With a new round of November elections on the horizon, it is an appropriate time to reflect upon the state of the economy and the performance of our elected representatives.
According to the Bureau of Labor Statistics, the official unemployment rate for the United States during the past four years has mostly fluctuated between 8 and 10 percent. Pennsylvania has fared slightly better between 7 and 9 percent, with the Harrisburg-Carlisle area between 6 and 8 percent.
Voters should ask themselves: what policies are the Democrats and the Republicans proposing in order to improve the economy?
One area of agreement between the political parties is the need to reduce the deficit. The reasoning is as follows:
Everyone knows that if a household or a business doesn’t get its finances in order, bankruptcy is a very real possibility. Therefore, just like a household or a business, the U.S. government should also get its finances in order.
This comparison is flawed.
The U.S. government is unlike any other entity in the United States because of one simple fact: it controls the printing press for dollars. Quite literally, the U.S. government has the ability to create an unlimited amount of dollars. Our elected representatives talk about the U.S. being broke, but this is nonsense. The entity that has the ability to create an unlimited amount of dollars can never run out of them.
It is worth mentioning that although the U.S. government technically can create an unlimited amount of dollars, that doesn’t mean that it should. The stability and security of the dollar is one of the most important responsibilities entrusted to the U.S. government.
Most people seem to recognize that if the U.S. government were to create too much money, it would have negative effects on the economy. But what most people do not seem to understand is that if the U.S. government does not provide enough money, this also has negative effects on the economy. Currently, a shortage of dollars is directly related to our persistent high unemployment. To understand why this is the case, we need to consider why businesses hire new employees.
There are two main reasons why a business would hire new employees. One is in order to assist the business in meeting current sales. The other is in order to assist the business in meeting an expected future increase in sales.
In order for any business to succeed, money must be spent on whatever that business is selling. Business is all about sales, and sales are the result of spending. In order for sales to increase broadly throughout the economy, spending needs to increase broadly throughout the economy.
What the U.S. economy has experienced in the past four years is a decrease in spending broadly throughout the economy. The housing crash and financial crisis have caused people to cut back on expenditures. This has resulted in businesses experiencing a decrease in sales.
It is a vicious cycle. Less spending leads to fewer sales, which signals to businesses to lay off employees in order to cut costs, which leads to even less spending and fewer sales because less people are earning income, which leads to more unemployment, and so on.
The mechanism that prevents this vicious cycle from spiraling out of control is U.S. government deficit spending. This is when the U.S. government spends more than it collects in tax revenue. (Money creation!)
As employees are laid off from their jobs, deficit spending is automatically triggered in the form of unemployment compensation. This trigger is absolutely vital to halting the vicious cycle.
By injecting (new) money into the bank accounts of people who would otherwise have no income, unemployment compensation helps maintain a level of spending that is just enough to stabilize the economy, but not enough to significantly bring down unemployment.
Both the Democrats and the Republicans are proposing a decrease in deficit spending. Doing this would push the economy back toward the vicious cycle because it would pull dollars out of the economy. It would lead to less spending, less sales and more unemployment.
Contrary to what we hear from both political parties, what the U.S. government should be doing is lowering taxes to give people more money to spend and increasing deficit spending, for example, by providing states with the funds to meet their budget shortfalls. There is no need for states to have to make cuts when the U.S. government has the ability to provide the necessary funds.
Both lowering taxes and deficit spending increase the amount of dollars in the economy. Both options lead to more spending and sales.
It is a virtuous cycle. More spending leads to more sales, which signals to businesses to hire more employees and/or invest in expanding business operations, which creates more jobs and therefore more people earning income, which leads to more spending and more sales, and so on.
The way to keep this virtuous cycle going is for the U.S. government to ensure there is enough money in the economy to keep spending high enough to keep businesses busy.
The potential downside in creating new money is possibly creating too much. This can result in inflation, where the price of most things we purchase increases. The U.S. government has the tools to rein it in. The process is the exact opposite of what needs to be done to stimulate the economy. The U.S. government can slowly raise taxes and/or decrease government spending, both of which remove dollars from the economy.
There is no exact taxation rate and level of deficit spending that is ideal for all times. The conditions of the economy change. We need elected representatives that understand this and keep a constant eye on the goal of low inflation and low unemployment.
Currently the U.S. economy desperately needs more dollars. Businesses will not hire many of the millions of unemployed people until increased spending and sales indicate that it is a wise investment.
It is the responsibility of our elected representatives to enact policy that will provide these dollars to encourage more spending throughout the economy. Until that happens, the U.S. economy will continue to slowly muddle along with persistent high unemployment. Unfortunately, both the Democrats and the Republicans appear determined to do the opposite of what is needed.
Jonathan Krajack is a Carlisle native pursuing an M.A. Economics at the University of Missouri-Kansas City.