Open Left

D'accord

What creates unemployment? When nominal aggregate demand is insufficient to purchase all the goods and services that would be offered with the economy operating at full capacity an output gap results and unemployment rises as businesses lay off workers as they contract production to reduce supply to adjust the lower level of demand.

The purpose of government spending is twofold. First, the government must either spend or reduce taxes when demand for goods and services falls short of what the economy is capable of producing or an output gap and unemployment will result. In a perfectly flexible economy, the elasticity of supply and demand would reset prices and wages automatically, but this is just on the case with a modern economy where prices and wages are "sticky."

Secondly, according to the preamble of the Constitution, one of the purposes of the government it constitutes is to "promote the general Welfare." This has been interpreted to mean that the government shall undertake to provide what promotes the general welfare, i.e., advance public purpose, in specific areas, when the private sector is either incapable or uninterested in doing so, and also assisting the private sector as needed. There is never a reason to just spend in order to spend. Of course, spending should be worthwhile and it is a just a conservative presumption that spending is not worthwhile and wasteful. However, the same result can be accomplished by reducing taxes, so the government can always increase NFA that way, as Warren Mosler suggests here, where he recommends a payroll tax holiday along with a $500 per capital block grant to all 50 states, most of whom are tanking due to falling revenue.

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by: tjfxh @ Tue Jan 26, 2010 at 11:43:18 AM CST