[…] pulls resources (employees, production, etc) from other parts of the economy, increasing the costs of the remaining resources since there’s less available.
That is why I specified that there needed to be excess productive capacity for whatever they are buying. As long as the economy is not at full employment, the government isn’t bidding up the prices with its spending.
At full employment though, you are absolutely right.
That doesn’t really exist in most developed countries. The US, for example, has about a 4% unemployment rate, which is pretty healthy. There will always be some people out of work for various reasons, so a relatively small amount of unemployment is pretty healthy.
If you have excess productive capacity, you probably have some systemic issues in your economy, and more government spending probably isn’t the right solution (e.g. FDR’s jobs programs didn’t fix the Great Depression).
It’s going to be a tradeoff, and spending more is rarely “free.” That money comes from somewhere, either directly from your pocket from a tax, or indirectly from your pocket from inflation.
There actually isn’t such a thing as a “natural rate of unemployment”, so all of those 4% are part of the excess productive capacity.
There will always be some people out of work for various reasons
If those people are unemployed simply because their previous contract expired a bit before their new one started (frictional unemployment), then I agree it is totally unproblematic. If it is because there aren’t enough jobs going around (structural unemployment), it isn’t.
That money comes from somewhere
All money in monetarily sovereign countries come from government spending: It is spent into existence by the central bank marking up the reserve accounts of the banks of the people and businesses it pays to. The money in circulation and saving is simply the difference between total government spending and revenue. It is important to realize the order of operations here: The governments has to spend before it can tax, or else there wouldn’t be any money to tax.
There actually isn’t such a thing as a “natural rate of unemployment”
I never claimed there was, I only claimed that 4% is right around ideal.
It seems somewhere between 3-6% is a good range. If you drop too low, you get inflation due to wage inflation (workers demand more pay) outpacing regular inflation (more money chasing the same number of goods -> inflation). If you go too high, you get do deflation due to reduced demand.
That’s why monetary policy tends to town tighten with lower unemployment (cool off the labor market), and it tends to loosen with higher unemployment (encourage investment and therefore job creation).
That said, this is a simplistic view of monetary policy, and employment is merely one of many factors central banks look at.
The governments has to spend before it can tax, or else there wouldn’t be any money to tax.
That’s only true if you lump monetary policy with “government spending.” In the US, the Federal Reserve is largely separate from the rest of government, so it makes little sense to combine them in your simplistic explanation.
The ideal scenario is that government spending matches receipts, meaning there’s a plan to pay for all spending. If there’s a deficit, monetary policy needs to step in to issue debt to fund the gap, and that’s inflationary. If there’s a surplus, monetary policy needs to step in to buy back debt, which is deflationary.
They’re absolutely related, but the perspective you seem to be talking from tends to justify deficit spending: “we can always just expand the money supply.” That works until it doesn’t, such as with Venezuela, Argentina, and Turkey. That’s a large part of why the Federal Reserve is independent, and why giving the legislative wing (or worse, executive wing) of government direct control over monetary policy is so dangerous.
That is why I specified that there needed to be excess productive capacity for whatever they are buying. As long as the economy is not at full employment, the government isn’t bidding up the prices with its spending.
At full employment though, you are absolutely right.
That doesn’t really exist in most developed countries. The US, for example, has about a 4% unemployment rate, which is pretty healthy. There will always be some people out of work for various reasons, so a relatively small amount of unemployment is pretty healthy.
If you have excess productive capacity, you probably have some systemic issues in your economy, and more government spending probably isn’t the right solution (e.g. FDR’s jobs programs didn’t fix the Great Depression).
It’s going to be a tradeoff, and spending more is rarely “free.” That money comes from somewhere, either directly from your pocket from a tax, or indirectly from your pocket from inflation.
There actually isn’t such a thing as a “natural rate of unemployment”, so all of those 4% are part of the excess productive capacity.
If those people are unemployed simply because their previous contract expired a bit before their new one started (frictional unemployment), then I agree it is totally unproblematic. If it is because there aren’t enough jobs going around (structural unemployment), it isn’t.
All money in monetarily sovereign countries come from government spending: It is spent into existence by the central bank marking up the reserve accounts of the banks of the people and businesses it pays to. The money in circulation and saving is simply the difference between total government spending and revenue. It is important to realize the order of operations here: The governments has to spend before it can tax, or else there wouldn’t be any money to tax.
I never claimed there was, I only claimed that 4% is right around ideal.
It seems somewhere between 3-6% is a good range. If you drop too low, you get inflation due to wage inflation (workers demand more pay) outpacing regular inflation (more money chasing the same number of goods -> inflation). If you go too high, you get do deflation due to reduced demand.
That’s why monetary policy tends to town tighten with lower unemployment (cool off the labor market), and it tends to loosen with higher unemployment (encourage investment and therefore job creation).
That said, this is a simplistic view of monetary policy, and employment is merely one of many factors central banks look at.
That’s only true if you lump monetary policy with “government spending.” In the US, the Federal Reserve is largely separate from the rest of government, so it makes little sense to combine them in your simplistic explanation.
The ideal scenario is that government spending matches receipts, meaning there’s a plan to pay for all spending. If there’s a deficit, monetary policy needs to step in to issue debt to fund the gap, and that’s inflationary. If there’s a surplus, monetary policy needs to step in to buy back debt, which is deflationary.
They’re absolutely related, but the perspective you seem to be talking from tends to justify deficit spending: “we can always just expand the money supply.” That works until it doesn’t, such as with Venezuela, Argentina, and Turkey. That’s a large part of why the Federal Reserve is independent, and why giving the legislative wing (or worse, executive wing) of government direct control over monetary policy is so dangerous.