The Unemployment Conspiracy; It's the Policy, Stupid
Economics / Unemployment Jun 12, 2011 - 02:27 AM GMTBy: Mike_Whitney
When the recovery began 2 years ago, the rate of unemployment was 9.5 percent. Today it's 9.1 percent. Think about that for a minute. Doesn't that prove that the market isn't really self-correcting after all? I mean, if the market was self-correcting then unemployment would have gone down by now, right? But, it hasn't. Why?
There's a long answer for that, and a short answer. The short answer is that unemployment can stay high forever if the wrong policies are in place. If you don't believe that, then vote Republican in 2012 and watch what happens when they start hacking away at public spending. Unemployment will soar to 15 or 20 percent in the blink of an eye.
So, it's the policy that matters not the market. And when the wrong policies are implemented, then demand weakens, people get laid off, and the economy goes into a funk. The good news is that we know how to fix the problem and get the economy revved up again. But the bad news is the politicians are not interested in doing what it takes to put people back to work. In fact, unemployment isn't even on their radar. Maybe that's because some of their bigshot constituents aren't bothered high unemployment; in fact, they kind of like it. It crushes big labor and puts pressure on wages. Maybe that's why they haven't been griping.
Look, the economy is just a reflection of the ideas of the people in power, right? That's why economics can't be separated from politics, because it is politics. And, it's totally agenda driven. There's no economic theory that's not agenda driven.
There's no reason why a recession has to drag on year after year. Everyone knows what needs to be done; it's just a matter of doing it. But, of course, that's not possible because "what needs to be done" conflicts with the objectives of the people who run the system. So the slump goes on and on and people get madder and madder until, finally, something snaps and the crowds pour out onto the streets and and start burning stuff down. That's how it works, isn't it? Have you checked out Athens, lately? How about Madrid, Lisbon, Dublin, or Reykjavik? People are pissed. And they're not pissed about the recession. They're pissed because they're getting reamed and they know it. They're pissed about the policy.
So, is that where America is headed; massive public demonstrations and street violence?
Could be. It's hard to tell. If the politicians stick with the same policies that created the recession and high unemployment, then we're headed for trouble. But if they make a course correction and fix the situation, then things will improve. It's up to them.
Think back to when Barack Obama first took office. The administration quickly slapped together an $800 billion stimulus package and rushed it through congress. What does that tell you?
It tells you that policymakers aren't really dopes, after all. It tells you that when the lights are blinking red they know what they need to do and they do it fast. The Obama stimulus stopped the bleeding (The economy was shedding 750,000 jobs per month when Bush left office) and gradually turned the economy around. It took a long time, but the patient finally started showing signs of life.
At the time, no one talked about the budget deficits because they knew that avoiding another Great Depression was more important. And, no one suggested that we forgo fiscal stimulus and try to stop the downward spiral by purchasing trillions of dollars of government bonds (QE) in an experiment that may or may not work. No one said anything like that, because they already KNEW that the traditional tried-and-true Keynesian methods of reversing the plunge would work. And they did.
So what does that prove?
It proves that the people in power actually know what to do, but they pretend otherwise so they can pursue their own agenda. All this deficit hawkery and QE2 is just agenda-driven gibberish. It has nothing to do with fixing the economy or putting people back to work.
So what should we be doing to reduce unemployment and get the economy back on track?
Well, we should do what we did in the '50s, 60's and 70s when the economy was growing and the middle class was at its apex. We should implement the policies that focus on job creation and wage growth. Here's an excerpt from "The Crisis of Capitalism: Keynes Versus Marx" by Robert Skidelsky which sums it up perfectly:
"Keynesianism dominated the political economy of developed economies from the 1950s through to the mid 1970s. As Thomas Palley argues, ‘economic policy was designed to achieve full employment, and the economy was characterized by a system in which wages grew with productivity. This configuration created a virtuous circle of growth. Rising wages meant robust aggregate demand, which contributed to full employment. Full employment in turn provided an incentive to invest, which raised productivity, therefore supporting higher wages'." ("The Crisis of Capitalism: Keynes Versus Marx", Robert Skidelsky) Link--http://www.skidelskyr.com/site/article/the-crisis-of-capitalism-keynes-versus-marx/
British economist John Maynard Keynes knew that capitalist economies perform best at full employment because the additional spending leads to widespread prosperity and stronger growth. But, as Skidelksy points out, the government has a role to play in sustaining employment to ensure the economy operates at maximum capacity. Here's more from the same article:
"Public Investment & Full Employment
Keynes’s answer ... is for the state to ensure enough investment and/or consumption in the economy to maintain continuous full employment.....The key to any restoration of a Keynesian political economy is thus the rehabilitation of the state as an instrument of the public interest...."
So the government should be directly involved in maintaining full employment. That means that fiscal stimulus has to be provided at various points in the business cycle to keep things running smoothly. But, as Professor Alan Nasser points out in a recent article in Counterpunch, there are two kinds of fiscal stimulus; one that works, and one that doesn't. It's an important distinction that needs to be clarified. Here's an excerpt from Nasser's article:
"...Closing the employment gap requires a specifically targeted stimulus, intended to stimulate not merely aggregate demand, but "effective demand". This was the kind of stimulus Keynes had in mind as his remedy for chronic unemployment. Aggregate demand stimulation is not authentically Keynesian. Keynes was explicit that the goal of macroeconomic stabilization policy is "a closer approximation of full employment as nearly as is practicable." (The General Theory, p. 378-379) He was unambiguous as to the principal effective means of accomplishing this goal: direct government job creation through public works projects....
If boosting effective demand is the explicit goal of fiscal policy, then work projects and the jobs they require must be provided directly by government. A resurrected Works Progress Administration is what will do the trick." ("Putting People to Work; The Kind of Stimulus We Need", Alan Nasser, Counterpunch)
Full employment is not a pipedream. In fact, it's an easily achievable goal if we're willing to use state resources. The real question is whether activists can apply enough pressure to force the changes that are needed, so that everyone who wants a job can find one.
By Mike Whitney
Email: fergiewhitney@msn.com
Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.
© 2011 Copyright Mike Whitney - All Rights Reserved
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