Unemployment refers to people not employed but actively looking for work, so a fall does not necessarily mean that they have found work, but that they have actually stopped looking. Clearly, this is even worse than unemployment. Sadly, it appears to be the case: “The number of people neither employed nor looking for work – not included in unemployment figures – was up to 21.2% of the population. That was the highest rate since August 2007″*. This is definitely an indictment of Labour, not a vindication; we’ve gone backwards.

Regardless, the fiscal stimulus: it was simply unnecessary. Anything that fiscal policy could theoretically achieve could be achieved much faster and more efficiently with monetary policy. That would also result in fewer long term problems (e.g. the effect of a higher national debt on growth). The reason the government chose to use fiscal policy is that it allows them to fund their pet projects; there is no economic justification.

* http://news.bbc.co.uk/1/hi/business/8469648.stm

This article is so amazingly confused I’m not sure where to begin.

Things aren”t helped by the fact it’s totally unclear what’s being argued for.

But let’s start with the claim that Keynesians think that unemployment is a “symbol” of a lack of “too little demand”.

Let’s at least have accuracy. Keynesians think (to carricature for simplicity) that unemployment is caused by low levels of aggregate demand.

Scenario 1 (pre-recession): AD is sufficiently high that 950,000 of our hypothetical working population of 1 million have full time employment.

Now imagine AD falls (i.e. we move into recession)

Scenario 2: AD is now at a level such that only 700,000 out of our 1million are employed full time. But there is (let’s imagine) no part time work offered.

Scenario 3: AD is now at a level such that only 700,000 out of our 1million could be employed full time. HOWEVER, if 100,000 of those people work part-time, let’s assume that this enables another 100,000 to work part time too, because the first part-timers wouldn’t get all the work done that was being demanded. Thus we’d have a workforce of 800,000 employed – as oppose to 700,000 – but 200,000 would be working part time.

Let’s imagine scenario 3 obtains. Notice that unemployment is still a product of AD. Notice that unemployment has gone down vis-a-vis scenario 2 because 200,000 people are working part time, instead of none, meaning total employment clocks in at 800,000 rather than 700,000. Notice that in both scenario 2 and 3, unemployment is still higher than in scenario 1, when AD was greater.

Now I’m not arguing that Keynesians/Keynes are right about unemployment being a product of AD. Maybe they’re wrong and it isn’t.
What I am trying to say is that statements like this:

“If part-time work has been used as a means of curbing unemployment, then naturally it is safe to assume productivity won’t increase any more than if half of those numbers were all fully employed, so therefore it is wrong to assume that unemployment in itself is a marker of too little demand”

Are pretty obviously confused, and can’t be used to so quickly dismiss Keynesian thoughts about unemployment. And not just because Keynesians don’t think that unemployment is a “marker” of too little demand but a result of too little demand. Which is a pretty basic thing to get right. So basic that even I spotted it straight away, and I haven’t studied any economics for 5 years.

You can’t just infer from increased headline employment figures caused by more people taking part time work that unemployment is not a product of Aggregate Demand. I mean, for crying out loud: no doubt there’s problems with Keynesianism, and the economists can explain those to us when they come along. But this is article just confused.

Sorry, just to correct myself slightly:

Of course if unemployment is a product of low AD then unemployment will be a “marker” for or “symbol of” low AD.

My point is that a) unemployment being a “symbol” of low AD isn’t the interesting and important claim that Keynesians make and b) it reverses the direction of fit of interest to talk of Keynesians seeing U as a “symbol” of low AD; that would be to imply that Keynesians are somehow interested in AD for it’s own sake, and simply use U as a proxy for it – when obviously what Keynesians are interested in is unemployment, what causes it and how to alleviate it – which means they’re interested in the contention that U is a result of low AD, and what needs to be done to change U levels is boost AD, artificially via fiscal stimulus if necessary.

But again: to note that unemployment figures have fallen because more people are part-time employed isn’t an indication that Keynesian contentions about employment are wrong. It’s simply an observation that more people are working part time.

@1

That’s a success for Labour isn’t it? Get people out of work, out of looking for work, and onto a life of state handouts. Lots of votes to be had when people are reliant on your for their income and livelihood.

I agree the article is a bit confusing. What Germany says and what they actually do are two different things. Steinbruck publicly opposed fiscal stimulus but as The IMF figures show their fiscal stimulus for 2009 was one of the largest in the G7. The UK stimulus was quite modest. Partially because of the dire state of the public finances but also due to Governor King’s straying into the fiscal policy territory at the Treasury Select Committee before the London G20 meeting.

It is very difficult for any government to get electoral benefit from a fiscal stimulus. They can rightly argue that things would have been even worse in the economy in the absence of the stimulus. However, this argument might be accepted in the City and academia but will not resonate with the public. They just see headlines about the public finances and believe the government in such circumstances should act like a household and stop spending.

@ 1. To imply that there was a choice between fiscal policy and monetary policy is nonsense. They were and are still trying to use both. With the velocity of money collapsing monetary policy loses traction at the zero bound as nominal rates can’t go negative. Hence the need for the Bank to expand their balance sheet through QE. The economy was in a liquidity trap so monetary policy was limited. For evidence of the liquidity trap just check out the explosion of bank reserves that were piling up at the Bank of England. The only other monetary measure that they could have used is bought more corporate bonds in QE rather than concentrating on the Gilts market. However, that was for the BoE MPC to decide rather than the government. Moreover, there were lots of rights issues and corporate bond issuance 2009. The corporate sector used those funds for net repayment of more expensive bank debt. All classic indicators of a liquidity trap.

One could argue forever about changes over time in how the unemployed are counted. Therefore, the best thing to concentrate on is the employment rate. This recession has been remarkable in how well the employment rate has held up compared to previous recessions. The employment rate does not tell the whole story because there has been a shift to part-time work. Therefore, the employment rate is relatively steady but total hours worked falling.

However, consider this. The recession in the UK has seen a fall in output of around 6%, resulting in the employment rate contracting around 2%. The US has seen a fall in output of 3.2% and the employment rate contracting 4.5%. The public sector in recent years expanding can partially explain it but not the whole phenomena. The UK have not yet fiscally consolidated? Neither have the US. The most bearish explanation is UK employers are hoarding labour and 2010/2011 will see the mother of all spikes in unemployment. Alternatively the output data is wrong and the ONS are over-estimating the recession in the UK.

Compared to the devastating unemployment, bankruptcies and repossessions during the 80s and early 90s recession this one is quite different and no one is quite sure why.

@5. “To imply that there was a choice between fiscal policy and monetary policy is nonsense. They were and are still trying to use both.”

Did I say that they didn’t use monetary policy? My point is that it would have been much more sensible to have used solely monetary policy. Monetary policy is faster, avoids many co-ordination problems, and has less of a negative effect on long run growth.

“The economy was in a liquidity trap so monetary policy was limited.”

Monetary policy was limited by the liquidity trap, yes, but it was still effective. To quote the Ben Bernanke of the 1990s on Japan: “It is true that current monetary conditions in Japan limit the effectiveness of standard open-market operations. However, as I will argue in the remainder of the paper, liquidity trap or no, monetary policy retains considerable power to expand nominal aggregate demand.” There is simply no justification for fiscal policy, even in a liquidity trap; monetary policy could do the same job, but better.

There is simply no justification for fiscal policy, even in a liquidity trap; monetary policy could do the same job, but better.

Then you don’t know what a liquidity trap is.

However, as I will argue in the remainder of the paper

Ah. I hope you don’t mind, but I’m going to ignore your conclusions until you have some evidence for them first.

Inyourhouse – economic illiterate

Carl Packman – just illiterate

@Paul (2/3) I take on board what you say, but two things, firstly Michael Stewart – my source for this article – in his book on Keynes makes a note that a frequent misunderstanding of Keynes’ is that unemployment is a symbol of too little demand. Unfortunately, for whatever reason, my explanation of this was edited out of my article, so I should just iterate that I don’t think this is a fair judgement of Keynes (after being persuaded by Stewart’s book).

Which brings me to my second point, that you’re right about part-time work being an ‘observation that more people are working part time’. The misunderstanding of Keynes that leads to the opinion that more employment brings more productivity forgets that more employment could mean more part-time employment, which means that productivity won’t necessarily increase. The fact that this is a shoddy economic analysis (that the fact that not as many people are looking for employment could mean productivity is on the rise) is only testament to the fact that Keynes did not author it. My charge is against those who in Michael Stewart’s opnion have misunderstood Keynes.

@Paul (2/3) I take on board what you say, but two things, firstly Michael Stewart – my source for this article – in his book on Keynes makes a note that a frequent misunderstanding of Keynes is that unemployment is a symbol of too little demand. Unfortunately, for whatever reason, my explanation of this was edited out of my article, so I should just iterate that I don’t think this is a fair judgement of Keynes (after being persuaded by Stewart’s book).

Which brings me to my second point, that you’re right about part-time work being an ‘observation that more people are working part time’. The misunderstanding of Keynes that leads to the opinion that more employment brings more productivity forgets that more employment could mean more part-time employment, which means that productivity won’t necessarily increase. The fact that this is a shoddy economic analysis (that the fact that not as many people are looking for employment could mean productivity is on the rise) is only testament to the fact that Keynes did not author it. My charge is against those who in Michael Stewart’s opnion have misunderstood Keynes.

@7. “Then you don’t know what a liquidity trap is.”

Yes, I do. A liquidity trap is where the interest elasticity of demand for money is infinite (ie. the LM curve is horizontal); in other words, an increase in the money supply will not lower interest rates any further. Another way of expressing it (first said by Hicks, if I recall correctly) is that income elasticity of money is zero; it’s basically the same thing. In any case, a liquidity trap simply means that monetary policy cannot function through an *interest rate mechanism*. Direct quantitative easing still has an effect, as explained below.

“Ah. I hope you don’t mind, but I’m going to ignore your conclusions until you have some evidence for them first.”

The velocity of money is dependent on part of real cash balances (M/P). An increase in the money supply through quantitative easing will (in the short run, before prices adjust) increase real cash balances, and thus increase the velocity of money. As per the equation of exchange, if M*V has risen, and we’re holding P fixed in the short run (or at least assuming that it can’t adjust as quickly as the increase in M and V), then Y (ie. aggregate demand) must rise. This isn’t rocket science.

@8. “Inyourhouse – economic illiterate”

Care to explain why?

Even Keynes was skeptical regarding the existence of the liquidity trap.

“liquidity trap”

Isn’t that simply when lowering rates does not stimulate borrowing i.e. the private sector shows preference for saving rather than consuming and businesses see no need to invest in future production. It’s the pushing on a string analogy.

I think we are seeing that now in some sectors of business. When the govt bleats on about “banks not lending”, it is in fact businesses are not borrowing. With excess capacity why would investment be necessary.