Tuesday, April 13, 2010

Greater evil - inflation or unemployment?

The rising US public debt stock and the resultant apprehensions of an inflationary spiral have increased the opposition to any further stimulus spending despite the dismal unemployment scenario. Opponents point to the examples of Greece and a few other European countries to warn about the unsustainability of any more debt-financed fiscal spending.

However, as many others like Mark Thoma and Paul Krugman have pointed out, the unemployment situation is so dismal (last three months the unemployment rate has held steady at 9.7%) despite the March gains, that even a return to some semblance of normalcy would require spectacular economic growth for a few years. Even with recent robust economic growth rates, "what is happening is that the pace of job creation is matching the number of people returning to the labor force, but once the change in labor force is accounted for there is no change in the rate of unemployment".

In the aftermath of the 162,000 jobs addition in March, Dean Baker had this to say, "The average in the private sector over the last two months was just 66,000 jobs. With the public sector shedding jobs, we will need more rapid job growth just to stay even with the growth in the labor force." The job market signals point to a "very long, gradual, drawn out recovery process", which if not hastened can result in considerable suffering and misery.

In the context of the debate about the choice between inflation and unemployment, Stephen Gandel writes

"Neither is great. And the combination is, of course, horrible. But the problem with the folks arguing against an expanded jobs bill is that they don't recognize that there is at least a chance that doing nothing is worse. Inflation at least has some positive affects. House prices rise again. Debt becomes more manageable. Wages increase. Yes, our buying power erodes. And higher interest rates can slow growth. But if anyone can tell me an even small upside to high unemployment, I would be interested."

And as Don Peck recently wrote in the Atlantic, the impact of the unemployment legacy of the Great Recession may be far reaching,

"The Great Recession may be over, but this era of high joblessness is probably just beginning. Before it ends, it will likely change the life course and character of a generation of young adults. It will leave an indelible imprint on many blue-collar men. It could cripple marriage as an institution in many communities. It may already be plunging many inner cities into a despair not seen for decades. Ultimately, it is likely to warp our politics, our culture, and the character of our society for years to come."

In this context, Mark Thoma points to a graphic that forecasts the unemployment rates with and without additional government fiscal support. He argues that "instead of getting back to full employment by, say, 2013, we could get there sooner if we act now".

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