Stimulus doesn’t get unemployment figures down

Here is an interesting graph from the Economist “Free Exchange” column. What the article states is that all these stimulus actions haven’t led to any sort of growth but higher levels of unemployment – see graph.

There has been many research papers as to why this has happened. Here are some of the findings from them:

1. One school of thought is that a high unemployment rate is structural and immune to the stimulative effects of monetary policy.

2. That the US Fed commit to keeping policy easy until the economy reaches a particular target, such as nominal GDP (ie, output unadjusted for inflation) returning to its pre-recession path.

3. The Bank of England is doing by providing subsidised credit to banks that lend more.

4. Monetary easing usually works by encouraging businesses and households to move future consumption and investment forward to today. But it also has “redistributive” effects. For example, low short-term interest rates redistribute income from depositors to banks, which allows them to rebuild capital and encourages them to lend more.

5. Raising banks’ profits has not done much to restart demand because the real problem is that indebted households cannot or will not borrow. There is evidence that retail spending and car sales have been weaker in states that entered the recession with higher household debt.

With the Fed now looking at QE3 and the ECB discussing a resumption in purchases of bonds of peripheral euro-zone members one wonders if “more of the same” will have any impact on unemployment.

1 thought on “Stimulus doesn’t get unemployment figures down

  1. Simon

    I have a sure fire way to economic growth. Compulsory acquisition demolition and reconstruction of a city’s CBD. Trouble is it only works if it is paid for by insurance. Things really start to rock if you add in approximately 10,000 new houses, replacement of 50% of infrastructure and cause almost every household to redecorate.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *