Every day we see new signs of the economic crisis into which America has plunged. How will President-Elect Obama handle it? The first student reading below provides a brief report on the economic crisis. The second reading summarizes Obama's most recent prescriptions for addressing it. Discussion questions follow.
Each of the following sets of materials on this website provide additional background on the economic crisis: "Presidential Election 2008: Inequality in America," "Presidential Election 2008: Financial Crisis," "Financial Crisis: Bailout or Rescue," "Presidential Election 2008: Second Debate: Financial Crisis."
Student Reading I:
The bad news
"THE ECONOMY SHRINKS WITH CONSUMERS LEADING THE WAY"
This was the headline over the top news story in the New York Times on the last day of October 2008, the month that saw the American economy plunging into crisis and taking the rest of the world with it.
The story reported that "the economy contracted from July through September. In a stark indication of national distress, consumer spending dipped for the first time in 17 years." Consumer spending "makes up more than 70 percent of American economic activity."
If people cut back on buying at Macy's, Circuit City, Home Depot, Gap, Stop & Shop, Ford show rooms and the neighborhood store, these businesses make less money and cut back on buying more inventory. They will probably also cut workers' hours and maybe their entire jobs-leaving them with less to spend themselves. And so the economy contracts.
"Economy" and "contracts" are fairly abstract terms. For a more concrete picture of what is happening, imagine Ford cutting back its production because of declining car sales. Then imagine the resulting layoffs for the workers who put the cars together and the staff who try to sell the cars. An "economy" comes down to Fred Smith, a single individual who has until now earned a living selling Ford cars. He is part of a larger system that runs on people producing and servicing, distributing, buying and consuming. Next time you buy a pack of gum, you are part of that process.
Whenever the economy contracts, the consequences are felt by very real people, such as:
1. the men and women who lost their jobs at Lehman Brothers, a Wall Street investment
banking firm, after it was forced out of business, overwhelmed by debt.
2. 760,000 Americans who lost their jobs between January and September.
3. hundreds of thousands of people who have lost their homes to foreclosure, 107,000 of
them in September alone.
4. countless investors, among them retirees, who have lost life savings in the stock
market.
5. the people of Duluth, Minnesota, which lost $2.25 million of an investment of
$3 million at Merrill Lynch when that firm went out of business. This will result in cuts in the services that every city provides-such as police, fire, garbage collection, street cleaning, libraries. (Exactly what will be cut and by how much is not yet known.)
6. Mark Snyder, a small businessman near Denver, who cannot get a loan for his new
medical supply company at less than an impossible 30 percent interest rate.
7. the tens of thousands of workers at General Motors and Chrysler. These companies are asking the federal government to support them in merging-or else they will both face bankruptcy.
8. the estimated one in five homeowners whose mortgage payments exceed the reduced
value of their homes—an unprecedented situation that could add to vacant homes across
America
9. about 700 employees at the Foxwoods Casino in Connecticut who lost their jobs as a result of the economic downturn.
10. and, on the lighter side, the customers of the Azena Nail Spa in Westport, Connecticut, where the median income is twice that of the rest of the state. Customers who used to come in every two weeks for a manicure and pedicure combo can now afford to come in once every two months.
Is there any good news? Yes, oil prices are down — and that's because worldwide economies are contracting, so people are driving less. It has also become slightly easier for consumers to get a bank loan to buy a car or a home. And, as of the last day in October, stocks have won back a portion of their losses. But nobody knows what will happen to the stock market next.
The financial markets in the U.S. and worldwide are extremely volatile. Consumer spending is down because many people have less money to spend and those who have money are being more conservative with it.
Consumer confidence in the economy is shaken. People are not at all sure that the government's efforts to bolster the economy will work — for example, the government's $700 billion bailout to buy bad debts held by financial institutions. Or the government's decision to lend money to banks so their executives will feel freer to lend money themselves. Uncertainty leads to a loss of trust, a loss of confidence, and fear.
Across America almost everyone is being affected by a monumental financial collapse that continues to ricochet through the economy and probably will worsen. A new worry is that "goods will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years. The word for this is deflation, or declining prices, a term that gives economists chills. Deflation accompanied the Depression of the 1930s. (Peter Goodman, "Specter of Deflation Lurks As Global Demand Drops," New York Times, 11/1/2008.)
The economic collapse has also struck across the world. The word "globalization," like the word "economy," is quite abstract. That abstraction comes down to earth when one learns that every bank in Iceland, a tiny nation of 304,000 people, declared bankruptcy this past month The major cause: the same bad debt from mortgage-backed securities that brought down Lehman Brothers and other financial institutions in the United States.
And so we learn that we are connected economically to one another, as we are in so many other ways.
For discussion
1. Start a discussion of the economic crisis through a "micro lab." You might ask students to discuss what signs of the crisis they have observed or know about. See a short description on conducting a micro lab in "Engaging Your Class Through Groupwork," at www.teachablemoment.org.
2. Invite comments and general discussion after you conclude the micro lab.
3. What questions do students have about the reading? How might they be answered?
4. Explain the headline the reading begins with.
5. Consider each of the ten examples of a "contracting economy." Why did Lehman Brothers go bankrupt? If you don't know, how might you find out? Loss of jobs and homes are two key signs of the crisis. Why is each happening and likely to continue, even grow worse?
6. Why are financial markets volatile?
7. Why is deflation a concern?
Student Reading 2:
Obama's proposals
The #1 problem and the first major test facing Barack Obama's presidency, beginning on January 20, 2009, will be the nation's financial and economic crisis. Through his leadership, executive orders and legislative proposals for Congress, Americans will expect prompt and effective action, especially on jobs, credit, and home foreclosures.
In an October 13 speech in Toledo, Ohio, Obama spoke in some detail about what he would do as president to immediately address the financial crisis. Of course, presidential candidates often make proposals that are never implemented once they are elected. Sometimes, circumstances change, requiring a change of plans. Sometimes the president changes his mind. Very often a proposal requires congressional approval, which the president can't get-or not get in the form he wants.
However, Obama's proposals are still worth examining. They include:
- A $3,000 tax credit for employers for each new person they hire — a measure intended to encourage job creation
- Allowing Americans to borrow from retirement savings without a tax penalty
- Eliminating income taxes on unemployment benefits
- Doubling the $50 billion in loan guarantees that the government has given to automakers
- Enabling the U.S. Treasury and the Federal Reserve to lend money to city and
state governments - Expanding government guarantees for financial institutions to encourage a return to
more normal lending - A 90-day moratorium on most home foreclosures
- Forbidding financial institutions that get government help from foreclosing on
homeowners who are making some payment, even if not the full amount
In the 10 weeks before Obama is inaugurated, it is certain that he and his economic and legislative advisers will work further on these proposals and they will probably develop new ones as well.
According to Obama's economic adviser, Jason Furman, Obama has "no plans to change" another proposal he has talked about for months — the repeal of the Bush tax cuts for all Americans with incomes above $250,000 and tax cuts for people who make less than that.
Obama's advisors say the cost of his economic stimulus plan will be $175 billion. They also say that many of Obama's proposals could be passed even before he is inaugurated. But House Speaker Nancy Pelosi has not agreed, since she thinks President Bush would veto them.
In his Toledo speech Obama said of his proposals: "I won't pretend this will be easy. George Bush has dug a deep hole for us. It's going to take a while for us to dig our way out. We're going to have to set priorities as never before." (Jackie Colmes and Jeff Zeleny, "Obama Details Plans To Aid Victims of Fiscal Crisis," New York Times, 10/13/2008)
In an interview on PBS' Bill Moyers Journal, economist Peter Galbraith underlined Obama's words. "What needs to be stressed," he said, "is that we've seen a breakdown of an entire system. The consequence of the failure of regulation, of supervision of the banking system over the past eight years, has been to cause a collapse of trust, a poisoning of the well." Galbraith is a professor at the University of Texas and once served as the executive director of Congress' Joint Economic Committee. (www.pbs.org/moyers/journal, 10/24/2008)
For discussion
1. What questions do students have about the reading? How might they be answered?
2. Which of Obama's proposals is supposed to promote employment and why? Which is aimed at helping homeowners in trouble and why? Why does the plan include lending money to city and state governments? How much difference might this make for you and/or your family?
3. Why does Obama want to repeal the Bush tax cuts? If you don't know, how might you find out? What do you think President Bush's reactions to repeal would be and why?
4. Why does Obama think that "George Bush has dug a deep hole for us"? If you don't know, how might you find out? Do you think this criticism is fair? Why or why not?
5. What does "failure of regulation" have to do with the crisis? What do you think Galbraith means by his metaphor "a poisoning of the well"?
For citizenship and writing
After students have discussed Obama's proposals, ask them which proposals they think are most important and why. Do they have any other proposals for easing the economic crisis?
Then have each student draft a letter to the president-elect on the proposal that he or she favors (either Obama's, their own, or another student's). Once students have drafted their letters, organize the class into groups of four to six students. Ask each group to discuss and provide constructive criticism of their letters and to select the letter they regard as best. Ask a spokesperson from each group to read the letter to the class. Have the class discuss each letter.
Give students another crack at drafting their letters now that they have heard criticism of them. Collect and comment upon these drafts, then invite students to prepare a final copy for mailing to president-elect Obama.
This lesson was written for TeachableMoment.Org, a project of Morningside Center for Teaching Social Responsibility. We welcome your comments. Please email them to: lmcclure@morningsidecenter.org