Friday, December 3, 2010

Unemployment Increases and the Politics of Fiscal Stimulus

It looks like the unemployment rate has increased again, moving from 9.6% to 9.8%. One wonders exactly how bad it has to get before Republicans relent on fiscal stimulus. Would 15% unemployment be enough to make them reconsider their position? What if unemployment is still near 10% next year. Would that be enough to make them reconsider?

I believe the answer is probably no. I just do not think the facts matter when it comes to the Republican position on fiscal stimulus. Perhaps I am wrong about that, but as Paul Krugman points out, incorrect economic theories have a way of surviving in the face of contrary evidence.

On the upside, I think that if unemployment rate continues to get worse, the preferred Republican policy of "doing nothing" will start to become increasingly politically unpopular. On the other hand, if the unemployment rate stays at about 10%, then I think it is possible that people get used to that as the "new normal" and see inaction as a perfectly acceptable policy response.

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