06 August 2011

Fighting Unemployment or National Debt

When a country faces a stagnant economy, high unemployment and a bulging national debt, what should the government do?

Many economists believe that the government should spend to get the country out of the slump.  When times are bad, the man in the street is likely to tighten his belt because he may have lost his job or he may be afraid of losing his job.  Businesses are unlikely to expand production in the face of weak demand, and may even cut production.  That leaves only the government.  The government has to spend.  But it has to spend wisely.  If the government's expenditure gives the money to citizens who do not spend it, the expenditure has little effect.  The government should spend on projects that will create jobs, such as teaching and security services, and building or upgrading infrastructure.  As the multiplier effect kicks in, it will result in a healthier economy, bringing with it higher employment and higher output, both of which increase taxes while reducing government expenditure on unemployment benefits.

For many months, the US House of Representatives, which is controlled by the Republicans, blocked President Obama's attempts to raise the country's debt ceiling.  They insisted that any such move be accompanied by a reduction of the budget deficit through cutting entitlements without increasing taxes on wealthy individuals or businesses.  It didn't matter to them that the higher debt ceiling was to accommodate budget measures that had already been approved by Congress.  It did not matter to them that opinion polls showed that the majority of their constituents were in favour of lowering the debt by a combination of cuts in entitlements and selective tax increases.

Much time was wasted.  The debt ceiling was eventually raised on 2 August, together with cuts in entitlements.  But no increases in tax.

Meanwhile, the economy was hardly growing.

How can the US economy grow if the (official or U-3) unemployment rate stands at 9.1 per cent.  Almost one in ten adults who want to work, are available for work and have recently actively searched for a job are jobless.

The U-6 unemployment rate (total unemployed, plus all persons marginally attached to the labour force, plus total employed part time for economic reasons, as a percent of the civilian labour force plus all persons marginally attached to the labour force) was 16.1 per cent in July.  Almost one in six adults who want to work and are available for work are unemployed or underemployed.

Consumers are the driving force of the US economy.  If large numbers of them are unemployed or not fully employed, who will buy the goods and services?

The US government itself is shedding jobs, because the Republicans don't want big government.

Companies are not expanding because there is insufficient demand for their goods and services.  Worse still, companies are importing goods because imports are cheaper than those produced domestically.

The US government should provide incentives for companies to produce in the US instead of importing from overseas or relocating offshore, unless such relocation is motivated by a need to be near to their customers.  This is not the time to be charitable, exporting jobs to other countries when there are so many Americans who are unemployed or underemployed.  Especially when those other countries grow economically, politically and militarily as a result of the Americans' generosity (or lack of common sense), and thumb their noses at the US.

The US government should repair and upgrade the country's infrastructure.  Given its debt situation, it is bizarre, and probably unacceptable to its citizens, that it is spending money on building schools in Iraq, Afghanistan and elsewhere in the world, while cutting back on such expenditure in its own country.

The US government should end its involvement in the wars in Iraq and Afghanistan.  Forget about pride or philosophy.  If the war in Afghanistan could not be won after ten years, it cannot be won.  It cannot be won because many Afghans themselves seem indifferent as to whom their rulers are, although they may change their minds rather quickly if the Taliban eventually takes over.  It cannot be won because it is almost impossible to distinguish between ordinary Afghan citizens and ordinary Taliban.  It cannot be won because the Taliban and al Qaeda are very patient and can afford to be patient, but the Americans and its allies cannot afford, and do not want, to stay in Afghanistan forever.  It cannot be won because the Afghan government believes it does not need the Americans (other than their money) and its allies.  It cannot be won because Pakistan allows the Taliban and Al Qaeda to take refuge on their side of the border, in the mistaken and dangerous belief that these terrorists may be useful in their fight against India.  The US should accelerate its withdrawal and save its money and the lives of its soldiers.

Standard and Poor's lowered the US's credit rating from AAA to AA+ on 5 August.  China's official news agency Xinhua insisted that China had every right to demand the US to address its debt problem.  The US should cure its addiction to debt and live within its means, as it could no longer borrow its way out of its mess.  China is the largest holder of US government bonds, the result of an imbalance in trade flows between the two countries, itself the likely result (at least partially) of China's holding down the value of its currency.

Vitriol aside, China has a point.  But it is judicious government expenditure coupled with principled taxation of the wealthy that will produce economic expansion to provide the US with the means to cut its deficit and reduce its debt.

The US is not alone in focusing on fighting debt rather than unemployment.  Many European governments are also shrinking their budgets in order to cut back their national debt despite slow growth and high unemployment.

These countries are probably headed for anaemic growth, if they can grow at all.  They may even slip into a recession.

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This post was updated.

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