Unemployment: Keynesian Ideas and Fiscal Policy

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Fiscal policy, as we know it today, is meant to mitigate unemployment and stabilize the economy through aggregate demand. Despite dismal unemployment numbers, politicians and policy-makers continue to use and be optimistic about the effectiveness of fiscal policy in this regard. Policy as we have seen over the past five years has had dismal effect on the unemployment numbers we are seeing today. It seems we need a policy that will tackle lagging aggregate demand as well as the employment problems. A direct-job creation effort will work to create the differences in aggregate demand and effective demand creating equilibrium and filling the void that the current Keynesian fiscal policy leaves. Keynesian Ideas The origins of many ideas seen in fiscal policy come from John Maynard Keynes a revolutionary economist who tackled the idea of aggregated demand through Keynesian economics. Aggregate demand is the demand for gross domestic product or goods and services that the country has to offer. It is represented by the formula GDP=AD= C + I + GS+ X or (C) Consumption, (I) Investment, (GS) Government Spending, (X) Net exports. Fiscal policy in essence is using tactics such as government spending and tax cuts in order to affect the right side of this equation and increase aggregate demand. The general agreement across Keynesian theory is that boosting aggregate demand is the precise thing to do when facing an economy with lackluster growth and on the shores of recession. Leading up to most recessions there is a significant reduction in demand for goods and services offered in the country. This lower demand leads to inventory reductions, lower production levels, layoffs and increased unemployment. In order to stabilize the economy, th... ... middle of paper ... ...y/jobless-rate-rose-to-73percent-during-government-shutdown-economy-added-204k-jobs/2013/11/08/f51fa1de-481f-11e3-b6f8-3782ff6cb769_story.html) National Economic Council. 2010, “Jobs and Economic Security For America’s Women.” October. Available at http://www.whitehouse.gov/sites/default/files/Jobs-and-Economic-Security-for-Americas-Women.pdf Plumer, Brad (2013). The U.S. labor force is still shrinking. Here’s why. Retreived from Tcherneva, P. 2011. “Permanent on-the-spot job creation—the missing Keynes Plan for full employment and economic transformation.” Review of Social Economics, forthcoming. Tcherneva, Paulina. 2011. “Fiscal Policy Effectiveness: Lessons from the Great Recession.” Levy Economics Institute of Bard College.
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