Tuesday, May 24, 2011

Contractionary policy in times of high unemployment: pain with or without a purpose?

I always enjoy having a look at the latest issue of The Economists' Voice, a unique e-journal of short articles, comments and letters.
   In the first issue of 2011, Barbara Bergmann has a brief letter about Brad DeLong's column "Pain without Purpose". In his piece, DeLong admitted that he could not understand why so many people in North America and Europe want to prolong high unemployment with contractionary policies. He writes:

when you listen to the speeches of policymakers on both sides of the Atlantic, you hear presidents and prime ministers say things like: “Just as families and companies have had to be cautious about spending, government must tighten its belt as well.”And here we reach the limits of my mental horizons as a neoliberal, as a technocrat, and as a mainstream neoclassical economist. Right now, the global economy is suffering a grand mal seizure of slack demand and high unemployment. We know the cures. Yet we seem determined to inflict further suffering on the patient.

   Bergman responds with the hypothesis that "The Pain Has a Purpose, Namely, Higher Profits". Here's an excerpt:

1. The business community has considerable influence on what governments do and don’t do.
2. Globalization has decreased the concern that managements of large corporations used to have for the well-being of the people in the high-wage economies.
3. The prolonged high unemployment is having the effect of putting downward pressure on wages in the high-wage countries. It is also increasing productivity, as the remaining workforce is being worked harder.
4. That will likely result in higher profits, both now and in the future.
5. The business community likes that.
Unfortunately, this seems like a plausible hypothesis.


1 comment:

  1. Their policies need to be updated. Times are changing and the economy is not getting any better.