Lost HC Investment

The idea of a loss in the growth rate of one's human capital (resulting from the unemployment rate) should concern young people, especially.

https://www.youtube.com/watch?v=-3XsHMOEQGc

Costs of Unemployment

In the last post, I mentioned some negative effects from unemployment on individuals, households, and society.  To be more specific, these costs can be broken down into three major categories:

Economic Costs:
In terms of the entire economic system, unemployed resources result in a loss of output (real GDP), income, and talent.  The output/income gap (difference between actual GDP and full-employment GDP) widens as unemployment rises --- recall Okun's Law.

Social Costs:
An indirect effect of unemployment is represented by the poverty rate, the crime rate, the murder rate, the suicide rate, the divorce rate, the admission rate to mental hospitals, etc., all of which have been shown to be positively correlated with the unemployment rate.  

Individual & Household Costs:
Idle resources can always be put back to work lowering the output gap, but for the individual, the loss is much more damaging and long-lasting.  It's not just income, or confidence that's sacrificed, but valuable work experience!  On average, the experience* that's foregone while the individual is idle or even underemployed will never be recovered.

* Another way of thinking about this foregone experience is that the opportunity cost of unemployment  represents the loss of one's potential human capital investment. 

JOBS!!!

What's the most important idea that's tied to the economic growth rate --- JOBS!!!

                                                                                 Source:  Google Images

If we lived in a more "self-sufficient" economy, then not being part of the labor force would be somewhat manageable.  However, given that we can't just "live off the land" -- though many of us would probably find that lifestyle fascinating -- if you want to be able to participate in a modern economy, then you must work.

Therefore, anything that prevents individuals from having a job (whether it's cyclical, frictional, structural, etc.) so that they can provide for their families is a critical issue for individuals, households, and society.

Name that Graph!

With respect to individuals and communities, stabilization policy is not only a kinder approach, but the goal is to "smooth out" business cycles, make recessions less severe and that not only helps private citizens, but businesses too!

So, if deficits increase automatically during recessions, along with the unemployment rate (and a host of other problems such as the poverty rate, the crime rate, the suicide rate, etc.) then the opposite should happen during times of economic growth.  So, in your opinion, how do we encourage growth?

Some of you might recall the following graph:


                                                          Source:  Google Images

Stabilization Policy

The "stabilization programs" mentioned in the 8/4/13 post (i.e., taxes and transfer payments, especially on programs such as unemployment compensation) are meant to prevent consumption from falling dramatically during recessions as a result of increased unemployment.  The rationale is basically this:  If aggregate demand can be stabilized (via consumption) then households won't experience as much uncertainty and stress, as they would in the absence of stabilization policy, the recession won't be as severe, etc., etc., etc..  

However, this type of nondiscretionary, stabilization policy, does automatically expand deficits as well as the national debt but the trade-off is perhaps a more balanced approach towards our nation and communities than with a free-market, laissez-faire, "survival of the fittest" philosophy.

* Deficits Rising Automatically?

How and why does the federal budget deficit automatically rise during a recession?

1.  Unemployment rises during recessions.

2.  With more people unemployed, there are less taxpayers and less tax revenues collected by government.

3.  Transfer payments rise on government programs such as unemployment insurance, welfare, student grants, etc.


Need an example?  Just google why Detroit is going bankrupt.

Paradox times 2

Referring to the Jerry Seinfeld quote below, how is the economy any different?

Think back to the Paradox of Thrift mentioned in the 7/14/13 post on "Effective Demand" .....
The paradox implies that more saving will actually hurt the economy, causing national income to fall, and ensuring that households (in the aggregate) will earn less and thus, save less. The intent to save more (i.e., consume less, pay off debt, etc.) means that aggregate saving falls so people, in general, end up saving less, thus the paradox.

It's the same story with austerity programs. The intent to reduce the deficit (by raising taxes, lowering government spending, or a combination of both) will reduce aggregate demand/spending and hurt the economy by causing national income (and output) to fall. Since deficits automatically rise during recessions*, policies to reduce deficits and debt will actually cause the deficit to rise.  Same paradox!

* see post above