Title: Can Fiscal Policy reduce Unemployment?

Take a look at your next paycheck stub or last income tax return. Consider how easy or hard it has been
for you and your friends or family to find jobs. Why do we ask you to think about this? The answer is
because fiscal policy has an effect on the taxes you pay, your ability to find a job, and the overall
financial health of the economy. The federal government creates regulations and policies to protect or
benefit families, many of which may have economic impacts, such as creating new job. Now we will
explain further.

What is Fiscal Policy? Fiscal Policy - Government policies concerning taxes and spending. These policy is
used to achieve various goals in countries economy. Before the Great Depression, which lasted from
Oct. 29, 1929, to the onset of America's entry into World War II, the government's approach to the
economy was laissez-faire. Following World War II, it was determined that the government had to take
a proactive role in the economy to regulate unemployment, business cycles, inflation and the cost of
money. By using fiscal policies and also monetary policy governments can control economic
phenomena. THREE common goals of fiscal policy are to reduce unemployment, control inflation and
encourage economic growth. Fiscal policy is based on the theories of British economist John Maynard
Keynes. Also known as Keynesian economics, this theory basically states that governments can
influence macroeconomic productivity levels by increasing or decreasing tax levels and public
spending. This influence, in turn, curbs inflation, increases employment and maintains a healthy value
of money. Fiscal policy plays a very important role in managing a country's economy. For example, in
2012 many worried that the fiscal cliff, a simultaneous increase in tax rates and cuts in government
spending set to occur in January 2013, would send the U.S. economy back into recession. The U.S.
Congress avoided this problem by passing the American Taxpayer Relief Act of 2012 on Jan. 1, 2013.

Importance of Unemployment - Unemployment negatively impacts the federal government's ability to

generate income and also tends to reduce economic activity. When unemployment is high, fewer people
are paying taxes to the government. At the same time, unemployment means there are fewer people
with disposable income to spend on goods and services. Low consumer spending makes it more difficult
for businesses to thrive and expand, which dampens economic growth.

The main question is – Does a fiscal policy reduce unemployment?

The solution for unemployment is, of course, to create new jobs. Usually, a healthy economic growth
rate of 2-3 percent is enough to create the 150,000 jobs needed to prevent high unemployment. When
unemployment creeps above 6-7 percent and stays there, it means the economy can't create enough
new jobs. That's when the government steps in. Federal Reserve uses expansionary monetary policy and
lowers the federal funds rate. If unemployment continues, the Congress uses fiscal policy. It can directly
create jobs for public works projects. It can also stimulate demand by providing extended
unemployment benefits.

Fiscal policy can decrease unemployment by helping to increase aggregate demand and the rate of
economic growth. The government will need to pursue expansionary fiscal policy; this involves cutting
taxes and increasing government spending. Lower taxes increase disposable income and therefore help
to increase consumption, leading to higher aggregate demand (AD). With an increase in AD, there will be
an increase in Real GDP. If firms produce more, there will be an increase in demand for workers and
therefore lower demand-deficient unemployment. Also, with higher aggregate demand and strong
economic growth, fewer firms will go bankrupt meaning fewer job losses.

An expansionary fiscal policy is slower, however provides much-needed confidence that the government
will turn things around. Confidence is crucial for convincing people to spend now for a better future.
Taxation is one of the primary fiscal policy tools the government has at its disposal to reduce
unemployment. High taxes mean consumers have less disposable income, which results in less
consumption. When consumers buy less, business take in less revenue and are less likely to hire new
workers or may even lay off workers to reduce costs. Cutting taxes is a common method the
government uses to spark economic growth and reduce unemployment. Tax cuts put more money into
the hands of consumers, which can lead to increased revenue for business and expansion and hiring. So,
cutting taxes works like lowering interest rates. Both give businesses and consumers more money to
spend. That increases demand. It gives businesses more cash to invest and hire more workers. Spending
on government programs is another way the federal government can attempt to influence
unemployment. For example, if the government funds new public works programs, such as building
infrastructure like roads or train systems, it can create jobs that serve to reduce unemployment and
increase disposable income and spending. If such programs encourage overall economic growth, public-
sector workers may be able to find jobs in the private sector after the projects are complete. So,
government spending takes the form of jobs programs. The government hires employees directly.

What's the most cost-effective unemployment solution?

Dollar for dollar, what's the best investment that creates the most jobs? A U Mass/Amherst study found
that building mass transit is the most cost-effective solution. One billion dollars spent on public
transportation creates 19,795 construction jobs.

The next is unemployment benefits. Every $1 billion spent on unemployment benefits creates 19,000
jobs, according to a Congressional Budget Office study. That's because the unemployed are most likely
to spend every dime they get. They buy basics like groceries, clothing, and housing. That drives retailers
and manufacturers to hire more people to meet the demand. Without these benefits, demand would
drop. Then retailers would need to lay off their workers, increasing unemployment rates.
Unemployment benefits work fast. The government writes a check that goes directly into the economy.
Public works projects take longer to get implemented. The plans must be updated, workers hired and
supplies delivered. (During the final quarter of 2008, unemployment programs paid $34.9 billion in
benefits to eight million unemployed workers.)

The third-best unemployment solution is funding education. One billion spent hiring teachers adds $1.3
billion to the economy. That's because better-educated people can get higher-paying jobs. They can buy
more things with the higher wages they earn. Each billion also creates 17,687 jobs.

The most popular fiscal stimulus is across-the-board income tax cuts. However, that’s not the most cost-
effective, according to the UMass/Amherst study. One billion dollars in cuts creates 10,779 jobs.
Workers only spend half the money. As a result, reductions in the tax rate damage the economy. Every
dollar in lost tax revenue creates 59 cents in economic growth. Most people don't realize they are
getting a break until tax time. The tax cut means they pay less in taxes, but they still have to pay.
Psychologically, they are less likely to spend anything extra. It just doesn't feel like a bonus. As a result,
people are more liable to save anything they get or use it to pay down other debts.

A more effective tax cut is in businesses payroll taxes. One billion dollars in payroll tax cuts created
13,000 new jobs. The best place to give business tax relief is with small businesses. They produce 65
percent of all new jobs.

Considerations

However there can be risks that Fiscal Policy can cause: While reducing taxes and increasing spending
can encourage economic growth and reduce unemployment, both practices can increase the
government's debt. Lower taxes mean that the government takes in less revenue, and if spending
exceeds revenue, the government has a deficit, meaning it is losing money over time and increasing its
debt load. When economic growth is high and unemployment is low, the government may increase
taxes and reduce spending to make up for debts accumulated during periods of low growth and high
unemployment.
References:

https://www.investopedia.com/insights/what-is-fiscal-policy/#ixzz5DJMo7Q8s

https://study.com/academy/lesson/fiscal-policy-and-the-effects-on-unemployment.html

https://www.investopedia.com/terms/e/expansionary_policy.asp#ixzz5DKcOA2Hl

http://smallbusiness.chron.com/unemployment-fiscal-policy-12614.html by Gregory Hamel

https://www.economicshelp.org/blog/3881/economics/policies-for-reducing-unemployment/

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