In one of my earlier posts “Is it the call to another Great Depression?” I mentioned how the easy monetary measures of Federal Reserve lead the US economy toward the Deflationary situation and suggested that the Black Man’s government should adopt easy fiscal measure to overcome this alarming situation. One of my friends posted me a comment on that article. In fact in response to that comment I was forced to write this new post.
Let’s take the things one by one. We know that US economy is facing a very high unemployment rate (up to 9.5%). Professor Arthur Okun conducted an empirical study and concluded that an increase in unemployment rate by 1% reduces the Real GDP of by 2%; his observation is given the name of Okun’s Law. So the government has to control unemployment rate by deficit spending and many economists recommend deficit spending to end recession, especially a severe one.
When the unemployment rate is high, an increase in government spending creates a market for business output, creating income and encouraging increases in consumer spending, which creates further increases in the demand for business output. This leads to increase in Real output and the employment also increases. Increased demand further leads to increased size of the market, due to government deficits; it further stimulates the economy by raising business profitability, which encourages private fixed investment in factories, machines, and the like to rise.
When the unemployment rate is high, an increase in government spending creates a market for business output, creating income and encouraging increases in consumer spending, which creates further increases in the demand for business output. This leads to increase in Real output and the employment also increases. Increased demand further leads to increased size of the market, due to government deficits; it further stimulates the economy by raising business profitability, which encourages private fixed investment in factories, machines, and the like to rise.
In the United States, during Vietnam-war era deficits encouraged inflation and at that time the unemployment rate was ideally low. Thus economy has inbuilt capability of recovering all that needed is the implication of the right decisions at the right time.
