Saturday, January 5, 2008

Unemployment Benefits and Costs

Back in the early 1990s, as the economy plunged into recession, the then Chancellor of the Exchequer, Norman Lamont said in the House of Commons - 'Unemployment is a price worth paying for lower inflation.' It was a similar sentiment shared by Mrs Thatcher in the 1981 recession. Yes, her policies were causing unemployment, but, she would claim it was an inevitable price for dealing with the inherited inflation. 365 economists wrote to the Times claiming her policies were flawed, but, the Iron Lady was not for turning. Unemployment stayed close to 3 million until 1986.

But, in this recession, as unemployment continues its remorseless rise towards 3 million, there is a general consensus that this is a heavy price to pay for a credit boom and bust.

A good A Level economics question is - Discuss Policies to reduce Unemployment (15). The answer would be a mixture of supply side policies and demand side policies. But, the truth is that currently there isn't really anything the government can do to prevent unemployment rising towards 3 million. We have cut taxes, increased spending and lowered interest rates. We have even experienced a depreciation in the Pound, all of which in theory boosts demand.
In short there is nothing left. The government would not dare to borrow more in 2009, we've just about had our limit of fiscal expansion. Interest rates have fallen sharply and could fall to 0% this year. However, the depth of the downturn means the usual policies just aren't working. At best there will be a long time lag before growth restarts. One thing is for sure, the first sign of growth will be greeted with relief by many.

To go back to the first statement the costs of unemployment are very obvious and pressing. But, it takes a real leap of the imagination to start seeing it in terms of benefits as Norman Lamont tried back in 1991.

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