Cyclical Unemployment – Definition, Causes and Cure
February 12, 2025
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All over the world, governments are held accountable for the unemployment rates prevalent in their country. It is as if, the government’s main duty is not to govern but rather to provide employment to every willing person in the country. Therefore, whenever unemployment rears its ugly head, governments find themselves under increasing pressure to change the situation or else face the wrath of the public. In the past century or so, governments have resorted to a technique called government spending to achieve these objectives. In this article, we will take a closer look at what government spending is and what are its pros and cons.
To solve the problem of unemployment, we need to reiterate its root cause. Unemployment does not happen because of a change to the factors of production. The factors of production are all there, unchanged. It is the market sentiment that really causes unemployment. More and more people fear job loss and this fear turns into a self fulfilling prophecy. Fear of job loss results in spending cuts. Spending cuts are followed by production cuts and then by the dreaded job loss. The idea is to reverse the process at the stage of spending cuts. The idea is to raise the market sentiment and prevent the self fulfilling prophecy from becoming true.
In most countries, governments are the single largest consumer in the country. Government spending accounts for 30% - 40% of the GDP of many countries in the world today. Hence, governments have a large influence on the spending patterns and can alter them. Even in countries where governments do not interfere much with the economy, they certainly have powers to legislate laws and do so if they see fit.
Therefore when the negative sentiment in the market begins to rise and people cut their spending, governments have the power and the ability to counter these negative sentiments with their own spending. The size of the government ensures that it can more than compensate for the spending cuts undertaken by the individuals.
Hence the spending cuts by the individuals are counterattacked by spending rise by the government, keeping production and consumption constant and ensuring no job loss.
This approach to increasing government spending has become wildly popular in the past couple of centuries because it has certain merits. Let’s first discuss the merits of this approach:
Even though many economists believe that unemployment can be controlled by government spending, we still have unparalleled levels of unemployment in the world. Developing countries like the United States and Europe are facing unprecedented levels of unemployment. The reason behind this is that government spending too has certain drawbacks. Let’s discuss them in this article:
The money is spent, not with the idea of creating a self sustaining economic system. Rather the money is spent to put more and more money in the hands of the consumers via wages, rents and profits. A combination of borrowing money and spending it on unsustainable projects is a recipe for disaster in the long run.
To conclude, government spending is theoretically a great way to counter unemployment and revive the economy. In theory, it seems like the method will work without any questions. However, as we have seen in practice there are a wide variety of issues that prevent this policy from being effective.
Also, it needs to be considered that the past is the best indicator of the future. In the past, countries like United States and Europe have extensively used government spending as a tool. This enables them to avoid unemployment in the short and medium term. However, as it turned out, they were just delaying the inevitable. Hence, government spending should be seen as a short term fix, the overuse of which can cause long term problems which are extremely difficult and painful to cure.
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