With the unemployment rate coming in at 6.8% in the June quarter, the unemployment rate has been “persistently high”. There are three broad mechanisms we can “blame”this on:
- A “supply shock” across the economy (eg high fuel prices, financial crisis)
- A requirement for a reorganisation in the skills needed in the labour market (eg the permanent part of the drop in demand for NZ retail, NZ manufacturing)
- A “lack of demand” (insufficient monetary policy loosening).
We can all paint our own pictures that appropriate blame between these factors – but ultimately I’m not going to do that.
Instead I will point out that there is no where here that arbitrary government spending helps – and then I will point out three ways that government policy can “automatically lean” against these problems.
You see, an increase in government spending based on debt stimulates “demand” insofar as monetary authorities do not respond to it. They do not help to buffer NZ from supply shocks by creating new goods and services, they just work on that “demand side”. So as long as our central bank is doing a good job (and our central bank is doing a pretty good job for all intents and purposes), there is nothing the government can add here.
However, what things can the government have in place that help out:
- A safety net that helps to limit the welfare cost of losing your job
- Countercyclical investment: So the government invests in infrastructure when it is cheap and easy to finance – they stick to a “long-term plan” of infrastructure … just time more of it to happen during lean times.
- Training and skill guidance: When there is a “reallocation”, wages will go up more in some sectors than others to signal there is scarcity – however in the modern economy people need a skill set to do this, and investing in this is a risky endeavor. During a slow down this problem is especially acute – as firms are unwilling to invest in building employees skills. As a result, if the government is going to spend, this seems like an appropriate place. Such a view should be seen as structural policy, and any help during a recession would be automatic rather than legislated at the time.
Lets not be like policy makers in other countries where we fight over budgets without thinking about “why” the policies will work. Lets take this framework and run with it – like we suggested on this blog in 2009 (*, *) …