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So, what’s it going to be?

Apr 20, 2010 | By: Mr_Blue | Comments | Permalink | Tags: economy, jobs, budget deficit

I recently came across a poll that said that those surveyed were most concerned about (in this order): economy, budget deficit and jobs. Now, obviously the accuracy of a survey depends on how the questions were asked and other things. But let’s say for the sake of argument that the poll is accurate. The problem is in this Great Recession reducing the budget deficit and creating jobs are in direct conflict - meaning you can’t reduce budget deficit and create jobs at the same time. It doesn’t matter if you prefer more tax cuts or more government spending - budget deficit will go up if the federal government focuses on job creation.

So, any politician or economist or Wall Street talking head who says we can have both (reduce budget deficit and create jobs) are just plain lying. In fact, mass unemployment like we are experiencing right now is because the budget deficit isn’t high enough - that’s right I said it. Unemployment is caused by a drop in aggregate demand - that is the total demand for goods and services in the economy. Let’s go to the equation:

aggregate demand = Y = Consumption + Gross Private Investment + Government Spending + (Exports - Imports)

If the situation is that consumers are not consuming and private sector businesses are not purchasing/investing aggregate demand will suffer and unemployment will result. Sound familiar? So what has to fill the void of the private sector (consumption + Gross Private Investment) spending - that’s right - government spending/fiscal policy (spending and taxing policy). There’s no way to avoid it if people want jobs.

Government spending provides revenue or money to the private sector. But this does not mean that any or all government spending or tax cuts are good for the economy and the creation of jobs. Certain types of government spending or tax cuts provide a better “bang for the buck” than others. One very direct way for fiscal policy to address unemployment is through a direct jobs program where the government becomes the employer of last resort.

If you are of the mindset that the government should not focus on job creation and we should wait for the private sector (consumers and businesses) to bounce back then are you prepared to live with all of the significant social costs related to long-term unemployment?

Good luck.