Everyone knows that the economy is in freefall and that unemployment is high, but it is not immediately clear why. Some blame regulation or taxes, while others blame a lack of spending or claim it is due to the absence of investor confidence. The problem is that unemployment is inherently complex and has no single cause. Still, it is possible to understand why unemployment is so high by looking at it with a broad scope, and this understanding can be useful when dissecting policy decisions or choosing how to invest, vote, or manage one’s business.
At the heart of all unemployment crises is a lack of demand; that is, the demand for products and services it not high enough to merit more hiring by production and distribution companies. This is a vicious cycle that feeds on itself: as unemployment rises, layoffs increase. The unemployed have less money to spend and therefore demand fewer products and services, which in turn leads to more people being laid off. This is why some countries with exceedingly high unemployment (usually in the third world) can collapse completely—without intervention from the government and private sector to create demand where none exists, unemployment increases at an exponential rate.
How Did Demand Drop?
So how did demand get so low? Much of the problem is owed to the 2008 housing crisis. Because housing prices were heavily inflated from 1990 to 2008, investment banks and industry invested heavily in both these real estate properties and the loans that allowed people to purchase them. When the bubble burst, billions of dollars literally disappeared, as they were invested in financial products that turned out to be worthless—the houses and loans the loans used to purchase them were inflated to many times their actual value. As such, companies and individuals all over the world saw their savings and working capital disappear overnight, forcing them to pull back on spending.
What Can Be Done About It?
When such a crisis occurs, governments have historically stepped in to replace the absence of private demand by funding public projects. The grandest example of this was the New Deal work program of the 1930s, in which the United States government spent billions hiring the unemployed to do everything from building roads to painting works of art. This was done in order to revitalize the economy by keeping them employed and thus providing money to spend on the private sector.
The problem with the current situation is that—unlike in 1932—there is no political will for such massive projects. The vast majority of bailouts in America and Europe were given to the same financial industries whose foolish investments caused or deepened the crisis, and very little of it went to lasting infrastructure or employment programs. Additionally, as most modern nations found themselves massively in debt from the Iraq and Afghan wars, they simply did not have the money available to pay for such immense programs.
What Can I Do?
So what can you do about this crisis? The first thing you can do is to vote for candidates who advocate policies which focus on employment, infrastructure spending, and revitalization of private sector business. Those who advocate only for social change, austerity, and further bailouts for the financial industry actually end up doing more harm than good. Additionally, you can personally help increase demand by spending and saving wisely, and shifting your money from investment banks that gamble on the stock market to local credit unions that put money into loans for the purchase of goods and services in your local community.
Jennifer Carrigan writes for www.medicalcodingandbillingcertification.net where you can find a program to become a medical biller and coder and hit the job market running.
Image courtesy: FreeDigitalPhotos.net
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