Issue #1: Unemployment in America, Pt. II

Posted: January 30, 2012 by alephnaughty in Economics, Politics
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Suppose that you expect to have a certain amount of funds at your disposal (you’re expecting your next paycheck, for example). What may you plan to do with those funds? One option is to spend them today, consuming goods and services produced by the economy. Another option is to save them today, so that you may consume goods and services down the line. If you decide upon the latter, you have two more options to choose from. The first is to free up your savings so that someone else may make use of them, in exchange for a promise of repayment (with interest) when you’re ready to spend. The second is to keep your savings to yourself–that is, to hoard money–until you’re ready to spend.

Whether you decide to consume (spend your funds yourself) or to invest (let someone else spend your funds), you’re contributing to the aggregate demand for goods and services produced by the economy. It’s only if you engage in hoarding that you deprive the economy of aggregate demand. The job of financial markets is to match savers with borrowers. If interest rates are just right, savers want to save as much as borrowers want to borrow. Consequently, there is little hoarding, and aggregate demand is plentiful. If interest rates are too high, savers want to save more than borrowers want to borrow, causing hoarding, thereby reducing aggregate demand.

In my previous post, I contended that greater aggregate demand would reduce the unemployment rate, putting willing workers back to work. If the preceding discussion is correct, then, the recipe for stimulating aggregate demand is lower interest rates. What, then, my fellow Americans, is my diagnosis of our jobs crisis? The interest rate is too damn high!

In my final post on this subject, I’ll explain why lower interest rates may not be so easy for the government to engineer, under the unusual circumstances of the present.

[Earlier posts in this series:

Announcing my bid for the US presidency

Issue #1: Unemployment in America

]

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Comments
  1. I’m no economist but interest rates are wicked low and are expected to remain very low for the near future.

  2. alephnaughty says:

    Wickedly low historically speaking, yes. But didn’t we go through a wickedly severe downturn, and aren’t we now in the midst of a wickedly slow “recovery”? Historic times call for historic measures, I guess.

    To be fair, I ended my post by noting that lowering interest rates will be harder than usual, precisely for the reason you state: they’re already about as low as they can go. My final post on this issue will more fully address this point.

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