Unit 2: Is unemployment inevitable in 2011?

Will many advanced economies have to live with a new semi-permanently higher level of unemployment as a consequence of the global financial crisis, economic slump and a period of fiscal austerity?


It is a dangerous scenario for all kinds of economic, social and political reasons and hints at a defeatism and defensiveness among some economists and policy-makers that active labour market policies and macro demand management cannot lift employment close to where it was before the slump.

In this article in the Guardian, Dean Baker questions the validity of the crowding out hypothesis championed by economists who believe deficit reduction must be the number one macro priority.

Monetary and fiscal policy still have a vital role to play in sustaining demand and jobs in economies where private sector demand is weak and likely to be constrained by falling real wages, asset prices and rising unemployment.

“The methods for generating demand are not a mystery. It basically amounts to the government spending more money until the private sector is again in a position to fuel demand. The fears of deficits and debt that the pessimists promote stem from a misunderstanding of basic economics. Deficits can be a problem when they crowd out private economic activity. In a severe slump like the current one, this crowding-out is not a realistic fear; there are vast amounts of idle resources.

Furthermore, there is no reason that the debt needs to pose an interest burden on taxpayers in the future. The Fed and other central banks can simply buy and hold the debt, refunding the interest payments to the government.”