多恩布什《宏观经济学》第十版英文原版i19revised

CHAPTER19BIGEVENTSTHEECONOMICSOFDEPRESSION,HYPERINFLATION,ANDDEFICITSCHAPTEROUTLINETHEGREATDEPRESSIONANDITSIMPACTONMACROECONOMICSMONEYANDINFLATIONMONETARISMANDTHERATIONALEXPECTATIONSAPPROACHTHEEFFECTSOFHYPERINFLATIONDISINFLATIONANDTHESACRIFICERATIOCREDIBILITYTHEFEDSDILEMMADEFICITS,MONEYGROWTH,ANDSEIGNIORAGETHEINFLATIONTAXFEDERALGOVERNMENTOUTLAYSANDREVENUESTHEPRIMARYDEFICITTHEDEBTTOINCOMERATIOTHEBURDENOFTHEDEBTFINANCINGSOCIALSECURITYCHANGESFROMTHEPREVIOUSEDITIONTHEMATERIALINTHISCHAPTERWASINCHAPTER18INTHEPREVIOUSEDITIONITHASBEENUPDATED,BOXES192AND195HAVEBEENADDED,ANDOTHERBOXESHAVEBEENRENUMBEREDACCORDINGLYINTRODUCTIONTOTHEMATERIALTHEGREATDEPRESSIONINTHE1930SPRESENTEDANECONOMICCRISISOFENORMOUSPROPORTIONSBETWEEN1929AND1933,REALGDPINTHEUSFELLBYALMOST30ANDUNEMPLOYMENTREACHEDANALLTIMEHIGHOFALMOST25WHILETHEECONOMYGREWFAIRLYRAPIDLYFROM193337,UNEMPLOYMENTREMAINEDINTHEDOUBLEDIGITRANGEIN1937/38,THEREWASANOTHERMAJORRECESSIONANDTHEUNEMPLOYMENTRATEREMAINEDABOVE5UNTIL1942INTHE1930SUNEMPLOYMENTAVERAGED188,BUTBY1939REALGDPHADRECOVEREDTOITS1929LEVELTHECLASSICALECONOMISTSOFTHETIMEWERENOTEQUIPPEDTOEXPLAINTHEEXISTENCEOFSUCHSUBSTANTIALANDPERSISTENTUNEMPLOYMENTORTOPRESCRIBEPOLICIESTODEALWITHITONLYIN1936,INJOHNMAYNARDKEYNESBOOKTHEGENERALTHEORYOFEMPLOYMENT,INTERESTANDMONEY,WASAMACROECONOMICTHEORYINTRODUCEDUPONWHICHPOLICIESTOKEEPTHEECONOMYOUTOFFUTURERECESSIONSCOULDBEBASEDKEYNESTHEORYPROVIDEDANEXPLANATIONOFWHATHADHAPPENEDDURINGTHEGREATDEPRESSIONANDSUGGESTEDPOLICIESTHATMIGHTHAVEPREVENTEDITTHESTOCKMARKETCRASHOF1929ISOFTENSEENASTHECATALYSTFORTHEGREATDEPRESSIONBUT,INFACT,ECONOMICACTIVITYACTUALLYSTARTEDTODECLINEEVENBEFORETHECRASHWHATMIGHTWELLHAVEBEENANAVERAGERECESSIONTURNEDINTOAVERYSEVEREDEPRESSIONDUETOTHEINEPTECONOMICPOLICIESEMPLOYEDATTHETIMETHEFEDFAILEDTOPROVIDENEEDEDLIQUIDITYTOBANKSANDDIDLITTLETOPREVENTTHECOLLAPSEOFTHEFINANCIALSYSTEMTHEHUGECONTRACTIONINMONEYSUPPLYDUETOTHELARGENUMBERSOFBANKFAILURESCAUSEDTHEECONOMICDOWNTURNFISCALPOLICYWASWEAKATBESTPOLITICIANSCONCERNEDWITHBALANCINGTHEBUDGETRAISEDTAXESTOMATCHINCREASESINGOVERNMENTSPENDING,SOTHEDECLINEINAGGREGATEDEMANDWASNOTCOUNTERACTEDMANYOTHERCOUNTRIESALSOSUFFEREDDURINGTHESAMEPERIOD,MAINLYASARESULTOFTHECOLLAPSEOFTHEINTERNATIONALFINANCIALSYSTEMANDTHEENACTMENTOFHIGHTARIFFSWORLDWIDETHESEPOLICIESWEREDESIGNEDTOPROTECTDOMESTICPRODUCERSINANATTEMPTTOIMPROVEEACHCOUNTRYSDOMESTICTRADEBALANCEATTHEEXPENSEOFFOREIGNTRADINGPARTNERSHOWEVER,THEATTEMPTSTO“EXPORT“UNEMPLOYMENTULTIMATELYRESULTEDINANOVERALLDECLINEINWORLDTRADEANDPRODUCTIONINTHEUS,MANYINSTITUTIONALCHANGESANDADMINISTRATIVEACTIONS,COLLECTIVELYKNOWNASTHENEWDEAL,WEREIMPLEMENTEDINTHE1930STHEFEDWASREORGANIZEDANDNEWINSTITUTIONSWERECREATED,INCLUDINGTHEFDIC,THESEC,ANDTHESOCIALSECURITYADMINISTRATIONPUBLICWORKSPROGRAMSANDAPROGRAMTOESTABLISHORDERLYCOMPETITIONAMONGFIRMSWEREALSOIMPLEMENTEDTHEEXPERIENCEOFTHEGREATDEPRESSIONLEDTOTHEBELIEFTHATTHEECONOMYISINHERENTLYUNSTABLEANDACTIVESTABILIZATIONPOLICYISNEEDEDTOMAINTAINFULLEMPLOYMENTKEYNESWASANADVOCATEOFACTIVEGOVERNMENTPOLICYINHISWORK,HEEXPLAINEDWHATHADHAPPENEDINTHEGREATDEPRESSIONANDWHATCOULDBEDONETOAVOIDARECURRENCEMANYYEARSLATER,MILTONFRIEDMANANDANNASCHWARTZOFFEREDADIFFERENTEXPLANATIONINTHEIRBOOKAMONETARYHISTORYOFTHEUNITEDSTATES,FRIEDMANANDSCHWARTZARGUEDTHATTHESEVEREDECLINEINMONEYSUPPLY,CAUSEDBYTHEFEDSFAILURETOPREVENTBANKSFROMFAILING,WASTHEREASONFORTHESEVERITYOFTHEGREATDEPRESSIONTHEYCLAIMEDTHATMONETARYPOLICYISVERYPOWERFULANDTHATFLUCTUATIONSINMONEYSUPPLYCANEXPLAINMOSTOFTHEFLUCTUATIONSINGDPOVERTHELASTCENTURYTHISARGUMENTPROVIDEDTHEIMPETUSFORNEWRESEARCHONTHEEFFECTSOFFISCALANDMONETARYSTABILIZATIONPOLICIESWHILEECONOMISTSARESTILLDEBATINGTHESEISSUES,WECANCONCLUDETHATMONETARYPOLICYCANAFFECTTHEBEHAVIOROFOUTPUTINTHESHORTANDMEDIUMRUN,BUTNOTINTHELONGRUNINTHELONGRUN,INCREASESINTHEGROWTHRATEOFMONEYSUPPLYWILLSIMPLYLEADTOINCREASESINTHERATEOFINFLATIONBOX193GIVESANOVERVIEWOFTHEMONETARISTPOSITIONSONTHEIMPORTANCEOFMONEYFORTHEECONOMY,WHILEBOX192QUOTESFEDCHAIRMANBENBERNANKE,WHOADMITSTHATTHEMAGNITUDEOFTHEGREATDEPRESSIONWASINDEEDTHERESULTOFTHEFEDSACTIONOR,MOREACCURATELY,INACTIONTHELINKBETWEENINFLATIONANDMONETARYGROWTHCANEASILYBEDERIVEDFROMTHEQUANTITYTHEORYOFMONEYEQUATIONMVPYMVPYMVYMYVINOTHERWORDS,THERATEOFINFLATIONPISDETERMINEDBYTHEDIFFERENCEBETWEENTHEGROWTHRATEOFNOMINALMONEYSUPPLYMMANDTHEGROWTHRATEOFREALOUTPUTYY,ADJUSTEDFORTHEPERCENTAGECHANGEINTHEINCOMEVELOCITYOFMONEYVVFIGURE191SHOWSTHATTRENDSINTHERATEOFINFLATIONANDTHEGROWTHOFMONEYSUPPLYM2HAVEBEENSOMEWHATSIMILAROVERTHELASTFOURDECADESTHEREISPLENTYOFEVIDENCETOSUPPORTTHENOTIONTHATINTHELONGRUN,INFLATIONISAMONETARYPHENOMENONHEREINTHEUSASWELLASINOTHERCOUNTRIESHOWEVER,THEREARESHORTRUNVARIATIONS,INDICATINGTHATCHANGESINVELOCITYANDOUTPUTGROWTHHAVEALSOAFFECTEDTHEINFLATIONRATEBYTHEMID1990S,THERELATIONSHIPBETWEENM2GROWTHANDINFLATIONHADLARGELYBROKENDOWN,EVENFORTHELONGRUNITISSTILLTRUE,HOWEVER,THATTHEREHASNEVERBEENINFLATIONINTHELONGRUNWITHOUTRAPIDGROWTHOFMONEYSUPPLY,ANDTHEFASTERMONEYGREWTHEHIGHERTHERATEOFINFLATIONALTHOUGHTHEREISNOEXACTDEFINITION,COUNTRIESARESAIDTOEXPERIENCEHYPERINFLATIONWHENTHEINFLATIONRATEREACHES1,000ANNUALLYCOUNTRIESTHATHAVEEXPERIENCEDHYPERINFLATIONHAVEALLHADHUGEBUDGETDEFICITSWHICH,INMANYCASES,ORIGINATEDFROMINCREASEDGOVERNMENTSPENDINGDURINGWARTIMEACLASSICALEXAMPLEISTHEGERMANHYPERINFLATIONOF1922/23INANECONOMYEXPERIENCINGHYPERINFLATION,THEREISOFTENWIDESPREADINDEXING,MOSTLIKELYTOFOREIGNEXCHANGERATESRATHERTHANTOTHEPRICELEVEL,SINCEPRICESARECHANGINGSOFASTEVENTUALLY,HYPERINFLATIONBECOMESTOOMUCHTOBEARANDTHEGOVERNMENTISFORCEDTOTAKEHARSHMEASURES,INCLUDINGFISCALREFORMANDTHEINTRODUCTIONOFANEWMONETARYUNITPEGGINGTHENEWMONEYTOAFOREIGNCURRENCYBOX194ONTHESITUATIONINBOLIVIAINTHE1980SPROVIDESAGOODEXAMPLEOFHOWHYPERINFLATIONCANBESTOPPEDITALSOPOINTSOUTTHATTHECOSTSAREGREATINTERMSOFDECREASINGPERCAPITAINCOMEIN1985,BOLIVIASTOPPEDEXTERNALDEBTSERVICE,RAISEDTAXES,REDUCEDMONEYCREATION,ANDSTABILIZEDTHEEXCHANGERATEINFLATIONCAMEDOWNQUICKLY,BUTPERCAPITAINCOMEIN1989WAS35PERCENTLESSTHANITHADBEENADECADEEARLIERINITSFIGHTAGAINSTHYPERINFLATION,ISRAELTRIEDTOKEEPUNEMPLOYMENTRATESLOWBYINSTITUTINGWAGEANDPRICECONTROLSWHILEALSOSHARPLYCUTTINGBUDGETDEFICITSANDRATIONINGCREDITTHESEMEASURESREDUCEDTHERATEOFINFLATIONSIGNIFICANTLYINTHELATE1980S,THEGOVERNMENTSOFARGENTINAANDBRAZILIMPOSEDWAGEPRICECONTROLSBUTFAILEDTOSUPPLEMENTTHEMWITHFISCALAUSTERITY,SOTHERESULTWASMUCHLESSSATISFACTORY,ALTHOUGHTHEY,LIKEMANYSOUTHAMERICANCOUNTRIESEVENTUALLYSUCCEEDEDINLOWERINGTHEIRINFLATIONRATESINTHEEARLY1990S,COUNTRIESINEASTERNEUROPEEXPERIENCEDBRIEFPERIODSOFHIGHINFLATIONDURINGTHEIRADJUSTMENTSFROMCENTRALLYPLANNEDECONOMIESTOMOREMARKETBASEDECONOMIESASSHOWNINTABLE196THEREISNOGUARANTEETHATPERIODSOFHYPERINFLATIONWILLNOTSURFACEAGAINNEWBOX195DESCRIBESTHESITUATIONINZIMBABWEWHERETHEDECISIONMADEIN2006TOPRINTMOREMONEYTOFINANCEHIGHERGOVERNMENTSPENDINGLEDTOINFLATIONRATESINEXCESSOF1,000WHENINFLATIONISHIGH,POLICYMAKERSMUSTFOCUSONREDUCINGITWITHOUTCAUSINGAMAJORECONOMICDOWNTURNTHISISFAIRLYDIFFICULTTOACCOMPLISH,HOWEVER,SINCELABORCONTRACTSTENDTOREFLECTPASTEXPECTATIONSANDNEWCONTRACTNEGOTIATIONSTAKETIMEINADDITION,ITMAYBEDIFFICULTFORACENTRALBANKTOGAINCREDIBILITYINITSFIGHTAGAINSTINFLATIONBECAUSEOFITSBEHAVIORINTHEPASTCREDIBILITYISIMPORTANT,SINCEINFLATIONARYEXPECTATIONSADJUSTDOWNFASTERIFPEOPLEBELIEVETHATAGOVERNMENTISSERIOUSINITSATTEMPTTOREDUCEINFLATIONIFTHISISTHECASE,THEEXPECTATIONSADJUSTEDPHILLIPSCURVESHIFTSTOTHELEFTSOONERANDTHEECONOMYADJUSTSMOREQUICKLYTOTHEFULLEMPLOYMENTLEVELOFOUTPUTATALOWERINFLATIONRATEBUTSOMEINCREASEINUNEMPLOYMENTISALMOSTALWAYSNEEDEDTOREDUCEINFLATION,SINCEREALWAGESNEEDTOADJUSTDOWNTOTHEIRFULLEMPLOYMENTLEVELTHECOSTSTOSOCIETYAREOFTENMEASUREDINTERMSOFTHESACRIFICERATIO,THATIS,THERATIOOFTHECUMULATIVEPERCENTAGELOSSOFGDPTOTHEACHIEVEDREDUCTIONINTHEINFLATIONRATEPROBABLYALLECONOMISTSNOWAGREEWITHTHEMONETARISTPROPOSITIONSTHATRAPIDMONEYGROWTHTENDSTOBEINFLATIONARYANDINFLATIONCANNOTBEKEPTLOWUNLESSMONEYGROWTHISKEPTLOWWEALSOKNOWTHATMONETARYPOLICYHASLONGANDVARIABLELAGSBUTOTHERMONETARISTPOSITIONSREMAINMORECONTROVERSIAL,INCLUDINGTHOSETHATSUGGESTTHATTHEECONOMYISINHERENTLYSTABLEANDTHATMONETARYTARGETSAREBETTERTHANINTERESTRATETARGETSTHERATIONALEXPECTATIONSAPPROACHCANBESEENASANEXTENSIONOFTHEMONETARISTAPPROACH,WITHASTRONGBELIEFTHATMARKETSCLEARRAPIDLYANDPEOPLEUSEALLINFORMATIONAVAILABLETOTHEMTHISISWHYTHEYADVOCATEPOLICYRULESRATHERTHANDISCRETIONANDPLACEEMPHASISONTHECREDIBILITYOFPOLICYMAKERSBOX196HIGHLIGHTSTHERATIONALEXPECTATIONSAPPROACHANYGOVERNMENTTHATISUNWILLINGTOSHOWFISCALRESTRAINTWILLULTIMATELYBEFACEDWITHEXCESSIVEMONEYGROWTHANDANINCREASEINTHEINFLATIONRATECONTINUEDLARGEGOVERNMENTBUDGETDEFICITSCREATEAPOLICYDILEMMAFORACENTRALBANK,WHICHMUSTDECIDEWHETHERTOMONETIZETHEDEBTIFTHECENTRALBANKDECIDESNOTTOFINANCETHEDEBT,THEINCREASEDBORROWINGNEEDSOFTHEGOVERNMENTMAYDRIVEINTERESTRATESUP,LEADINGTOTHECROWDINGOUTOFPRIVATESPENDINGTHECENTRALBANKMAYTHENBEBLAMEDFORSLOWINGDOWNECONOMICGROWTHBUTIFTHECENTRALBANKISWORRIEDABOUTHIGHINTERESTRATESANDMONETIZESTHEDEBTINORDERTOKEEPINTERESTRATESLOW,INFLATIONMAYINCREASEWITHTHECENTRALBANKTAKINGTHEBLAMETHEFINANCINGOFGOVERNMENTSPENDINGTHROUGHTHECREATIONOFHIGHPOWEREDMONEYISANALTERNATIVETOEXPLICITTAXATIONINFLATIONACTSLIKEATAXSINCETHEGOVERNMENTCANSPENDMOREBYPRINTINGMONEYWHILEPEOPLECANSPENDLESS,SINCESOMEOFTHEIRINCOMEMUSTBEUSEDTOINCREASETHEIRNOMINALMONEYHOLDINGSTHEINFLATIONTAXREVENUEISDEFINEDASINFLATIONTAXREVENUEINFLATIONRATETHEREALMONEYBASETHEABILITYOFTHEGOVERNMENTTORAISEADDITIONALTAXREVENUETHROUGHTHECREATIONOFMONEYANDTHEREFOREINFLATIONISCALLEDSEIGNIORAGE,ANDTABLE197SHOWSSOMEEMPIRICALEVIDENCEOFTHEINFLATIONTAXREVENUERAISEDASPERCENTAGEOFGDPFORSOMELATINAMERICANCOUNTRIESHOWEVER,THEREISALIMITTOHOWMUCHREVENUEAGOVERNMENTCANRAISETHROUGHANINFLATIONTAXASINFLATIONINCREASES,PEOPLEREDUCETHEIRCURRENCYHOLDINGSANDBANKSREDUCETHEIREXCESSRESERVES,SINCEHOLDINGMONEYBECOMESMORECOSTLYEVENTUALLYTHEREALMONETARYBASEFALLSSOMUCHTHATTHEGOVERNMENTSINFLATIONTAXREVENUEDECREASESFIGURE193SHOWSTHISGRAPHICALLYWHILEHIGHERDEFICITSCANCAUSEHIGHERINFLATIONIFTHEYAREFINANCEDTHROUGHMONEYCREATION,HIGHERINFLATIONMAYALSOCONTRIBUTETODEFICITS,SINCEINFLATIONREDUCESTHEREALVALUEOFTAXPAYMENTSINADDITION,HIGHNOMINALINTERESTRATESCAUSEDBYHIGHINFLATIONRAISETHENOMINALINTERESTPAYMENTSTHEGOVERNMENTMUSTMAKEONTHENATIONALDEBTTHEINFLATIONADJUSTEDDEFICITCORRECTSFORTHATANDISDEFINEDINTHEFOLLOWINGWAYINFLATIONADJUSTEDDEFICITTOTALDEFICITINFLATIONRATENATIONALDEBTLARGEGOVERNMENTBUDGETDEFICITSANDRAPIDMONETARYEXPANSIONSEEMTOBEINEVITABLEPARTSOFHYPERINFLATIONTHEHIGHRATEOFMONETARYEXPANSIONORIGINATESINTHEGOVERNMENTSDESIRETORAISEITSINFLATIONTAXREVENUEHOWEVER,THEGOVERNMENTCANONLYBESUCCESSFULIFITPRINTSMONEYFASTERTHANTHEPUBLICANTICIPATESEVENTUALLY,THEPROCESSWILLBREAKDOWN,ASTHEREALMONEYBASEBECOMESSMALLERANDSMALLERDURINGTHE1980S,THEUSEXPERIENCEDVERYLARGEBUDGETDEFICITS,WHICHWERETEMPORARILYBROUGHTUNDERCONTROLINTHELATE1990S,ONLYTOINCREASESHARPLYAGAININ2002FIGURE194SHOWSTHETRENDINUSBUDGETDEFICITSASPERCENTAGEOFGDP,WHILETABLES198AND199GIVEANOVERVIEWOFTRENDSINTHEUSGOVERNMENTSOUTLAYSANDREVENUESITISINTERESTINGTONOTETHATENTITLEMENTSANDINTERESTPAYMENTSONTHENATIONALDEBTHAVEINCREASEDSIGNIFICANTLYOVERTHELASTFOURDECADESONTHEREVENUESIDE,CORPORATEINCOMETAXESASASHAREOFGDPHAVEDECLINED,WHILESOCIALINSURANCETAXESHAVEINCREASEDSUBSTANTIALLYTOHIGHLIGHTTHEROLEOFTHENATIONALDEBTINTHEBUDGET,ITISUSEFULTODISTINGUISHBETWEENTHEACTUALBUDGETDEFICITANDTHEPRIMARYNONINTERESTBUDGETDEFICITTHEUSBUDGETDEFICITSINTHE1990SWEREACTUALLYMOREARESULTOFHIGHINTERESTPAYMENTSONTHEPREVIOUSLYINCURREDDEBTTHANOFGOVERNMENTSPENDINGEXCEEDINGTAXREVENUESTHISISTHELEGACYOFPASTDEFICITSASTHENATIONALDEBTACCUMULATES,ITSINTERESTCOSTSACCELERATE,CONTRIBUTINGEVENMORETOTHEBUDGETDEFICITTHENATIONALDEBTISTHERESULTOFALLPASTANDPRESENTBUDGETDEFICITS,ANDTHEPROCESSBYWHICHTHETREASURYFINANCESTHEDEBTISCALLEDDEBTMANAGEMENTASOLDGOVERNMENTSECURITIESMATURE,THETREASURYISSUESNEWSECURITIESTOMAKETHEPAYMENTSONOLDONESROBERTEISNERHASARGUEDTHATITISIMPORTANTTORECOGNIZETHATTHEGOVERNMENTHASASSETSANDNOTJUSTDEBTSANYSPENDINGONINFRASTRUCTURESHOULDBETREATEDASACCUMULATIONOFREALCAPITALANDOFFSETBYTHEDEBTISSUEDTOPAYFORITINOTHERWORDS,JUSTLIKEPRIVATESPENDING,GOVERNMENTEXPENDITURESSHOULDBESEPARATEDINTOGOVERNMENT“CONSUMPTION”ANDGOVERNMENT“INVESTMENT”WITHTHEUSGROSSNATIONALDEBTNOWEXCEEDING85TRILLIONOROVER28,000PERCAPITA,ITBECOMESIMPORTANTTOCONSIDERITSREALBURDENIFINDIVIDUALSWHOHOLDGOVERNMENTBONDSCONSIDERANINCREASEINGOVERNMENTDEBTASANINCREASEINTHEIRPERSONALWEALTH,THEYWILLCONSUMEMOREANDALOWERSHAREOFGDPWILLBEINVESTEDTHISWILLLEADTOALOWERRATEOFCAPITALACCUMULATIONANDSLOWERFUTUREECONOMICGROWTHANOTHERCONCERNISTHATFOREIGNERSHOLDALARGEPARTOFTHEDEBTSINCETHEBURDENOFFUTURETAXPAYMENTSONTHISPARTOFTHEDEBTPLUSINTERESTWILLFALLONUSTAXPAYERSWHILETHERECIPIENTSOFTHESEPAYMENTSWILLBEFOREIGNERS,THEREWILLBEAREDUCTIONINUSNETWEALTHHIGHDEFICITSCANNOTBESUSTAINEDINDEFINITELY,BUTASLONGASNATIONALINCOMEISGROWINGFASTERTHANTHENATIONALDEBTIMPLYINGADECLININGDEBTINCOMERATIO,THEPOTENTIALFORINSTABILITYISFAIRLYLOWINTHE1990S,THEREWASWIDESPREADSENTIMENTTHATGOVERNMENTHADGROWNTOOBIGANDTHATSOUNDFISCALPOLICYHADTOBEIMPLEMENTEDTHEFISCALRESTRICTIONFINALLYSUCCEEDEDINTURNINGTHELARGEBUDGETDEFICITSOFTHE1980SINTOBUDGETSURPLUSESIN1998ADEBATEQUICKLYBEGANAMONGPOLITICIANSABOUTTHEBESTWAYSTOPUTTHESURPLUSTOUSEWASITBETTERTOCUTTAXES,INCREASESPENDING,ORGRADUALLYPAYOFFTHENATIONALDEBTTHEPATHCHOSENBYTHEBUSHADMINISTRATIONWASAMASSIVETAXCUT,LEADINGTORENEWEDBUDGETDEFICITSIN2002ANOTHERDEBATEREVOLVESAROUNDSOCIALSECURITYREFORMTHEREISINCREASINGCONCERNABOUTTHEFINANCIALDIFFICULTIESTHATTHESOCIALSECURITYSYSTEMWILLFACEINTHENEARFUTURETHESYSTEMISFINANCEDTOALARGEEXTENTONAPAYASYOUGOBASIS,WITHMOSTOFTHEEARMARKEDTAXESPAIDBYCURRENTWORKERSBEINGUSEDIMMEDIATELYTOFINANCETHESOCIALSECURITYBENEFITSOFCURRENTRETIREESSUCHATRANSFEROFRESOURCESFROMTHEYOUNGTOTHEOLDCANBEACCOMPLISHEDIFAGROWINGPOPULATIONINCREASESTHERATIOOFWORKERSTORETIREESIFPOPULATIONGROWTHSLOWS,HOWEVER,THENCONTRIBUTIONSHAVETOBEINCREASEDORBENEFITSHAVETOBECUTHIGHINCOMEGROWTHALLOWSRETIREMENTBENEFITSTOBEHIGHERTHANPASTCONTRIBUTIONS,SINCETHESOURCEOFTHEBENEFITSISTHEHIGHERINCOMEOFTHEYOUNGERGENERATIONSIFINCOMEGROWTHSLOWS,HOWEVER,THENTHESYSTEMMAYFACEFINANCINGDIFFICULTIESTHEPOLITICALSITUATIONISFAVORABLEALARGERPERCENTAGEOFOLDERPEOPLETHANYOUNGERPEOPLEVOTESOTHEELDERLYCANENFORCETHEINTERGENERATIONALTRANSFERTHROUGHTHEPOLITICALSYSTEMBUTATSOMEPOINT,THEYOUNG,WHOEXPECTTORECEIVELOWERBENEFITSTHANTHEIRPARENTSRELATIVETOTHEIRCONTRIBUTIONS,MAYREFUSETOSUPPORTTHESYSTEMTHROUGHTHEIRTAXESWHILETHESOCIALSECURITYSYSTEMISOFTENSEENASA“FORCEDSAVINGSSYSTEM,”WHICHMAKESSURETHATEVERYONEACCUMULATESSOMEWEALTHFORRETIREMENT,THEREISSTRONGEMPIRICALEVIDENCETHATTHESYSTEMACTUALLYREDUCESNATIONALSAVINGDUETOITSPAYASYOUGOFINANCINGTHEDECLINEINSAVINGREDUCESTHERATEOFCAPITALACCUMULATION,WHICHLOWERSPRODUCTIVITYANDFUTURELIVINGSTANDARDSTHESOCIALSECURITYTRUSTFUNDACTUALLYHASBEENGROWINGASARESULTOFTHESOCIALSECURITYREFORMOF1983,BUTCURRENTPREDICTIONSARETHATTHESYSTEMWILLBEBANKRUPTAFTER2045WHENMOSTOFTHEBABYBOOMERGENERATIONWILLHAVERETIREDWHILEMOSTPEOPLEDONOTWISHTOSEETHESOCIALSECURITYSYSTEMTOTALLYABANDONED,ADDITIONALREFORMSAREVERYLIKELYINTHENEARFUTURETHECENTRALQUESTIONISHOWTOEARNHIGHERRETURNSONTHEFUNDSINVESTEDTOPREVENTTHESYSTEMFROMINSOLVENCYANDHOWTOPRESERVEEQUITYFORTHOSEWHOHAVEALREADYPAIDINTOTHESYSTEMSUGGESTIONSFORLECTURINGSTUDENTSWHOFOLLOWTHENEWSSEESTOCKPRICESFLUCTUATEDAILYANDTHEYPROBABLYHEARDABOUTPASTSTOCKMARKETBUBBLESANDCRASHESTHESESTUDENTSWILLBECURIOUSABOUTTHEIMPACTOFMAJORSWINGSINSTOCKMARKETACTIVITYONTHEECONOMYMOSTPEOPLEASSUMETHATTHESTOCKMARKETCRASHOFOCTOBER,1929MARKEDTHEBEGINNINGOFTHEGREATDEPRESSIONANDARENOTAWARETHATECONOMICACTIVITYHADACTUALLYBEGUNTODECLINEEARLIERAGOODWAYTOINTRODUCETHEMATERIALINTHISCHAPTERISTOASK“COULDAGREATDEPRESSIONHAPPENAGAIN”OR“DOSTOCKMARKETCRASHESCAUSEECONOMICDOWNTURNS”EITHERWILLLEADTOALIVELYCLASSDISCUSSIONTHATCANHELPTOHIGHLIGHTSEVERALOFTHEISSUESRAISEDINTHECHAPTERINTHISDISCUSSIONTHEMAJORSTOCKMARKETCRASHOFOCTOBER,1987ANDTHEDECLINEINESPECIALLYHIGHTECHSTOCKVALUESTHATSTARTEDINMARCH,2000WILLUNDOUBTEDLYCOMEUPTHEYAREREMINDERSTHATSTOCKMARKETBUBBLESWILLALWAYSEVENTUALLYBURSTANDTHATTHEREISCONSIDERABLERISKASSOCIATEDWITHBUYINGSTOCKSMOSTECONOMISTSNOWAGREETHATTHEMAGNITUDEOFTHEGREATDEPRESSIONWASEXACERBATEDBYINADEQUATEFISCALANDMONETARYPOLICYRESPONSESTHEFEDSFAILURETOINJECTENOUGHLIQUIDITYINTOTHEBANKINGSYSTEMTOPREVENTFAILURESLEDTOASEVERECONTRACTIONINTHESUPPLYOFMONEYANDANECONOMICDOWNTURN,ANDPOLICYMAKERSALSODIDLITTLEINITIALLYTOSTIMULATEECONOMICACTIVITYTHROUGHFISCALPOLICYTHESEVERITYOFTHEECONOMICSITUATIONINTHE1930SISNOTSURPRISINGTOECONOMISTSTODAY,ASNOWELLDEVELOPEDECONOMICTHEORYEXISTEDATTHETIMETHATCOULDDEALWITHADISTURBANCEOFTHISMAGNITUDEITWASNOTUNTILJOHNMAYNARDKEYNESOFFEREDANEXPLANATIONOFWHATHADHAPPENEDDURINGTHEGREATDEPRESSIONANDSUGGESTEDWAYSTOPREVENTFUTURERECESSIONSTHATMACROECONOMISTSBEGANTOPONDERTHEVALUESOFFISCALANDMONETARYSTABILIZATIONPOLICIESITISNOWONDERTHATKEYNESISSEENBYMANYASTHE“FATHEROFALLMACROECONOMISTS”ECONOMICTHEORIESAREGENERALLYPRODUCTSOFTHEIRTIMEAND,ASMENTIONEDABOVE,KEYNESMACROECONOMICTHEORYWASDEVELOPEDASARESULTOFTHEGREATDEPRESSIONHISEXPLANATIONANDPRESCRIPTIONFORPREVENTINGFUTUREDEPRESSIONSWEREWIDELYACCEPTED,BUTDIDNOTHAVEMUCHIMPACTONPOLICYMAKINGINTHEUSUNTILTHE1960S,WHENTHEGOVERNMENTFOLLOWEDMOSTLYFISCALACTIVISTPOLICIESTOENSUREFULLEMPLOYMENTTHEHANDLINGOFTHEMAJORSTOCKMARKETCRASHOF1987APPEARSTOINDICATETHATPOLICYMAKERSHAVELEARNEDFROMPASTMISTAKESSTOCKVALUESDROPPEDBYMORETHAN24INOCTOBEROF1987,BUTWEDIDWENOTSEEASEVEREDOWNTURNINECONOMICACTIVITYWHYNOTFORONE,ALANGREENSPAN,WHOHADBEENAPPOINTEDASCHAIROFTHEBOARDOFGOVERNORSOFTHEFEDONLYAFEWMONTHSEARLIER,WASCONSCIOUSOFWHATHADHAPPENEDIN1929ANDIMMEDIATELYASSUREDFINANCIALMARKETSTHATTHEFEDWOULDPROVIDETHELIQUIDITYNEEDEDTOPREVENTAFINANCIALCOLLAPSETHEFEDQUICKLYSTARTEDTOUNDERTAKEOPENMARKETPURCHASESINANEFFORTTODRIVEINTERESTRATESDOWNINADDITION,ASARESULTOFINSTITUTIONALCHANGESIMPLEMENTEDAFTERTHEGREATDEPRESSION,GOVERNMENTNOWHASAMUCHLARGERROLEINTHEECONOMYSTUDENTSSHOULDBEAWARETHATTHEGREATDEPRESSIONNOTONLYSHAPEDMODERNMACROECONOMICTHINKINGANDAPPROACHESTOSTABILIZATIONPOLICY,BUTALSOSHAPEDTHESTRUCTUREOFMANYUSINSTITUTIONSINSTRUCTORSMAYWANTTOSPENDSOMETIMETALKINGABOUTTHESEINSTITUTIONSANDTHEIRIMPORTANCETOOURECONOMYITALSOSHOULDBENOTEDTHATTHEECONOMYWASINMUCHBETTERSHAPEWHENTHESTOCKMARKETCR