
science initiatives inaugurated by President Eisenhower in
1958, motivated to increase the technological sophistication
and power of the US alongside, for instance DARPA and NASA.
It followed a growing national sense that U.S. scientists were
falling behind scientists in the Soviet Union, catalyzed,
arguably, by early Soviet success in the Space Race, notably the
launch of the first-ever satellite, Sputnik, the year before on
Oct. 4, 1957. U.S. citizens feared that schools in the USSR were
superior to American schools, and Congress reacted by adding
the act to take US schools up to speed. The act authorized
funding for four years, increasing funding per year: for
example, funding increased on eight program titles from $183
million in 1959 to $222 million .
Years of
Change: The
1960s and 1970s
The 1950s in America are often described as a
time of complacency. By contrast, the 1960s and
1970s were a time of great change. New nations
emerged around the world, insurgent
movements sought to overthrow existing
governments, established countries grew to
become economic powerhouses that rivaled the
United States, and economic relationships came
to predominate in a world that increasingly
recognized military might could not be the only
means of growth and expansion.
President John F. Kennedy (1961-1963) ushered in a
more activist approach to governing. During his 1960
presidential campaign, Kennedy said he would ask
Americans to meet the challenges of the “New
Frontier.” As president, he sought to accelerate
economic growth by increasing government
spending and cutting taxes, and he pressed for
medical help for the elderly, aid for inner cities, and
increased funds for education. Many of these
proposals were not enacted, although Kennedy’s
vision of sending Americans abroad to help
developing nations did materialize with the creation
of the Peace Corps. Kennedy also stepped up
American space exploration. After his death, the
American space program surpassed Soviet
achievements and culminated in the landing of
American astronauts on the moon in July 1969.
Military spending also increased as American’s presence
in Vietnam grew. What had started as a small military
action under Kennedy mushroomed into a major military
initiative during Johnson's presidency. Ironically,
spending on both wars—the war on poverty and the
fighting war in Vietnam—contributed to prosperity in the
short term. But by the end of the 1960s, the government's
failure to raise taxes to pay for these efforts led to
accelerating inflation, which eroded this prosperity. The
1973-1974 oil embargo by members of the Organization of
Petroleum Exporting Countries (OPEC) pushed energy
prices rapidly higher and created shortages. Even after
the embargo ended, energy prices stayed high, adding to
inflation and eventually causing rising rates of
unemployment. Federal budget deficits grew, foreign
competition intensified, and the stock market sagged.
What Happened to
the Economy in
the ’80s?
The Size of the Government—the central theme of
Reagan’s national agenda, however, was his belief
that the federal government had become too big and
intrusive. In the early 1980s, while he was cutting
taxes, Reagan was also slashing social programs.
Reagan also undertook a campaign throughout his
tenure to reduce or eliminate government
regulations affecting the consumer, the workplace,
and the environment. At the same time, however, he
feared that the U. S. had neglected its military in the
wake of the Vietnam War, so he successfully pushed
for big increases in defense spending.
The combination of tax cuts and higher military spending
overwhelmed more modest reductions in spending on
domestic programs. As a result, the federal budget deficit
swelled even beyond the levels it had reached during the
recession of the early 1980s. From $74,000 million in
1980, the federal budget deficit rose to $221,000 million
in 1986. It fell back to $150,000 million in 1987, but then
started growing again. Some economists worried that
heavy spending and borrowing by the federal government
would re-ignite inflation, but the Federal Reserve
remained vigilant about controlling price increases,
moving quickly to raise interest rates any time it seemed
a threat. Under Fed Chairman Paul Volcker and his
successor, Alan Greenspan, the Federal Reserve retained
the central role of economic traffic cop, eclipsing
Congress and the president in guiding the nation’s
economy.
The Cold War defined the political role of the United
States in the post–World War II world: by 1989 the US
held military alliances with 50countries, and had
526,000 troops stationed abroad in dozens of countries,
with 326,000 in Europe (two-thirds of which in west
Germany) and about 130,000 in Asia (mainly Japan
and South Korea). The Cold War also marked the
zenith of peacetime military-industrial complexes,
especially in the US, and large-scale military funding of
science. These complexes, though their origins may be
found as early as the 19th century, grew considerably
during the Cold War. The militaryindustrial complexescontinue to have great impact on
theircountries and help shape their society, policy and
foreign relations.
Fini