TJP

Today very few, if any, politicians talk about full employment. Rather, it appears that they’ve decided that some citizens should remain chronically unemployed. This strategy or non-strategy has been applied to Central City communities for years and now elected officials are mainstreaming it.

Americans should require nothing less than full employment from elected officials. Moreover, they should require that these officials provide a step-by-step plan to achieve the goal of full employment.

As far back as 1967, economists, such Abba Lerner, knew that full employment could be maintained without inflation by keeping the rate of effective demand not too small or not too large.

Today’s politicians claim that they can use fiscal policies to create jobs (improve effective demand). However, they fail to describe in a step-by-step fashion the process by which they can do so. Rather, they broadly argue that increasing (Democrats) or reducing (Republicans) government spending creates jobs. Thus, Democrats and Republicans propose contradictory arguments, without specificity for growing the economy and creating jobs.

Given a fixed supply of money, government spending can only reallocate jobs from the private to the public sector and it has to borrow or raise taxes to do so. Furthermore, government borrowing and higher taxes reduce investment and effective demand. Likewise, reducing government spending and taxes during economic slowdowns adversely affect demand, the deficit, and job creation.

According to Evsey Domar, in “Expansion and Employment,” if money and income remain fixed, the creation of new capital equipment would remain unused, substituted for old equipment or for labor. The Federal Reserve kept the money supply (M1) at approximately the same level from 2003 to 2008. In essence, it restricted income.

If income is not increasing, demand is anemic and businesses will not hire labor.

Unfortunate, politicians adhere to Say’s law. They believe that providing bailouts and easy money to banks and suppliers creates demand, instead of consumers. However, consumers’ outlays make up 60 to 70 percent of gross domestic product. Thus, it is income from consumers that drives demand.

Domar wisely noted, “…capital formation not accompanied by an increase in income will result in unemployed capital and labor.”

Real income (purchasing power) of American consumers has been eroding for years; wages have been flat in nominal terms and receding in real terms. And, rising energy prices, as well as the Federal Reserve policy of keeping money supply (M1) flat for long periods adversely affected consumers’ income.

Effective demand could increase if the cash funneled to the banking system was used to provide loans to small business and consumers.

Apparently, the Fed is still fighting inflation. Thus, it continues to pay interest on bank reserves, as well as keeping interest rates low; both strategies create disincentives for banks to lend to the public. And, as long as banks constrain lending to small businesses and the public, the recovery will be long and unemployment will remain high.

The public can reverse this process by electing third party candidates committed to reforming the Fed and the existing uncaring political duopolistic system that restricts American output.

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