Terry McCormick, age 12, of Eugene, Ore., for his question:
WHAT CAUSES ECONOMIC DEPRESSIONS?
Many economists, although certainly not all, agree that an economic depression can be held within reasonable limits by the use of government deficit spending to offset a drop in private spending, at least partially. How soon the government should act and just how far it should go are still disputed questions.
A depression is the low level of a business cycle, or the opposite of prosperity. A business cycle is the waves of good and bad times that have always plagued modern industrial economics.
Most economists agree that depressions may very well be the most serious problem that faces our free enterprise economic system. There are many different ideas on what causes a depression and what can be done to avoid one.
Some say a depression comes when people spend too little of their incomes, which is much like saying they save too much. Some economists say this lowers the demand for goods and services and that leads to unemployment.
Other economists say depressions are caused by changes in the amount of spending for capital goods, such as tools, buildings and machinery, which are used to produce other goods. This type of spending is called investing. When people invest, they put their money back into circulation. But if there are not enough investment openings, the extra dollars are not put back into circulation which reduces the dollars being spent for goods and services.
Boom and bust, some economists say, is caused by changes in the money supply of the economy. Others believe that business cycles are the price of a modern economy: progress never comes about smoothly but rather by a process of "three steps forward and two backward."
Some economists say that business cycles come about because prices and wages are not permitted to move up and down in free response to changes in supply and demand conditions. They say that in a free market the price would always seek that level which would "clear the market." No goods would ever be unsold and no workers would ever be unemployed. Unemployment, they say, comes because markets are not free.
Most economists agree that serious depressions can be avoided by controlling the extremes in the economic system during times of prosperity. Many feel this could be done by making sure that the quantity of check money not be permitted to increase in a runaway fashion during prosperity and that the price fixing activities of some groups should be curbed to avoid upsetting the price structure or the relationships among the prices for different types of goods.