Dangers of Unemployment
Unemployment is a problem because it means that some people in society
are not making any money, which puts them in grave danger of tremendous
poverty or worse. When unemployment rises to high levels, those without jobs
may become hostile to the government, blaming it and their leaders for their
situation. At such times, political shakiness or insecurity can result.
In extreme cases, governments have fallen due to their high rates of
unemployment.
Example: During the Great
Depression, unemployment was extremely high around the world—approaching
30 percent in some places. The large number of jobless people created
tremendous instability in many countries, including Germany. There the
high unemployment, along with hyperinflation, contributed to the rise of
Nazism. The middle class was financially wiped out, and many citizens
began to blame the new democratic government and saw the Nazi Party as a
positive regime change.
Unemployment rates vary from place to place within a country. In the
early years of the twenty-first century, for example, unemployment in
Washington State was higher than in most other places in the United States
because the Seattle-area economy is heavily dependent on high-tech
industries, which underwent a serious slump around this time. Likewise, the
closing of a factory can devastate the local economy even if the rest of the
nation’s economy is strong.
Inflation
Inflation occurs when the prices of goods and services begin
to rise. Analysts measure inflation as a percentage increase in price over the
course of a year. So, if inflation is 10 percent, an item that costs $1 will
cost $1.10 a year later. The official inflation rate is an average of price
increases for all goods and services, so it may not apply exactly to any one
given good.
Inflation also means that the currency becomes worth less. In the above
example, one dollar is now worth less than it once was. Economists refer to this
decrease as a decline in buying power, which is the amount of goods
and services money can buy. In other words, if a person’s salary stays the same
but inflation occurs, her buying power will go down. This person will be poorer
because she can no longer afford the things she used to buy as the price of
those goods increases.
Example: According to the Bureau of
Labor Statistics, $1 from 1989 had the buying power of $1.73 in 2009. In
other words, if a hamburger cost you $1 in 1989, you’d have to pay $1.73 for
it today. This difference of $0.73 many not seem significant until you start
purchasing more expensive items. A car that cost you $10,000 in 1989 would
cost you more than $17,000 today, and a $100,000 home in 1989 would now cost
you more than $170,000.
Excess Demand
In general, the basic law of supply and demand causes inflation. When
the demand for something exceeds supply (what economists call excess
demand), the price goes up. Excess demand and high inflation have
a variety of causes:
- A bad harvest
- Shortages due to war
- A natural disaster
- Increased consumer desire (that is, more people wanting a
particular good)
- Increased consumer spending power
Other factors contribute to inflation too, such as when a company
intentionally underproduces an item to drive up prices or when a government
steps in to increase or decrease inflation. We cover the economic policies
of governments later in the chapter, particularly in the sections on fiscal
policy.
Dangers of Inflation
High inflation (defined as more than 5 percent in North America and
Europe) can do the following:
- Create economic turbulence
- Exaggerate a person’s financial success or failure so that he
becomes rich or poor very quickly
- Increase the number of people who are at risk for poverty (if
things cost more, then more people may be considered poor)
- Cause political instability (historically, many authoritarian
regimes have risen to power during periods of extremely high inflation)
Balancing Unemployment and Inflation
All governments must balance the effects of unemployment with those of
inflation. In most cases, reducing unemployment usually requires spending
more money, which causes prices to increase. Similarly, reducing inflation
often means re-ducing the amount of money spent, which usually increases
unemployment. Balancing these goals is a difficult but necessary
governmental task.
Recession and Depression
All governments want to avoid an economic recession, which is
a period of decline in the economy. Recessions often are accompanied by high
unemployment and, sometimes, high inflation. Even worse is a
depression, an economic downturn that dips deeper and lasts
longer than a recession.
Example: When the stock market
crashed on October 24, 1929, the world fell into the Great Depression, one
of the most severe economic downturns of the industrial era. Unemployment
skyrocketed, reaching about 33 percent in the United States. Many people
suffered from dire poverty, and some starved. The depression did not fully
end in the United States until the nation entered World War II at the end of
1941.
