Unemployment
Salı, 06 Kasım 2007UNEMPLOYMENT. In its most obvious sense, unemployment means being without a job. As an economic definition, however, this is inadequate. The term unemployment is one description of the economic condition of a society at a given time. Low unemployment means most of the labor force has steady work. High unemployment is an indication of an economy in recession, or worse. It means that a sizable percentage of the labor force is unemployed for a considerable length of time.
Unemployment figures for the United States are published monthly by the Bureau of Labor Statistics of the Department of Labor and by similar agencies in other governments. The figures cover every segment of the economy that can readily be measured. Some aspects of unemployment are more difficult to measure: underemployment, part-time work, and the underground, or barter, economy, for example.
Underemployment is a category that comprises a large variety of workers, including some farmers, construction workers, house painters, and others whose work may be seasonal or sporadic because of weather. It may also refer to employees of a manufacturing firm whose plants run on a less than full schedule because of an economic downturn.
Part-time work is sometimes a matter of choice, sometimes a matter of necessity. Many women with families, especially mothers of small children, choose to work part-time to augment family income. Some of these women would prefer to work full-time, but they must divide their day’s responsibilities between workplace and home. There are other individuals, men and women, who would prefer to work full-time but cannot find such employment again, probably because of unfavorable economic conditions. During good economic times a significant percentage of the labor force will add to their incomes by taking a second, part-time, job. This is usually called moonlighting, because such jobs have traditionally been evening part-time work after a full day at another job. Schoolteachers and police officers are among the types of workers who often moonlight.
The underground, or barter, economy is almost impossible to measure. Government statistics can only give estimates. The underground economy includes all those who work outside the official, visible labor market. They are paid in cash, goods, or services to evade income tax reporting requirements. An unemployed carpenter, for example, may do work for friends or relatives and be paid directly by them. Word of his abilities gets around town, and soon other people contact him. He can afford to charge less than competing carpenters who are in the measurable labor force and so he gets a good deal of work. The heavier the tax burden and the more onerous the government regulations, the greater will be the size of the underground economy. In Peru, for example, more than 50 percent of the labor force is in the underground economy; and if the government tried to undo the situation the economy would collapse.
CAUSES
There are three primary causes of unemployment: changes in the structure of economies, wage differentials, and government policies. Structural changes in economies will persist as long as there are economies. New technologies and diversity in innovation are among the factors leading to such alterations. International wage differences may make companies in high-wage countries noncompetitive. Government policies have existed as long as there have been national economies. Government policies are usually attempts to promote improved economic conditions, but they do not always have the intended effect.
Structural Unemployment
To say that economies have changed dramatically in the past 6,000 years is to note the obvious. But changes in the dynamics of economies always result in shifts of workers from one set of tasks to another, so unemployment is temporary. From the earliest emergence of civilization up through the late 19th century most employment was agricultural. In undeveloped countries most of it is still agricultural as much as 80 percent. Europe, and later North America, were the first places where farm populations declined in relation to the rest of the labor force though farm production did not fall; it actually continued to increase.
Changes in landholding policy in Europe took much farmland out of production, leaving thousands of individuals out of work. In time, most of these people found jobs in the factories of the Industrial Revolution. Many others, by the millions, emigrated to the New World. As industry grew, employment in agriculture diminished dramatically. Mechanization was in great measure responsible for this. Far fewer individuals can now produce much greater amounts of food.
A similar trend has emerged among industrial workers in the late 20th century. Whereas blue-collar manufacturing jobs accounted for one third of the labor force in the 1920s, the proportion had dropped to one fourth by the 1950s and to one sixth by the mid-1980s. Economists project the continuation of this downward trend in the coming decades until blue-collar labor will account for no larger a percentage of the work force than farmers do now less than 3 percent in the United States.
This trend does not mean that manufacturing is declining. The opposite is true, but its nature is changing. As in agriculture, productivity has gone up with fewer workers, accounting in part for the great decrease in union membership. Labor costs of production have dropped, partly because of automation. Manufacturing is rapidly becoming knowledge-intensive instead of labor-intensive. As this occurs, the old "smokestack industries," such as steelworking and auto manufacturing, are being transformed. The need for fewer workers means, of course, many people out of work. With blue-collar jobs disappearing, the workers will have to be retrained for new work; and those who hoped to become blue-collar workers will not have that option. Without appropriate training and adequate school systems, a social mismatch will result: many white-collar jobs for which there are not enough qualified workers and many low-skill workers for whom there are not enough blue-collar jobs.
Wage Differences
Largely because of organized labor, wages in Europe, North America, and Japan are quite high compared to wages in China, Indonesia, Taiwan, and Mexico. Yet the differences in products put on the market are minimal. Companies with global markets find they cannot compete with companies whose manufacturing is done in low-wage countries. The solution in the United States has been to shift manufacturing facilities overseas or across the border to Mexico. This helps the competitive position of companies but puts workers in the high-wage nation on the unemployment line. Employment rises, of course, in those nations that received the new facilities.
Government Policies
Structural changes to an economy are jarring, but they mean that the economy is adjusting to new conditions. When the adjustment has been made, the economy will run smoothly again. Government intervention in the economy is designed to soften the blows of change. Government intervention is also often designed to undo the problems caused by earlier failed policies. In both cases, relatively high levels of unemployment often result. Many economists argue that some of the policies that promote or prolong unemployment are welfare payments, unemployment compensation, the minimum wage, tax legislation, and trade regulation. (See also Business Cycle; Inflation.)
Welfare payments were designed to counter the problem of poverty. However, unemployment necessarily increases when money in the form of taxes is taken from the employed and transferred to a segment of the population that does not work. Welfare payments may also create disincentives to work. To counter the many criticisms of welfare, elected officials have implemented workfare programs, making the recipients of welfare do some work for the money they are given.
Unemployment compensation, while not entirely a welfare program, can also prolong unemployment. This has long been true in Europe, where payments to those out of work may have no time limit, or a very extended one. In the United States there has been a limit of 26 weeks. During the recession of 1990-92, however, Congress voted to extend the payment period, thus setting a precedent for future lengthy benefit periods. (See also Welfare State, section on Unemployment Compensation.)
Unemployment Compensation
Unemployment protection is less common than other welfare programs. It is mostly found in highly industrialized nations with developed labor markets and strong labor unions. Unemployment compensation is for individuals who have been separated from their jobs through no fault of their own. Such compensation is normally paid only for specific periods of time, usually less than one year. The programs require that the unemployed person be ready to accept a job, and they stipulate that the person must be involuntarily unemployed. Those who quit their jobs are usually ineligible.
Benefits do not cover all wages. They average between 50 and 75 percent. There is a tendency to set benefits to favor lower wage earners. Unemployment compensation is financed primarily by contributions from employees and employers and amounts to an insurance program. In Sweden, Finland, and Denmark the programs are operated by the trade unions, and they are voluntary.
Minimum wages are set by law at a fixed level. This has proved one of the most harmful economic policies adopted by governments, because it can affect unskilled workers negatively. If an individual new to the labor force is willing to work for three dollars an hour but the government mandates four dollars, a company may be reluctant to hire the person. Companies have labor costs, and they will spend their money where it will do the most good. A minimum wage draws a line between the skilled and the unskilled. If a company is forced by law to pay higher wages to the unskilled, its costs rise. This being the case, it will no longer be interested in hiring truly unskilled workers. It will seek out better-qualified employees at the higher wage. Although minimum wage laws are strongly endorsed by labor unions, the laws have no direct effect on union wages, which are always much higher. But the minimum wage policy succeeds in keeping the poorly schooled and unskilled out of the labor market and therefore out of competition for jobs held by union workers.
Tax policy. In 1990 the United States Congress passed a new tax law that, among other things, imposed a luxury tax on yachts. The effect of this provision, within a year, was the loss of about 19,000 jobs in the boatbuilding business. All tax policies have a direct bearing on business operations, usually by raising costs, potentially forcing layoffs. The controversial capital-gains tax raises the cost of capital formation by taxing returns on investment at high levels. Without capital investment no new jobs are created, and old ones may be lost. In Japan the capital gains tax is 5 percent; in the United States it was 28 percent in 1992. Taxes on savings also hinder investment, because individual savings provide the funds financial institutions use for lending.
Trade policy. There is usually a very close connection between jobs and trade policy. Protectionist legislation, whether through tariffs or import quotas, raises prices of imported goods. If those goods are raw materials or finished products needed by American companies, the ability of those companies to produce competitively is diminished. By seeking to protect one industry, legislation inadvertently damages other industries and their employees. For example, government protection of the sugar industry in the United States forces industrial customers such as candymakers to pay prices many times higher than the world level. This lowers competitiveness and contributes to unemployment. Extreme protectionist legislation, such as that adopted early in the 1930s, stifles international trade and leads to massive unemployment.
Full Employment Policy
The United States Congress, in passing the Employment Act of 1946, committed the federal government to policies designed to achieve full employment. This was in accordance with the economic theories John Maynard Keynes developed in his ‘General Theory of Employment, Interest and Money’ (1936). Keynes insisted that government could, by manipulating the money supply and spending policies, achieve a stable level of employment.
The Keynesian recommendations have proved to be flawed. Only by injecting large amounts of money into the economy can government induce employment. This works for a time, but it causes inflation. Eventually the inflation will bring on a recession and high unemployment, as the economy tries to squeeze out the distortions caused by government spending. By contrast, an economy freed from excessive government intervention will normally have a high and stable level of employment.
Reviewed by Murray N. Rothbard
INFLATION. In the 1970s the prices of most things Americans buy more than doubled. Such a general increase in prices is called inflation. Of course prices of selected goods may increase for reasons unrelated to inflation: the price of fresh lettuce may rise because unseasonably heavy rainfall in California has ruined the lettuce crop, or the price of gasoline may rise if the oil-producing countries set a higher price for oil. During inflation, however, all prices tend to rise.
Over the last 400 years there have been many periods of inflation. In the 16th century, when the Spaniards began bringing back gold and silver from the New World, prices in Western Europe moved upward as the supply of money increased. During the 19th century prices tended to go downward as food and raw materials became cheaper. After major wars such as the Napoleonic Wars and World Wars I and II, prices again moved upward. In the 1950s and ’60s a so-called creeping inflation occurred, when the general price level in the United States and Western Europe rose by an average of 1 to 5 percent each year. In the 1970s inflation increased until it reached as much as 13 percent a year in the United States.
Many countries have suffered from inflation more than has the United States. Israel had inflation of more than 100 percent a year in the early 1980s, meaning that the cost of living more than doubled every year. In Argentina inflation was greater than 400 percent in 1975 and averaged more than 100 percent each year from 1976 to 1982. The most remarkable inflation in modern times was the German hyperinflation of 1923, when people went to the store with wheelbarrows full of money to buy a few groceries. A similar hyperinflation occurred in Hungary after World War II.
Inflation has been defined as "too much money chasing too few goods." As prices rise, wages and salaries also have a tendency to rise. More money in people’s pockets causes prices to rise still higher so that consumers never quite catch up. Inflation can go on continuously year after year so long as the money supply continues to increase.
Continued inflation affects people in diverse ways. Those who live on fixed incomes, or those whose incomes increase very slowly, suffer most from inflation because they are able to buy less and less. Those who lend money when prices are lower may be paid back in dollars of reduced purchasing power. Banks and savings and loan associations generally lose from inflation. People who borrow money, however, may profit by paying their debts in dollars that have shrunk in purchasing power. Inflation thus encourages borrowing and discourages saving. It also leads people to buy real estate and durable goods that will keep their value over time. In the United States this tendency is reinforced by the tax system, which allows taxpayers to deduct property taxes and interest payments from their taxable incomes. If inflation continues for a long time, the country as a whole may begin to consume more and invest less as people find it more profitable to borrow than to save. In other words, inflation causes society to use more of its resources for today’s purposes and to set aside less for tomorrow’s needs.
Causes of Inflation
Inflation has many causes, but they all operate to raise the demand for goods and services beyond the capacity of the ecomomy to satisfy that demand. Often inflation follows a war, when the government has spent vast sums on military equipment and has not raised taxes enough to pay for it. Heavy government spending in peacetime may also lead to inflation. The principal reason why governments create inflation is that they are able to print money. When a government pays its bills by printing money rather than by raising taxes, the effect is to increase the demand for goods and services. If demand is already high, increasing it will only push up the prices of those goods and services.
But the government may not be the only player in the inflation scenario. Citizens, through their voting power, encourage the government to follow inflationary policies. In the United States special interest groups often exert pressure on Congress for programs that will benefit them at the expense of the treasury. Few taxpayers actually ask their Congressional representatives to raise taxes. Government deficits in themselves do not necessarily lead to inflation, but they make it more difficult to prevent inflation or to slow it down.
Another part in the scenario is played by people’s efforts to protect themselves from the effects of inflation. Consumers want their incomes to increase so as to keep up with rising prices. Those who belong to unions may put pressure on employers to raise wages, a factor that tends to force up prices still further. Those who lend money expect to be paid back in inflation-adjusted dollars. Retired people want their social security and other pension payments to increase with the cost of living. As inflation continues, people expect it to become even worse and try to compensate for it in advance. The simple expectation of inflation thus helps to keep it going.
Stagflation
In the 1970s many industrial countries experienced high inflation coupled with rising unemployment. The word stagflation was coined to describe this condition of rising prices and economic stagnation. Stagflation was brought about by a number of factors: (1) The price of oil trebled in 1973 and 1974 and doubled again in 1979 as the Organization of Petroleum Exporting Countries (OPEC) raised its selling prices. This led to steep increases in energy costs for industrial countries. (2) For a number of reasons output per worker grew more slowly in the 1970s than it had before. (3) Industrial countries were faced with a need to adjust their industries to the changing world economy, particularly industries such as shipbuilding, steel, and textiles. Old established industries in some countries were losing their markets to new competitors elsewhere, and their laid-off workers could not always find new jobs. (4) The labor force in the industrial countries grew rapidly during the 1970s; more women entered the job market as well as greater numbers of inexperienced male workers.
All of these factors helped to hold down output and raise prices, but their effects were made worse by the slowness of labor and management to adjust to changing conditions. Governments were also slow to do the unpleasant things that were necessary to combat inflation and make industries more productive. By the beginning of the 1980s, inflation was still at high levels in most countries. In Italy consumer prices rose by 17.8 percent in 1981, in France by 13.3 percent, and in the United Kingdom by 11.9 percent. In Canada the figure was 12.4 percent and in the United States 10.4 percent. Least affected were West Germany and Japan, where prices rose by 5.9 percent and 4.9 percent, respectively.
Cure of Inflation
Perhaps the most painful aspect of inflation is the measures that must be taken to overcome it. Essentially they involve reducing the pressure on prices. One way is to limit the rate at which the supply of money is allowed to increase, as the Federal Reserve authorities did in the United States beginning in 1979. Limiting the supply of money makes it difficult for businesses and consumers to obtain loans; it causes interest rates to rise; and it often creates unemployment. The American recession of 1980 to 1983 was largely the result of the Federal Reserve Board’s tight money policy, which was intended to stop inflation. While inflation fell from above 13 percent in 1980 to less than 5 percent in the first half of 1983, unemployment rose from about 7 percent in 1980 to more than 10 percent in 1983.
Price Controls
Sometimes governments attempt to prevent inflation by making it illegal to raise prices. This works best in wartime when the economy is being organized toward military goals. The United States government used price controls during World War II and supported them by rationing goods that were in short supply. Consumers were given coupons entitling them to buy limited amounts of essential goods in order to make sure that everyone got a fair share. Otherwise lines would have formed outside retail stores and outlets with only those at the head of a line able to purchase what they needed. When controls were discontinued after the war, prices rose rapidly for several years because of the excess purchasing power that had accumulated in consumers’ savings. But inflation in the United States never exceeded 15 percent in any single year modest compared with that of many other countries. In the early 1970s, when inflation began to exceed 5 percent a year, President Richard M. Nixon established price controls, but the experiment did not work well and was soon discontinued.
Price controls interfere with the free working of the economy. No government regulation can take account of all the complex changes that occur within different industries. Prices of some goods may be falling while those of others are rising; such changes often reflect differences in production costs. The straitjacket of controls prevents the economy from adjusting to such changes in relative costs.
How Inflation Is Measured
Inflation is a general increase in prices, but it is difficult to measure because the prices of different goods change by different amounts. One approach is to deal with a "basket," or selection of goods that most people buy. If such a basket costs $10.00 in December 1973 and $11.22 a year later, one can say that the rate of inflation is 12.2 percent (1.22 divided by 10). This is the method used in the Consumer Price Index (CPI) compiled by the United States Department of Labor. The CPI rose 12.4 percent in 1980, 8.9 percent in 1981, and 3.9 percent in 1982.
For some people inflation will be greater than for others. For those whose shopping list resembles the CPI market basket, inflation will not be the same as for those who buy a quite different assortment of goods. For example, if food is left out of the market basket, the CPI rose by 4.0 percent in 1982 rather than 3.9 percent. If energy is omitted, the CPI rose by 4.2 percent. If both food and energy are omitted, the CPI rose by 4.5 percent. If food, energy, and the cost of buying a home are left out, the price of the remaining goods in the basket rose by 6.0 percent.
A more complex way to measure price changes is by pricing all the goods and services produced in the national economy and comparing the total change from year to year. This is done by the United States Department of Commerce through its gross national product statistics. The so-called Implicit Price Deflator rose 9.3 percent in 1980, 9.4 percent in 1981, and 6.0 percent in 1982.
Disinflation and Deflation
The process of getting rid of inflation is sometimes called disinflation, which means a slowing down of the rate of inflation. This should not be confused with the term deflation, which is defined as a fall in the general level of prices.
Deflation occurs rarely in modern industrial economies. The last time a heavy decline in prices occurred in the United States was in the Great Depression of the 1930s. Between 1929 and 1933 the Implicit Price Deflator for all goods and services fell by 2.1 percent, while the prices of goods used for personal consumption fell by 3.8 percent.
Deflation also refers to a reduction in incomes rather than prices. The petroleum price increases of the 1970s had both inflationary and deflationary effects: in the United States, for example, they raised the general price level while at the same time reducing incomes. Much of the former purchasing power of Americans was diverted to petroleum-exporting countries, especially those in the Middle East. (See also Business Cycle.)
Francis S. Pierce
EUROPEAN UNION. known as the European Communities (EC) or the Common Market, the organization for the economic and political integration of Europe took the name European Union (EU) on Nov. 1, 1993. This union was the result of nearly 45 years of effort by the nations of Western Europe. After the terrible destruction caused by World War II, European leaders believed it was essential to forge new ties of economic and political cooperation to achieve prosperity and to prevent a recurrence of war. The new institutions were also designed to be a free-market response to the Communist states of Eastern Europe (see Cold War).
The steps toward creation of the European Union were Plans for a wide-ranging common market were discussed at a meeting in Messina, Sicily, in 1955. Representatives of the six nations signed the Treaty of Rome, on March 25, 1957. The EEC, or Common Market, was formed on Jan. 1, 1958. The goals of the Treaty of Rome were: to remove trade barriers; to establish a single trade policy toward nonmember countries; to coordinate transportation systems and agricultural policies; to ease the movement of capital and labor across borders; and to remove obstacles to competition
BUSINESS CYCLE. Modern economies have alternated between periods of boom and bust. These are times of economic expansion and prosperity followed by economic downturns. Such periods of economic expansion followed by a contraction are called business cycles. During periods of expansion, employment remains high and prices remain stable or rise.
In a downturn, or recession, unemployment will rise, companies may be forced out of business, and prices tend to fall. Such economic cycles must not be confused with business fluctuations. A fluctuation of supply and demand, or of prices, may occur in a specific segment of the economy (or in several segments) without severely damaging the whole economy. In a business cycle the whole economy is affected simultaneously, in both its upswing and its downturn. Some geographic areas of a country may be more affected than others, depending on the types of local industries or agriculture.
A business cycle usually takes several years to complete itself. When the economy as a whole is slowing down, a recession is under way. (A severe and extended recession is called a depression.) In the United States between 1948 and 1992, there were nine recessions. They reached their lowest points in October 1949, May 1954, April 1958, February 1961, November 1970, March 1975, the summer of 1980, the end of 1981, and mid-1991. The recession of 1981-82 was the most severe since the Great Depression, but it was followed by one of the most robust expansions in American history.
Economists, politicians, and others have been puzzled by business cycles since at least the early 19th century. One of the more unusual explanations was proposed by English economist William Stanley Jevons in the 19th century. He believed the ups and downs of an economy were caused by sunspot cycles, which affected agriculture and caused cycles of bad and good harvests. This hypothesis is not taken seriously today.
Most business-cycle theories fall into one of two categories. Some economists assert that economies have basic flaws which, for some reason, lead to cycles. Other economists insist that only some form of outside interference can cause swings from high to low unemployment. Unemployment and business failures are the most visible and characteristic signs of a recession (see Unemployment). Those who accept the flawed-economy theory usually insist that economies are far too large and complex to operate without a significant degree of government guidance and regulation. Those who hold the opposite view believe that economies are not inherently flawed and that there will be no business cycles as long as there is no outside interference from governments, banks, or other sources.
All economies undergo stress and shock from time to time. Natural disasters, such as hurricanes, tornadoes, floods, and earthquakes, can do serious economic damage, but the damage tends to be localized. If a severe freeze wipes out the Florida orange and grapefruit crops, the growers lose money; and the consumers are forced to pay more for these goods, since there are fewer of them. A more severe shock, such as the increases in oil prices during the 1970s, can have far-reaching consequences. But economies adjust to the new situation in a few years.
Shifts, changes, and temporary fluctuations do not constitute business cycles. They are adjustments that economies have always endured. The question that must be answered is, What causes a widespread buildup of prosperity followed by a sudden decline? Since money is the connecting link between all economic activities, the answer must be sought there.
Economies exist because people exchange goods and services for money. This means that economies are consumer-driven. Everyone is a consumer, though not everyone is a producer. Producers spend money for land, buildings, machinery, resources, and workers. Money circulates through the economy as producers pay owners of land, builders of buildings, makers of machinery, sellers of resources, and a labor force. Products, when they are sold, circulate money back to the producers to keep production going.
The money that producers use to start a business comes from investment. Investors believe that a product or service will have a good chance of success, so they want to put money into a business. Some people invest by buying stock, which is ownership in a company. Others invest by making loans buying bonds issued by the company. Once a business is operating, it gets the bulk of its funds for future growth and continued operations from borrowing.
Getting investment money together is the start of a process called capital formation. Investment money is the initial capital. It is used to pay for capital goods: the land, buildings, machinery, and labor force. The source of investment money is savings. A large number of consumers do not spend all of their money in the present. They save part of it. Saving is postponed consumption. Instead of spending today to consume now, some people save in order to be able to consume later. Money set aside in savings earns interest. Both the interest and the original investment can be used for consumption in the future.
The money available for investment, especially for loans to business, comes from the savings of all economic units individuals and organizations. It may be a very large amount, but it is a fairly stable amount. This means there is competition for it. Money, like any commodity, has a price because it is scarce. The price is called interest. If savings exceed demand, interest rates will be low. If demand exceeds savings, interest rates rise. But there is generally a balance between savings and investment in the normal course of economic activity. In other words, supply and demand tend toward equilibrium.
Businesses borrow money to expand their enterprises based on the money available for loans. They take it for granted that the money available for lending represents an overall consumer preference for future consumption. Guided by this preference, business operators adjust their plans for the future.
If an outside agency interferes with the money supply, the equilibrium between savings and investment is disturbed. This happens in the United States when the Federal Reserve System increases the money supply. Banks have more money to lend, but this money does not come from the original stock of savings. Unfortunately, the businesses that are borrowing do not know this. A loan is a loan, as far as the borrower is concerned. Business expansion, using the new larger supply of money, is no longer being guided by consumer time preferences. But businesses do not know that. Instead of realistic expansion for future needs, they are making malinvestments a term coined by Austrian economist Ludwig von Mises. These are investments that will not pay off somewhat like borrowing to build a factory to make a product no one wants.
The process of malinvestment can take several years, as an inflated supply of money courses through the economy and borrowing is easy. New office buildings are constructed, factories are expanded, machinery is purchased, workers are hired all to be ready for a great surge of consumer buying power. Meanwhile, prices rise. But the explosion of consumerism never happens. Consumers never voted with their money, by means of savings, to underwrite an excessive expansion. The expansion was due to an inflated money supply. (See also Inflation.)
The awareness of this fact gradually works its way through the economy. Businesses realize they are in trouble. They have too many workers, too much machinery, too large inventories, and too much debt. It is time to wind down. So the economy, which has grown like a balloon, begins to contract. People lose their jobs, businesses fail or are sold. Inventories are unloaded at bargain prices. A great inventory adjustment, called a recession, takes place inventories of goods, machinery, resources, and workers. This progress from money inflation to malinvestment to collapse is the business cycle.
Creating a business cycle has never been the goal of the Federal Reserve or any other government agency. Attempts by the federal government to guide and stabilize the economy began early in the 20th century, when, for the first time, unemployment became a political issue. For three quarters of the 19th century, most Americans lived in rural areas and were largely self-employed. Industrialization changed that. Cities grew as job-seekers moved into them. A downturn in the economy that put many people out of work suddenly brought unemployment to the attention of social workers and politicians.
The Federal Reserve was very active following World War I in monitoring the money supply. Its inflationary policies probably had a great deal to do with promoting the prosperity of the Twenties and the subsquent collapse (see Great Depression). Unemployment remained above 10 percent during the 1930s, in spite of federal programs. After World War II, the federal government deliberately established a full-employment policy to avoid another depression. By then it had become generally accepted by economists and politicians alike that the government could fine-tune the economy through adjustments in tax policy, government spending, and control of the money supply. The writings of British economist John Maynard Keynes were extremely influential in spreading this view (see Keynes, John Maynard).
By the 1990s persistently high unemployment had become a significant political problem, and business cycles showed no sign of disappearing. By the mid-1990s, public confidence in economic management by government was declining worldwide. This occurred as economies were undergoing dramatic changes in workforce composition, spurred by the information revolution.
Reviewed by Murray N. Rothbard
