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In order to participate in a nation’s economy, money is required for consumers to purchase goods and services offered. Most consumers earn money through employment, and the number of individuals in a nation that are employed has been an important measure of economic stability (Boone, Berston, & Kurtz, 2016).
The gross domestic product (GDP) is the measure of goods and services produced in a country during a year (Boone, Berston, & Kurtz, 2016). When GDP is increasing, the economy is in expansion mode.
When GDP is decreasing, the economy is in a recession. Economic growth occurs when the GDP increases over time. When economists use the term “economic growth,” they are normally referring to sustained increases that occur over a substantial time period, rather than the quarterly changes sometimes discussed in the newspapers or on television (Boone, Berston, & Kurtz, 2016).
The unemployment rate is a measurement of the percentage of the workforce who are seeking work, but are not currently employed (Boone, Berston, & Kurtz, 2016). Unemployment has a variety of causes, and unemployment numbers are watched very closely. The U.S. Bureau of Labor Statistics issues a monthly employment report that describes the state of the U.S. economy based on employment statistics. The unemployment rate is calculated by dividing the number of unemployed workers by the total number of workers in the current labor force. An individual is considered unemployed if they do not have a job and have been actively seeking employment. When determining the unemployment rate, the statistic used is for workers who have looked for a job within the past four weeks (Khan, 2018).
When examining unemployment rates, there are three main reasons for unemployment that need to be considered. Frictional unemployment is short-term unemployment that applies to individuals who are members of the workforce, who are looking for new jobs. Recent college graduates who have not yet found jobs are frictionally unemployed (Boone, Berston, & Kurtz, 2016). Frictional unemployment is considered positive for the economy, as it creates a labor pool for expanding businesses. Structural unemployment is caused by a mismatching of work skills that employers are seeking with skills held by available members of the labor force. It can also be caused by location mismatches. For instance, there may not be any workers with the necessary education and skills available in the nearby area. Structural unemployment is not considered to be positive, however, it is acknowledged that it is a necessary part of a growing economy (Boone, Berston, & Kurtz, 2016). Changes in the business cycle can cause cyclical unemployment. Cyclical unemployment causes workers to be out of work for long periods of time because of a cyclical contraction in the economy, such as a recession or corporate downsizing (Boone, Berston, & Kurtz, 2016). When unemployment rates get too high, the government sometimes intervenes to try to create new jobs, especially if the increased unemployment figures are primarily due to cyclical causes.
When the government steps in to create jobs, monetary and fiscal policies are used. The primary goal of fiscal and monetary policy is to reduce or smooth out fluctuations that occur in the business cycle. Fiscal policy involves government spending and taxation decisions that are designed with the goals of controlling inflation, reducing unemployment, encouraging economic growth, and improving the general welfare of citizens (Boone, Berston, & Kurtz, 2016). Fiscal policies aim to change the total spending in an economy. One example of a fiscal policy was the American Recovery and Reinvestment Act of 2009, also known as “The Recovery Act” and “The Stimulus Bill.” The stimulus package was intended to end the economic recession by encouraging consumer spending and creating new jobs. Other goals were to invest in education, health, infrastructure, and renewable energy. The stimulus package cut taxes by $288 billion, created jobs by providing $275 billion in federal grants, loans, and contracts, and it allocated $224 billion to extended unemployment benefits, health care, and education. Economists disagree about the effectiveness of the stimulus, but most agree that unemployment was lower by the end of 2010 than it would have been without the stimulus package. Fiscal policies can be quite effective in combating unemployment during recessions, if implemented correctly. The creation of public infrastructure projects, for instance, creates more new jobs, and thereby reduces unemployment numbers.
Monetary policy is more involved with government actions aimed at influencing the supply and demand of money, primarily through the utilization of interest rates (Boone, Berston, & Kurtz, 2016). The U.S. Federal Reserve, “The Fed,” controls monetary policy by buying and selling government securities, controlling interest rates, and managing reserve requirements by requiring the percentage of deposits that banks must maintain. Monetary policy can sometimes increase economic growth by keeping interest rates low, or by lowering interest rates. Unemployment rates can be affected by monetary policy because reduced interest rates encourage consumer spending, and increased consumer spending leads to the creation of new jobs.
A recession is a cyclical retraction in the economy that lasts for a time period of six months or more (Boone, Berston, & Kurtz, 2016). Frictional unemployment numbers usually decrease during recessions, as workers fear quitting their current jobs due to the lack of new job prospects. A depression is a more extreme or severe type of recession, in which there are repeated periods where the GDP falls. The most well-known example of a depression in United States’ history was the Great Depression, which began in 1929, and lasted through the 1930s and into the 1940s. During recessions, fiscal policy can be used to promote economic recovery. Typically, when an economic recession occurs, corporate profits begin to decline. As a result, many workers lose their jobs and become unemployed.
This situation causes the amount of income tax revenue and corporate income tax revenue that normally flows to the government to fall. Additionally, when workers become unemployed, their dependency on government programs, like unemployment insurance, increases. This increased dependency on unemployment insurance and other government programs results in more government spending. To help the nation’s economy recover from recession, the government sometimes creates new social programs, such as “The New Deal,” a program of President Franklin D. Roosevelt’s administration during the 1930s. Franklin’s deal was enacted with the goal of alleviating the suffering of the many unemployed workers. New government agencies were established, such as the Civilian Conservation Corps (CCC) and the Works Progress Administration (WPA), that were intended to provide emergency, short-term government aid, as well as provide temporary jobs for the unemployed workers in the form of projects in the national forests and construction projects.
During a recession, the government receives less money from taxpayers, and usually spends more money to bolster the economy. This causes money to flow from the government much faster than it flows into the government. This unbalanced flow creates a budget deficit. When the government continues spending during a budget deficit, and the expenditures are greater than the revenues the government is collecting, this is known as deficit spending (Boone, Berston, & Kurtz, 2016). British economist John Maynard Keynes developed the concept of deficit spending as a fiscal policy, though many argue that his ideas were merely already existing concepts that Keynes simply re-interpreted. (). Keynes felt that the primary role of deficit spending during a recession was to reduce rising unemployment rates. In his book, “The General Theory of Employment, Interest, and Money,” Keynes argued that a decline in consumer spending could be balanced by increased deficit spending by the government. He contended that government deficits could be repaid once unemployment rates returned to normal.
Some economists believe that the U.S. relies too heavily on the GDP as a measurement of economic growth and that alternatives that better reflect the economic situation should be implemented. For example, the measurement of jobs and unemployment is heavily focused on, but this measurement sometimes conveys a misleading or incomplete message (Marland, 2014). The GDP primarily measures market performance, and overlooks the complexities of social health, environmental sustainability, and income inequality (Costanza, 2014). Since World War II, most countries have used GDP growth as a primary policy goal, but this method lacks the ability to measure quality of life. When the GDP was implemented, it was a reasonable solution to solve the problems of the time: reducing unemployment and social conflict to prevent another war. The modern-day world is much different, and alternative progress metrics should be explored. “The successor to GDP should be a new set of metrics that integrates current knowledge of how ecology, economics, psychology and sociology collectively contribute to establishing and measuring sustainable well-being,” (Costanza, 2014, p.285).
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