Keynesian, classical, and supply-side approaches to unemployment policy

Economics

The Keynesian would argue that unemployment is caused by a lack of aggregate demand. This demand derives from consumption, government spending and business investment. Business investment is likely to be suppressed by a lack of consumer spending. The government's policy response should be to increase spending in order to support the level of aggregate demand. The classicist would take the view that unemployment is the result of disequilibrium. Wages could be held out of equilibrium through government policy such as minimum wage laws or through high interest rates that discouraged investment. The classicist would prescribe that the interest rate be lowered in order to stimulate investment that would increase the demand for labor and would advocate the removal of barriers that keep the cost of labour artificially high. In addition, the workers themselves would need to accept a lower wage, as they are unemployed "voluntarily" through their lack of willingness to accept that lower wage (no author, 2010).

2. Aggregate supply is, to supply-side economists, critical to managing the economy. The way to manage the aggregate supply is by managing the inputs that drive supply. One input is the interest rate. Higher interest rates demand higher rates of return because they increase risk. Lower interest rates are therefore associated with lower risk. Lower risk will mean an increase in supply at the business investment level.

Another prescription of supply side economists is lower taxes. By lowering taxes, businesses will have more money to invest. With improved efficiency and greater production, supply will increase, spurring economic growth. Taxes lower the rate of investment because they weaken the returns to be gained from an investment because they discourage savings. Savings are important because they provide banks with capital to lend, which spurs economic growth. By lowering taxes, barriers to investment are removed and total economic activity increases (Roubini, 1997).

3. Monetarists would prescribe that the Fed increase money supply at the same rate that full employment grows in an economy. Monetarists believe that monetary policy should be neutral in the long-run. While this view is accepted by some other schools, the monetarists believe that it is central to economic stability. The money supply only affects prices in their view, which is why they imply that government action to stabilize the economy is ultimately fruitless, but creates a situation where a tradeoff is being made between economic stability today and instability in the future (McCallum, 2008).

4. The role that the FDA plays in setting food safety requirements is inherently costly to the economy. The function is not based on economic concerns but rather public health concerns -- the FDA's mandate dates to Congressional concern about the Elixir sulfanilamide disaster and traces its roots to Upton Sinclair's The Jungle, which documented meat production in Chicago at the turn of the 20th century (FDA.gov, 2009). Thus, decisions about FDA regulations are not made on the basis of economic good, but rather public good. Increased regulations would impose increased costs on business. In classical economics, these costs would act as a form of tax, increasing risk and discouraging investment. Eliminating these requirements would lower these costs, which would allow for an expansion of the food business. It could be argued that the threat of litigation today would counterbalance the need for regulations, but that claim has not been proven. Moreover, the risk such a situation would put on Congress and the FDA would be politically untenable.

Hot dogs may not be healthy, but reducing regulations on their content would carry significant irony in light of The Jungle being the impetus for the original Food and Drugs Act that founded the idea of government regulation of food safety. Economically, this would theoretically lower the price of hot dog production and give producers the flexibility to lower prices to the consumer. This may spur a short-term increase in the number of hot dogs sold, but the impact to the economy overall would be minimal, unless the additional health care and litigation costs that would stem from toxic hot dogs arriving on the market are also included in the calculation.