Give three reasons why the U.S. economy was more stable from 1950-2007 than it was prior to 1950

Question

What will be an ideal response?

Answer 1

Any three of the following four reasons are correct.
First, our economy changed over time in terms of the types of goods produced. We produce more services today and less goods than we did in the past. Manufacturing production used to account for 40 percent of GDP, now it accounts for 12 percent. Manufacturing production fluctuates more over the business cycle. Durable goods manufacturing is extremely volatile. GDP is relatively more stable because service production is more stable over the business cycle and we produce more services now.
Second, government safety-net programs such as unemployment insurance and Social Security give workers more income during recessions. These programs did not exist to the extent that they exist in the post-World War II U.S. economy. The extent of the downturn tends to be less severe as these workers who take advantage of these programs do not have to curtail their spending as much as they would if the programs did not exist. The additional spending may have the effect of shortening recessions since 1950.
Third, prior to 1930, the government did not pursue policies to shorten recessions or prolong expansions. After the Great Depression, public opinion changed towards favoring the government pursuing active policy. The government has actively implemented fiscal and monetary policies to smooth out the business cycle, shortening recessions and prolonging expansions. Many economists believe that these policies stabilized the economy. However, it is not a settled issue as other economists disagree.
Fourth, the severity of the Great Depression of the 1930s was caused in part by instability in the financial system. The financial system became much more stable following the end of the Great Depression, although the return of financial instability during the 2007-2009 recession is likely a key reason for the severity of the recession.