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2010-2011 Essay Contest Standard Economics Second Place Essay

Government Is Not The Problem, It Is The Solution

Katie Kosovich
Little Falls Community High School
Little Falls, Minnesota

Protesters are swarming the capitol city. They are flooding the entrances and lobbies of major government buildings. Thousands have set up makeshift camps. They will not leave until they get what they want. The president is dumbfounded. He wonders how things could have gotten to this point so quickly. His military advisors are prepared to sweep out the protesters with horses and tanks. The president orders the military to act. From that moment on, whether he knows it or not, his presidency is at an end. This is not the story of Hosni Mubarak, President of Egypt, in 2011; it is the story of Herbert Hoover, President of the United States, in 1932. Hoover had tried to battle the Great Depression with relief programs, but his programs weren't powerful enough to turn the economy around. The country didn't begin to recover until Hoover's successor, Franklin Roosevelt, spent billions of dollars on the New Deal. In times of economic downturn, laissez-faire is not an option. The government must be actively involved in job creation by spending money on programs to provide relief and employment for the unemployed. Franklin Roosevelt got America out of the Great Depression by doing so.

During his first 100 days as president, Roosevelt focused on immediate relief for Americans. First, he helped stabilize the collapsing banking system by passing the Emergency Banking Act. Insuring banks calmed the fears of the people ("the only thing we have to fear is fear itself!") and put an end to bank runs. As Former President of the Federal Reserve Bank of Minneapolis Gary Stern said in Achieving Economic Stability: Lessons From the Crash of 1929, maintaining integrity of the banking system is crucial to a steady economy. When the present economic crisis hit in late 2008, President Bush and President-elect Obama acted quickly to stabilize the banking industry. In December of 2008, Congress passed a bailout of major banks that was supported by both the outgoing and incoming president.

After stabilizing the banks, Roosevelt provided employment for 250,000 young men, putting them to work in reforestation, road construction, and other projects that benefited the nation. He introduced new programs every couple of weeks, all geared towards relief and employment. His deficit spending managed to make the GNP grow for the first time in years. Critics of Roosevelt argue that spending didn't work because the country had another recession in 1937, but the recession in 1937 actually proves the opposite. After record growth in 1936, Roosevelt became concerned with balancing the budget and cut costs. It was this slash in funding that caused the 1937 recession, not the earlier spending. If anything, Roosevelt didn't spend enough. America didn't make a full recovery until she pulled out all the stops and paid millions of dollars towards World War II. GDP nearly doubled between 1940 and 1945 while deficit spending went through the roof.

When Barack Obama took office in 2009, he faced a crisis nearly as large as Franklin Roosevelt did in 1933. Unlike Hoover and Roosevelt, Bush and Obama worked together to save the banks before Obama took office. Similar to Roosevelt, Obama took immediate action to stimulate the economy, passing the American Recovery and Reinvestment Act (ARRA). ARRA included increases and expansions of various benefit programs and increased spending on infrastructure.

Princeton University Professor Alan S. Blinder and Moody Analytics Chief Economist Mark Zandi published "How the Great Recession Was Brought to an End" in July, 2010. They calculated the effectiveness of various parts of President Obama's American Recovery and Reinvestment Act of 2009 package with an analysis of how much economic benefit was received from each dollar spent, in other words, how much bang each buck provided. Blinder and Zandi calculated "The bang for the buck is estimated by the one year $ change in GDP for a given $ reduction in federal tax revenue or increase in spending." Blinder and Zandi first looked at tax cuts, the choice form of stimulus among Republicans. For every dollar spent in temporary tax cuts, the GDP increased by $1.30 at best, 22 cents at worst. Permanent tax cuts yielded even less benefit with a return between 32 and 51 cents. Increases in spending, however, gave much more "bang for the buck." A dollar increase in infrastructure spending raised GDP by an estimated $1.57; a dollar paid towards Food Stamps increased GDP by $1.74. Spending increases pay for themselves; the same cannot be said for tax cuts. Blinder and Zandi concluded that without ARRA, "GDP in 2010 would be about 11.5% lower, payroll employment would be less by some 81/2 million jobs, and the nation would now be experiencing deflation."

Those opposed to Keynesian deficit spending (or any government spending at all) love to say that recessions and depressions are natural parts of the market cycle and that the market can heal itself. That argument has no historical merit. No government in the 20th century has gotten out of a depression without government spending. Former President Ronald Reagan famously said in his first inaugural address, "Government is not a solution to our problem; government is the problem." History seems to show otherwise. Government is not the problem, it is the solution.

Works Cited

Blinder, Alan S., and Mark M. Zandi. How the Great Recession Was Brought to an End. West Chester, Pa.: Moody's, 2010. Print.

Kennedy, David M. Freedom From Fear: the American People in Depression and War, 1929­-1945. New York: Oxford University Press, 1999. Print.

Lohr, Steve. "Roosevelt's slow embrace of government spending." The New York Times 27 Jan. 2009: n. pag. nytimescom. Web. 20 Mar. 2011.

Rubin, Robert, and Jared Bernstein. "No More Economic False Choices." The New York Times 3 Nov. 2008: n. pag. nytimescom. Web. 20 Mar. 2011.

Stern, Gary. Achieving economic stability: lessons from the crash of 1929. Minneapolis, Minn.: Federal Reserve Bank of Minneapolis, 1987. Print.

"Timeline of the Great Depression." Tom Huppi. N.p., n.d. Web. 20 Mar. 2011.