Monday, October 25, 2010

Arguing for Austerity

Those who claim that stimulus spending in the US will only create inflation because unemployment is "structural" and not demand-driven need to look at the following table by Mike Konczal on the blog new deal 2.0:

This shows that unemployment is widespread, among all age groups, and among all education levels. A "structural unemployment" problem would be one where the 1960s clerk typist pools disappeared as personal computers allowed supervisory staff to do their own communication. In this situation demand for typically younger workers with modest education would spike as these people were forced to change careers. That's structural. But with the Great Recession unemployment is up across the board.

Austerity makes no sense in this environment. It was tried in 1937-38 when FDR was convinced that recovery was underway and that he had to head off inflation by reducing deficits. Read the Wikipedia article on the Recession of 1937-38 to get details..

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