Do governments deliberately keep unemployment 'high?'

Discussion in 'Economy & Infrastructure' started by pmaitra, Oct 24, 2012.

  1. pmaitra

    pmaitra Moderator Moderator

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    Do governments deliberately keep unemployment 'high?'

    I have been introduced to a new idea, that governments have an interest in keeping unemployment high. Now, that is, hitherto, a subjective statement.; however, I shall attempt to establish the objectivity of that claim later. For the moment, let us assume this claim is true. Now the question arises, why would the governments want to keep unemployment high?

    [Ref:01]

    Now, let us revisit that the subjective claim that governments want to keep unemployment high. Yes, they do, but to a certain limit. What is the limit? To understand this, let us see how Milton Friedman explains this scenario:

    [Ref:02]

    What did we see here? Among others, we were introduced to the idea that there exists a cost to look for jobs, a cost of movement, etc.. Let us keep that aside, but we shall come back and explore this further. Now, to continue on the concept of 'natural rate of unemployment,' while Friedman did not give a hard number, there exists another metric, called NAIRU (Non-Accelerating Inflation Rate of Unemployment). Overall, many economists (for example Paul Krugman) agree, that the 'natural rate of unemployment' is said to be in the vicinity of 6%.[Ref:03]

    Now that we have a established a proximate number for the 'desired' unemployment rate, we have established the objectivity of the claim made in the very first paragraph.

    At this point, many of us probably content with the idea that two of the most important factors of any economy, unemployment and inflation, remain in equilibrium with 6% unemployed and 94% employed. However, this simplistic conclusion ignores the fact that the population is not made up of two demographics, unemployed and employed; and that, there exists yet a third demographic - the non-employed.

    [Ref:04]

    Now, let us refresh our memories about the passing reference I made to the cost of looking for jobs, and the cost of mobility. On close introspection, one can deduce, that these factors are, indeed, taken into account, thus representing the non-employed, when arriving at the 'natural rate of unemployment;' or at least, the inference thereof.

    So who are the beneficiaries of inflation, and who are the losers?

    [Ref:05]

    So we see, that banks, who are loaners (or money lenders), do have an interest in keeping the inflation low, in order, not to make losses. Do note, that this is true in case of economies run on a Fiat Currency.

    Therefore, it can be summarized that banks will gain by keeping inflation low, and one way to achieve this is by keeping unemployment high, thus establishing the possibility that banks might be tempted to encourage or induce governments to strive to keep a section of the population jobless, and also discourage yet another section from seeking jobs.

    However, is this not a vicious cycle? Perhaps not. One explanation is that it is more of a cycle of repetitive crests and troughs, that happens over a temporal scale, while the economy, from the holistic view, continues to grow. This is shown by the curve below:

    [Ref:06]

    The readers are advised that many (perhaps all?) of the economists, and their theories, have been criticized. I am of the personal opinion, that one can get any number of mathematicians to agree, but it is virtually impossible to get two economists to agree. In a significant number of cases, IMHO, economists are best described, in less than generous terms, as charlatans, and their trade, economics, an art in debauchery.

    [HR][/HR]

    References:
    [Ref:01]: SparkNotes: Measuring the Economy 2: The Tradeoff Between Inflation and Unemployment
    [Ref:02]: http://www.stanford.edu/~rehall/Theory_Natural_Unemployment.pdf
    [Ref:03]: NAIRU
    [Ref:04]: 3 Lies About Jobs and the Unemployment Rate - Economic Intelligence (usnews.com)
    [Ref:05]: Who Gains and Who Loses from Inflation? - Economics
    [Ref:06]: Unemployment and Inflation
     
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  3. panduranghari

    panduranghari Senior Member Senior Member

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    Without trying to give more details right now (bit short of time) I will post 2 graphs which may add to this thread;



    [​IMG]

    [​IMG]
     
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  4. uvbar

    uvbar Regular Member

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    im not a economics person can somebody explain this
     
  5. Sakal Gharelu Ustad

    Sakal Gharelu Ustad Detests Jholawalas Moderator

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    Sorry for the late reply. Pmaitra-did you write this summary?

    By the way, the idea that you present here is pretty much in original form and is dead. Philips curve was just an observation before the 1970s. But the stagflation in the early 70s showed that this relation does not always hold as US had both high inflation and unemployment at that time.

    Given that this observation does not depend on sound fundamental principles(theory), people do not take the original Philips curve idea seriously any more. This relationship can be expected to hold in the short-run but would almost always break down in the long run.
     
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  6. pmaitra

    pmaitra Moderator Moderator

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    Yes, I did write the summary, but, if you see closely, there is a word 'possibility,' that acts as a disclaimer. :D

    In any event, the theories aren't mine, but you are no stranger to my opinion about most of these banks and financial institutions.
     
  7. Sakal Gharelu Ustad

    Sakal Gharelu Ustad Detests Jholawalas Moderator

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    ^^Nevemind.

    If you get time, read about Lucas critique....It changed macro big time.
     
  8. pmaitra

    pmaitra Moderator Moderator

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    ^^

    Thanks SKU. Let me elaborate further for everyone's benefit:

    Lucas Critique

    Now, this goes against Markovian theory, that the future can be predicted based on past experience. This is the fundamental axiom on which the entire subject of Machine Learning, which is so relevant in fields starting from economic forecasting to robotics, based on. In part, I do agree, and I have seen, most successful predictions can go only a small distance into the future.

    In essence, what Lucas is saying, is that, we cannot predict the future because we do not have the right data, or complete data, or the understanding thereof, from the past, which is why prediction fails. However, if one were to actually train algorithms, which can often be surprisingly simple (Occam's Razor), Lucas' criticism might be open to further criticism.

    Link: Lucas critique - Wikipedia, the free encyclopedia
     
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  9. Sakal Gharelu Ustad

    Sakal Gharelu Ustad Detests Jholawalas Moderator

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    I would do a correction here in the argument. It is not just about having the right(complete) data but taking into account the factor that people think and change their actions and beliefs upon policy change as shown in the above example of Fort Knox. Philips curve is dead because it took a macro relationship at face value without telling what people or firms would do if central bank pursued a policy known to everyone. For eg. Monetary shocks work only if the people do not know about it, otherwise everyone would update their belief about inflation.

    So, Lucas critique does not completely disown Markovian processes but suggests to have a theory incorporating actions of people to make sensible predictions. And that is why now there exists a micro foundation of macroeconomics.
    Microfoundations - Wikipedia, the free encyclopedia
     
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  10. pmaitra

    pmaitra Moderator Moderator

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    Ok, so there are two things; one is government doles or handouts given to the people (arguably, to get votes, but we can debate that later), and the other thing is the convergence of inflation and recession.

    On government doles:
    I am against "take from Peter, give to Paul," policy. It never works. I have always argued against such populism. I have also advocated raising the train fares, which all governments in India avoid, so that they don't lose votes. I respect labour, because I respect the hammer and the sickle. In other words, I respect a workers' paradise, that the founders of the USSR envisaged (good socialism); not a lazy man's paradise where scroungers take benefits out of hard working salaried citizens' taxes (bad socialism).

    There was one person in DFI, I forget who, who made a nice comment. Whenever the government gives subsidy at one place, it introduces a cess or duty at some other place. Eventually, it comes back into the people. Such policies never do any good in the long run.

    The best this is for the government to completely stay out of this dole-business, and refrain from this criminal doles-for-votes policy, a policy of largesse, a policy of living off the state's teats.

    On convergence of inflation and recession:
    I have lived through inflation and recession in the past 4 years of Obama's Presidency, but I'll let @panduranghari explain this phenomenon in details first, before I chip in.
     
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