Free The Keynesian Policies And The Unemployment Essay Example

Causes and Impact of Unemployment in Canada during the Great Recession: Abandoning Keynesian Policies Promoting Social Stability in Favor of Profits

Introduction:

The Great Recession of 2007 and its dramatic negative influence on the Canadian economy underscores the need for global economic regulatory forces which can ensure that the economic imbalances which generated the downturn are not repeated. Policy pressed by the United States was designed to capitalize on the enormous economic opportunity presented in global markets. In short fashion, nations like Canada also sought similar advantage but their actions generated structural defects due to the rapid shift away from aligning policies which would, at the very least, acknowledge labor within each nation. Economic policy makers in nations like Canada believed that economic stimulus would make it possible for the citizens of their nation as well as other nations with mature economies to transform from production based economies to consumption based economies. However, this was dependent upon a change in labor dynamics, because it was compelled through cheaper products manufactured in other nations without the heavy labor costs. The premise was alluring, but did not maintain the economic principles which had lead these same economies to prosper in the years following the Second World War. Indeed, many nations had begun to see the Keynesian model outdated, and chose to let the market regulate itself instead. In Canada, the economy did eventually regulate itself, and unemployment was the result. This highlighted the fact that The Keynesian Policies needed updating in order to meet the needs for employment regulation in the era of global economics. More specifically, there is a deep need for government policies to regulate unemployment in Canada, but the Keynesian policies which aim to deal with the unemployment are not effective and need to be adjusted, in order to provide employment protection in a modern economy; this is supported by the evidence original effectiveness of the Keynesian policies in the 1930s and 40s, the effect that departure from those principals had on the Great Recession in 2007, and the need for reinstatement and reform of the Keynesian policies in order to prevent a similar economic collapse in the future

Background:

What Are Keynesian Policies
Keynesian economists operate under the understanding that unemployment is an involuntary state. When there is a high enough demand for laborers in the market, people are forced out of the labor force, and into dependence on the government. By that logic, they depend on demand, and consumption, in order to keep unemployment rates low. Also, consumption is expected to depend on wages, because it is understood that when the distribution of wealth is more even, the propensity to consume is enhanced.
This does not, contrary to popular belief, mean that wages need to be high, but rather that they need to control the average distribution of wealth. Higher wages, however, will only have a negative effect on employment, if they create a reduced percentage of investment. So, generally, Keynesian policy supports the assumption that higher wages are better for the economy overall. In summary, the Keynesian view of unemployment supports the concept that unemployment is directly related to aggregate demand, and that the government should implement policies that support the economy, by supporting employment (Keynes, J. 1924).
Typically, these policies include supporting a minimum wage, offer tax cuts, countercyclical fiscal policies, or policies that work against the natural tide of the business cycle, deficit spending during recessions, and generally solving problems in the short term, rather than waiting for them to stabilize on their own (Keynes, J. 1924). The effect of the implementation of these policies was first seen in their success following the end of WWII.

Keyesian Policy Application in the 1930s and 40s

On the heels of the Second World War, with economic chaos looming throughout the world, Canada used Keynesian policies in an effort “to unite the principle of continued private control of the investment and production processes of a capitalist economy with public demands for a change in the market-determined pattern of employment and income” (Wolfe, 1984, p. 47). Canada played a large role in the manifestation of the Global Keynesian economic strategies domestically, although Canada was not a factor in Keynes’ own formative thinking. Keynes did not regard Canada as a driving force for the global economy of the post Great Depression era; however, the principles which Keynes held (especially in regards to the welfare state was well demonstrated throughout Canadian society in the Post WWII era. Keynes challenged attempts to apply a Neo-Classical economic theory to a world emerging from the Great Depression, and established an economic paradigm. This paradigm took into consideration the shaping possibilities of the State, recognizing that economies were not to be formed by previously held views such as Say’s Law, but were instead driven by the State’s ability to manage the total employment of the populace. A sparsely populated if geographically rich nation such as Canada was less than relevant to an economic plan which was designed to explain the future super economy of the post WWII years. Yet Canada, with the adherence to Keynes principles in the so called welfare state illustrates just how powerful economic decision made by the State can be in forging entirely different economic circumstances, in entire different economic times. Unfortunately, this was a lesson soon forgotten, and the abandonment of that governmental power drove the Canadian economy towards its eventual downturn in the late 2000s.
Similarly, in the late 1940s, great economic changes took place in Canada. According to Shalla (2006), the Canadian government further worked to shape the economy along Keynesian lines, and as a result “Major social changes took place. The class structures and social and political relations were more or less transformed; increased productivity allowed for the laying of the economic basis for the Keynesian welfare state” (p. 13). While it could be argued that the economic growth that was experienced was the direct result of the progress from the slowly increasing global presence of other marketplaces in concert with Canada’s natural resources, with closer analysis it is clear that it was the government of Canada, with its focus on the collective, that rebuilt the economy of the state in the post WWII era. As Canada demonstrated in its economic success, it unconsciously indicated the prominence of “the first genuinely supranational experiment in governance” (Shalla, 2011, p. 13). This undoubtedly could not have been accomplished without the countries reliance on Keynesian policy with regard to the need for employment.

Canada’s Changing Economy of the 1990s and 2000s:

As time passed, and the world changed as a result of increasingly automated actions and computerized databases which permitted different means of production, a more thoroughly globalized economy dawned. The Keynes views, which required governmental intervention in economic policy, gave way to a reliance on the interaction between other partner countries. This was accomplished in Canada through “the Free Trade Agreement (FTA) with the US and through the North America Free Trade Agreement (NAFTA) with the US and Mexico” (Smith, 2005, p. 13). These decisions allowed Canada to participate in a global economy, and compelled “a transition from the policies and practices of the postwar Keynesian welfare state to the market-based neoliberalism of the global era” (Smith, 2005, p. 13) in Canada. The profits were looming, which certainly excited the Canadian economic theorists. Yet also looming was unemployment, which was entirely ignored by those same theorists. As the Keynesian principles were abandoned, so was the focus on unemployment, which would eventually lead to nationwide financial defeat.
Recession struck Canada, as it had other developed nations around the world at the end of the 1970s; however, Canada was not as well equipped to emerge from this recession as were countries such as Japan and the United States. Moy (1985) reflected that Canada was strikingly impacted by the recession, with unemployment escalating from a stable 7.5% in the first quarter of 1980 to a high of 12.5% in the first quarter of 1983 (p. 10). Recession was replaced by rapid inflation, and in an attempt to maintain stability in the Canadian economy as well as competitiveness in the developing global marketplace, Canada leveraged the national economy “through indexed wage contracts and by investing in the housing market. Others saw an opportunity to benefit from high inflation by speculating in real estate or other assets” (Theissen, 2001). The result would perhaps have been balanced out through traditional expectations of the market which would have been likely with the existing economic policies, however, with the Free Trade Agreement (FTA) with the United States in 1987, the Canadian government made a choice which would eventually lead to higher levels of unemployment in Canada, and would set the stage for economic crisis during the Great Recession in 2007.
More specifically, the FTA gave way to a larger agreement called the North American Free Trade Agreement (NAFTA), which allowed partners in Canada, the United States, and Mexico to collectively profit from economic trade agreements. The agreement did result in greater profitability potential through trade liberalization; however, it set a precedent through which even greater measures of liberal trading around the world could be facilitated. As a result, Canada moved from a reliance on the Keynesian principles to more Neo-liberal principles which “favors creditors over debtors, finance over production, and the rich over the poor. A growing underclass of marginalized persons is excluded from formal circuits of employment, production and consumption” (Polanyi, 2007, p. 2). Policy, as Keynes believed, would shape the economy. The Canadian policy makers chose profits over the stability of the workforce, and while the results were not as damaging as in the United States, the impact of the policy on a significant downturn in the Canadian economy during the Great Recession cannot be overlooked.
Unemployment did elevate in Canada, though not as high as the United States; yet the greater damage to Canada was through underemployment of citizens in a nation which was privileging the economic growth of the few over the growth of the many. Cross (2009) maintains that simply looking at unemployment rates does not reflect the influence that recession has on an economy. He suggests that while the “outright contraction of the economy is reflected in jobs and the unemployment rate” (p. 3.10), what is most significant is the change in unemployment rates from the previous years. During the boom period prior to the downturn in the economy of the 2000s, unemployment in Canada demonstrated a sharp rise following the signing of NAFTA, followed by a balancing between 1997 and 2000. The unemployment rate then rose sharply for two years, before plummeting in each of the next six years, leading to 2007 (Cross, 2009, p. 3.10). While the number of unemployed was certainly significant; what was more significant, and what caused such a crisis in Canada, and to a much greater degree in the United States and many companies in the European Union was that the production economy had been replaced by a consumer economy, and when the consumers could not exercise their power, the economy collapsed. Furthermore, with abandonment of economic policy that addressed employment concerns, and its failure to find footing in the new global economy there was no foundation from which to rally.

Body of Argument

The Advantages of the Keynesian Policies in the Post WWII Era
The advantage of Keynesian Policy during the 1930s and 40s started with Keynes very accurate depiction of the economic sickness which had invaded the economy including: chronic unemployment, deflation, currency wars, and beggar-thy-neighbor economic policies (Coy, 2014, P.1).” By intentionally addressing each of these concerns, he was capable of turning the economy and changing the social structure of Canada by redistributing wealth, reducing unemployment stimulating consumption, and generally pushing the economy in a more positive direction.
More specifically, Keynes argued that during times of economic downturn, the government’s role is not to tighten the belt, but rather to loosen the purse strings. In a downturn economy, businesses are afraid to invest because of lagging profits, but private individuals also spend less, because they understand a need for conservation, and make moves in their own budget to continue paying for essentials, despite the economic hardship that are facing. The result of this financial stalemate is dangerous for an economy, because, essentially, no one is making money. One man’s purchase, necessarily, becomes another man’s income, so if booth businesses and private individual’s refuse to increase spending, the economy has nowhere to go but down.
This is exactly the phenomenon that was present in the post-WWII economy that Keynes set out to address. His theory that only the government could enact policy that generated spending by either businesses or individuals, in order to break the stalemate proved essential and correct, leading to a respectable uptick in the downturn economy of that era.
His theory was well suited to the financial environment, and extremely successful, because the nations that applied his theory were in a state of development, and so were able to control the spending, and keep both job creation and spending within its own boarders. Canada could rely on Canadians to invest in Canadian products, and drive forward a consumer based economy, unfortunately, that is not so today.

The Weakness of the Keynesian Policy Today

In the current market economy, the reality is that Keynesian, or the government controlled economic policies that regulate employment have been deemed unnecessary. Many current economists see a problem with these forms of economic policies. They recognize that the global marketplace will have ups and downs, and the market will regulate itself through competition, especially in consumer economies such as Canada and the United States will withstand downturns. Yet the resulting economic polarity between the winners and losers which emerge through Neo-Liberal economic policy decisions eventually will promote “aggregate macro volatility” (Piketty and Saez, 2013, p. 476), which is highly undesirable.
In contrast, however, Piketty and Saez (2013) maintain that policy is critical for societies in the globalized economy, in order to avoid “financial fragility” (p. 476). The truth of their findings is demonstrated through the Great Recession. They hold that “in order to study the interplay between macroeconomic fragility and the distribution of income and wealth, it is critical to introduce the rise of wealth income ratios and the rise of financial intermediation and globalization into the general picture” (Piketty and Saez, 2013, p. 477). For these theorists, unemployment is an important determinant, yet it may be more important to evaluate wealth distribution to evaluate the economic development of a nation. They sagaciously argue that reliance on traditional market indicators are ineffective in the global marketplace, because the relationship of labor is not necessarily accurately reflected in terms of its connection to the progress of the economy.
A case in point would be Okun’s law, which “typically assigns a 2- to 3-percentage-point decrease in real gross domestic product (GDP) growth to a 1-percentage-point increase in the unemployment rate” (Owyang, 2012, p. 399). The problem with this traditional indicator is that it does not have as much relevance in the global marketplace, in which labor does not have as clear of a correlation with the economy. In short, while it is clear that the global economy has not outgrown the need for income oversight, or employment regulation, has not been outgrown by the current global economy, but rather the indicators which were used as the foundation of country’s post WWII greatness, like Keynisian lines, are no longer relevant in the marketplace, and need updating.
In that vein, Owyang & Sekhposyan (2012) found that in regards to the Great Recession, Okun’s Law did not hold. Looking at the United States, the researcher discovered that the close correlation between GDP and unemployment was completely inaccurate in the Great Recession, particularly during the recovery. What this means is that employment did not have as great of an influence on the productivity of the economy, nor did it reflect the productivity of the economy. Because Okun’s Law should have shown improved employment in the United States as well as growth in GDP. It did not. Instead, “during the recovery from the Great Recession, the United States has experienced a sustained high level of unemployment during a period of positive output growth” (Owyang & Sekhposyan, 2012, p. 399). This finding underscores that employment of citizens in a consumer economy are not the same as those in a production economy, and highlights the need for reform, which provide a more accurate view of the relationship between unemployment and economic growth in the new global economy.

Recommendation

In an era in which all economies are more and more connected (with the exception of North Korea, now that even Cuba and Myanmar have opened economic borders), the indicators of all nations have become more and more connected. And, although American policy compelled many of the factors which developed increased unemployment and eventually caused economic catastrophe, a greater responsibility resides in the alignment of macroeconomic policy globally. Without a concerted effort by all prominent members in the world economy to coordinate policy in regards to labor, stability in labor cannot be attained, and unemployment (particularly in nations with mature economies, in which labor costs are much greater, such as Canada, the United States, and the European Union) could potentially damage domestic economies in the future, setting up a chain reaction which could develop into another global financial crisis. This risk demonstrates the strictest need to return to policy like the Keynisian policy, that is shaped to fit more modern economic realities, and which are effective at reducing unemployment in the current global market.
Van Ours (2015) discovered in his multivariate analysis of several countries influenced negatively by the Great Recession and discovered that “there is a high cross-country correlation of the unemployment rates” (p. 1). The reason that this is of such critical importance is the threat of a multiplicative impact between trade partners who are experiencing downturns. In such circumstances, most perniciously the youngest male workers, who rely on experience in order to gradually increase their productivity over their careers are the most thoroughly impacted by any downturn in the globalized economy. During the Great Recession, “In every country the unemployment rate of young men is substantially higher than the unemployment rate of prime age men” (van Ours, 2015, p. 6). This is a large population, and their increased lack of productivity, could create social instability. Also, the economic loss may be camouflaged, because in time the unemployment rates may indicate that the employment levels appear to be higher. Yet this may not be the case. These workers may simply become non-participators. This results in a large population of workers who otherwise could be contributing, but who instead are not. They post a social threat, initially because their efforts are simply not being maximized. More threateningly, this population of young men could become a social problem, in turn creating economic costs and increased tax needs, ultimately depriving the mass of the Canadian workers from realizing their potential. The disparity of income will indicate that Canada has a very favorable economy as the few amass great sums of wealth. Yet the greater loss is a large portion of citizens who are not contributing to the society. This can only be prevented, or eliminated through government intervention and economic regulation. It is up to the Canadian government to find ways of updating that fit with the country’s current economic needs, rather than the needs of the past, but relating Keynisian elements to a more global, and a more targeted economic design.
In addition to the need for government unity, and the development of global economic policies that protect the labor force, it is the responsibility, and the sincere need of individual countries to develop policies that can move their nation forward and out of economic diversity. One of the primary reasons that Keynesian policy is no longer as effective as it was in the Post-WWII era is that Canada is no longer a national consumer, but rather part of a global consumption ring. Offering policy that incentives purchasing local products, or national prodcuts, or introducing policies that reduce importation of products with domestic competitors is one way to increase consumption.
Finally, Keynesian policy relied heavily on job creation, and while it was once enough to stimulate consumers, and using manipulation of companies to decrease unemployment, and break the financial stalemate, it is an equally equitable option to stimulate the consumer economy by increasing the governments support of the individual. Peter Termin and David Vines, in their book Keynes, Useful Economics for the World Economy, remind policy makers that creating jobs to update and repair the road and bridge infrastructure, build a more modern, and more energy efficient energy grid, and modernize other means of travel across the country are all sectors in which new job creation is more than possible (2014). Canada needs to be actively working to create policy that redistributes wealth, and which looks at Keynesian policy from a new perspective, and with the root causes of economic downturn in mind, consistently address the short term issues, in order to feed the long term economic goals of the nation.

Conclusion:

The Great Recession, as Hoffman and Lemieux (2013) discovered, harmed different consumer-based economies in different ways. For those nations which relied on imports, such as the United States and Europe, the damage was greater than that of countries who were able to command greater control of their exports. They found that “industrial composition is strongly associated with the labor market impact of the Great Recession” (Hoffman and Lemieux, 2013, p. 26), and Canada’s strong status as an exporter, rich in natural resources, partially protected it against the damage of the Great Recession; however, Bennatti (2013) noted that “quite strikingly, the period following the outbreak of the financial crisis does not exhibit any obvious, clear-cut difference compared to the pre-crisis years” (p. 82). The problem for Canada as it continues to participate in the global economy with free trade is different than it is for the United States, and it is different than the European Union. Forgotten in the return of Canada to stability following the Great Recession is a critical policy which considered “new import restrictions” (Brown & Crowley, 2013, p. 3), and sought to regulate those imports from China in favor of stimulating Canadian production.
It is not a complete turn back to the era of Canadian production economy, and given the changes in the world, it is likely that such a measure would be counterproductive to prosperity. However, what is critical to recognize is that Canada’s balanced policy significantly contributed to improved domestic economic success. There is a recognized need for significant policy based regulation of the economy, specifically regarding employment, in order to both protect the economy, and to protect the productivity of the Canadian nation.
While the nation cannot remain isolated, and while it is clear that it cannot it entirely return to Keynesian policies at this point, because they are out of date, and as such the global economy would not temper those policies profitably for Canada, it is also clear that a balance must be struck. This means that a revised version of Keynesian policy, which is appropriate to the global economy still has a place in Canadian governmental management, and economic development. What is important is that Canada continue to use policy to find the balance of Canadian production and consumption in the global economy as it seeks to maximize its workforce and minimize unemployment.

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