Fiscal policy

Fiscal policy

Fiscal policy decreases unemployment by helping to increase aggregate demand and the rate of economic growth. The government needs to pursue expansionary monetary policy; involving activities such as cutting taxes and increasing government spending. Lowering taxes increase disposable income   and therefore helping to increase consumption, leading to higher aggregate demand (AD).

Rising in aggregate demand, there will be an increase in Real GDP provided that, there is enough capacity in the economy. If firms produce more, there will be an increasing in demand for workers and therefore lower demand-deficient unemployment. Also, with higher aggregate demand and strong economic growth, fewer firms will go bankrupt meaning fewer job losses.

Keynes was an influential advocate of expansionary fiscal policy during a prolonged recession. He argues that in a recession, resources (both capital and labor) are idle. Therefore the government should intervene and create additional demand to reduce unemployment.

Monetary policy involves cutting the interest rates. Lower rates lower the cost of borrowing and encourage people to spend and invest.Monitery policy increases AD and should also help to increase GDP and reduce demand deficient unemployment. Also, lowering interest rates will be reducing exchange rate and making exports competitive.

In some cases, lowering interest rates can be ineffective in boosting demand. In this case, Central Banks may resort to Quantitative easing. This is an attempt to increase the money supply and boost aggregate demand.

Similar problems related to fiscal policy. e.g. it depending  on other components of total demand. Lowering the rates of interest does not help in increasing or spending if is not willing to lend. Demand side policies can contribute to reducing demand deficient unemployment e.g. in a recession. However, they cannot be ale in reducing the supply side unemployment. Therefore, their effectiveness depends on the type of unemployment that occurs.

Some of the long term  policies that makes US more competitive include, Education and Training. The aim is to give the long-term unemployed new skills which enable them to find jobs in developing industries, e.g. retrain unemployed steelworkers to have basic I.T. skills which help them find work in the service sector.   However, apart from providing education and training schemes, the unemployed may be unable or unwilling to learn new skills. At best it will take several years to reduce unemployment.

Reducing  Power of trades unions. If unions can bargain for wages above the market clearing level, they will cause real wage unemployment. In this case reducing the influence of trades unions   will help solve this real wage unemployment.   Business could be given tax breaks and grants for taking on long-term unemployed. Giving them new confidence and on the job training. However, it will be quite expensive, and it may encourage firms to replace current workers simply with the long-term unemployment to benefit from the tax breaks.

Improving  flexibility of a labor market. For example, reducing or cancelling maximum working weeks it makes easier to operate and dismiss encourages job opportunities to be created. However, increasing labor market flexibility lead in temporary employment and job insecurity.

Stricter Benefit requirements.  The  Governments takes a more pro-active role in making those jobless to a job or risk losing benefits. This is  Stricter benefit requirements.  After a given period the government can guarantee some public sector job .Significantly reduces unemployment. However, it may mean the government end up employing thousands of people in the expensive, unproductive task. Making it difficult to claim benefits, you may reduce the claimant count, but not the International Labor force survey.

To defeating geographical unemployment, the government could give tax breaks to firms who set up in depressed areas. Alternatively, they can provide financial assistance to unemployed workers who move to areas with high employment.

Such policies will lead to several changes such as: Changing interest rates affect the public’s demand for goods and services mainly by altering borrowing costs, the availability of bank loans, the wealth of households, and foreign exchange rates. For example, a decrease in real interest rates lowers the cost of borrowing; that leads businesses to increase investment spending, and it leads households to buy durable goods, such as autos and new homes.

The increase in aggregate demand for the economy’s output through these different channels leads firms to raise production and employment, which in turn increases business spending on capital goods even further by making greater demands on existing factory capacity. It also boosts consumption further because of the income gains that result from the higher level of economic output.

Works Cited

Woodford, Michael, and Carl E. Walsh. “Interest and prices: Foundations of a theory of monetary policy.” (2005): 462-468.

Blanchard, Olivier, and Jordi Galí. “Labor markets and monetary policy: a new Keynesian model with unemployment.” American economic journal: macroeconomics 2.2 (2010): 1-30.

Bowles, Samuel. “The production process in a competitive economy: Walrasian, neo-Hobbesian, and Marxian models.” The American Economic Review 75.1 (1985): 16-36.

Gilpin, Robert. The political economy of international relations. Princeton University Press, 2016.