A General Systems Law: Complex systems such as economies go through cycles of peaks and valleys. A Rule for Good Government: Governments should increase their spending when the economy is faltering and should cut their spending when the economy is booming. The boom periods would be restrained somewhat and the downturns would be ameliorated. This would tend to stabilize the economy.
Economies are driven by demand. As demand for goods and services goes up, jobs are created to meet the demand. As more people are hired, there is more demand which creates more jobs. A virtuous cycle is created with demand and jobs each tending to increase the other.
As demand for goods and services falls, people are laid off. As fewer people have jobs, demand falls and more people are laid off which causes demand to fall further. A vicious cycle is created in which falling demand and fewer jobs each tend to drive the other down.
One of governments functions should be to counter these boom and bust cycles by deficit spending during recessions and curtailing spending during boom times.
The points above are so obvious that they hardly seem worth stating. Except … leaders (and even economists) all over the world don’t seem to understand this. Most of the developed nations of the world are obsessed with debt and are trying to cut their spending, thereby making the current recession much worse.
While debt levels are a problem for many nations, high levels of unemployment are a much more immediate and more serious problem.
Most governments are routinely doing precisely the wrong things with regard to stabilising their economies, i.e. they increase spending during boom times and cut spending during economic downturns. They quite obviously should be doing the opposite.
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