Unemployment and Inflation

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General trends suggest that inflation and unemployment share an inverse relationship; when one goes up, the other goes downwards. A. William Phillips highlighted this correlation applied to macroeconomic outcomes, publishing it in the UK-based journal Economica in 1958 in an essay titled The Relationship between Unemployment and the Rate of Change of Money Wages in the United Kingdom 1861–1957. At the time, policymakers typically agreed that demand must be stimulated during periods of recession. In periods of great inflation, contrary action was needed to limit the amount of demand. Even today, a general belief in the principle of limiting unemployment through economic incentives holds strong as evidenced in the stimulus package passed by the Obama administration in the American Recovery and Investment Act of 2009. Phillips's research in the 1950s called such assertions into question implying that if demand increased, companies would hire more employees thereby driving up competition for quality workers and their wages. With more purchasing power, consumers would spend more money, but their newfound leverage would be offset by higher prices implemented to account for the rising cost of hiring workers.

By the 1960s and 1970s, proponents of this research met the reality of stagflation, a disturbing trend of high inflation coupled with high unemployment and lukewarm demand. This reality in the marketplace was met by a theoretical challenge to Phillip's curve by Milton Friedman in 1968. For Friedman, the natural rate of unemployment consisted of

the level that would be ground out by the Walrasian system of general equilibrium equations, provided there is imbedded in them the actual structural characteristics of the labor and commodity markets, including market imperfections, stochastic variability in demands and supplies, the cost of gathering information about job vacancies and labor availabilities, the costs of mobility, and so on (King, 330).

Friedman argued that inflation was at some level based on the cost of knowledge of the current employment market and its accessibility. His research solidified the notion that the process was more intricate than Phillips implied a decade before.

In Saudi Arabia, the Phillips curve does not clearly apply to current economic situations. Over the past five years, Saudi GDP maintains a level of 3.5% with an unemployment rate of 10.9% and an inflation rate of 5% (Heritage). The country sustains its economic growth through consistent oil production and public investment initiatives, thereby maintaining its inflation levels by means of a stable industry with consistent demand even in the aftermath of lowering oil prices due to developing fracking technologies.

The current cost of unemployment leaves a substantial mark on government costs as supported by empirical evidence. Every state supplies unemployment checks to people who can prove their status with a weekly average payout of $299 between Massachusetts at $653 and Mississippi at $235. The US Bureau of Labor Statistics reports that payments maximized at $150 billion in the fiscal year 2010 at a time when Congress extended benefit terms up to 99 weeks (George Washington), accounting for about 4% of the American budget for that year. Although these numbers substantiate a portion of the budget, by no means do they account for significant expenditure.

Here, we will measure the cost of inflation in terms of concepts. It seems convenient to observe that continued inflation imposed over the economy at large makes little impact on the individual consumer. People earn more; people pay a little more. However, inflation obscures the ability of the decision-maker to accurately allocate resources and capital, ultimately wearing away at the rule of law and advocating for a results-oriented system where the citizen is coddled by short-term solutions instead of focusing on the process (Skaggs). Capital misallocation may result because business executives invest in goals projected as profitable through inflated numbers only to later discover that the margins may not satisfy the cost of expansion. As a result, large sums of money disappear in projects that produce few tangible benefits.

German economist Hans Hennholz argues that inflation exists for the manipulation of the general worker and generally disregards the Phillips curve. When inflation comes into place, both the unemployed, who were already under limited financial circumstances and the employed have weakened purchasing power. Inflation serves the interests of politicians and entitlement grantees while generating large amounts of unearned income (Hennholz) such as unemployment benefits. "Inflation consumes productive capital, lowers labor productivity and forces minimum wage rates, and destroys the middle class that saves and invests in monetary instruments" (Hennholz). When viewed as a function of lowering demand, unemployment simply provides a temperature gauge of the expansion of the economy. When extraneous force comes applied from the government to alleviate this unemployment, "fake" jobs assume positions in the market while producing few tangible benefits and raising inflation for everyone (Hennholz). As a result, the lower-class voter finds the government responding to their needs and politicians lock upvotes in the interest of the people, but actually in the service of their job security.

Today, popular wisdom favors the notion that unemployment is worse than inflation because of its compounding role for subsequent generations. If parents lose their job position and can no longer invest in the market and their children's education, instead of resorting to only paying bills with occasional splurges, they will have no means by which to give benefits to their children. The children, who will have to borrow for their education, will begin their adult lives mired in debt. With students averaging around $25,000 debt upon completing college, the implications suggest that people will not have the same advantages as their parents did when there were a growing economy and opportunities abounded.

With so many jobs focused on experience required to even merit consideration, young people stand to directly receive the blows coming from high unemployment. With even nominal job positions requiring decent experience, how can people get their first opportunity? When viewed in such stark terms, it stands no small wonder that people accept inflation over unemployment. Even with increasing transaction costs to move money and menu costs for basic goods and services, inflation plays second to the menacing shadow of unemployment.

It might be best to start out admitting that both situations are disagreeable. No one wants to lose their job or pay $10 for a sandwich that they paid $7.50 for two years ago. Minimum wage increases do not effectively support that kind of inflation. Where can one find the solution? The answer lies in perspective. Do the general public and politicians focus on long-term fixes or short-term band-aids? Minimizing inflation while setting prospects of unemployment to the side could provide long-term solutions to the overall stability of a country's economy. People who have lost their jobs will find themselves in positions where they must innovate and employ their creative abilities in order to survive, thereby making useful growth and adding value to the economic and cultural landscape. Of course, not everyone can succeed and the caveat to this argument remains in the hands of politicians, whose long-term success depends on the relatively short-term contentment of their constituents. For this reason, economists argue against the Keynesian principle of beneficial inflation, going as far as to call it "one of the worst economic calamities and social evils" (Hennholz). Such a direct attack against inflation may seem insensitive and cold through the eyes of common people. Through the worldview of an economist, inflation through subsidized spending and rhetorical policies that continue impotent job positions fuel the decline of nations. Ultimately, the general public must awaken to the risks found in unchecked inflation and elect leaders who will provide disciplined economic reforms that avoid kicking the problem of jump-starting the American economy down the road for the next term.

Foreign direct investment may passively occur in the form of exchange-traded funds (ETF) researched and purchased by the common investor or as the result of an individual investor underwriting a project in the form of loans after contacting and perhaps even visiting the site in question. The result creates a business relationship where the investor stands to apply their insights to the success or demise of the given project. In effect, much more remains at stake than the simple transaction of goods and services—investors aim to profit from the facilities proffered to others by the foreign company.

Foreign direct investment proposes a compelling imperative for economic growth. With developing markets, especially in Africa, vast quantities of capital investment must come in order to achieve terminal growth velocity. For example, if an economy stands to grow by 7% a year, it requires an influx of funds of at least 35% of its GDP. In industries with potentially untapped natural resources such as Nigeria, direct investment in key sectors such as natural gas and coal may ultimately yield a higher product quality for the investor rather than simplistic importing tactics. Although foreign direct investment could result in a lengthened development process for the investor, especially in the face of corruption, the ultimate payout could justify the time involved and inherent risks in a world where most industrialized countries experience minimal GDP growth of 1-3% during this time of stunted economic growth.

Foreign direct investment (FDI) in Saudi Arabia does not diversify between many different sectors. With 25% of the world's hydrocarbon reserves and 12% of the world's oil output, FDI in Saudi Arabia focuses primarily on mining and quarrying, especially from crude petroleum and natural gas. Specific benefits consist of "new technologies [for exploration and excavation], management techniques, and finance and market access for the production of goods and services" (Abdel-Rahman, 4). Such investments yield improvements in the quality of the product with stronger leverage for the Saudi Kingdom in the international market and an overall increase in profits (4). The proposition, on the surface and by the numbers, seems to present a mutually beneficial relationship for all parties involved.

The economy of Saudi Arabia depends on investment from abroad. Since the Saudi economy achieves at least 90% of its export earnings with oil revenues (3), FDI plays a substantial role in the continued development of the economy. Direct beneficiaries make up companies like ARAMCO and the Saudi Arabian Basic Industries Company (5). As demand for foreign investment decreases with increasing stability within the geological infrastructure and alternative sources of energy development in the coming decades, foreign investment may shift to other sectors such as water supply, transportation, and communication. With a government generally regarded in the Western world as stable, albeit bureaucratic, opaque, and slightly corrupt, there stands no substantial economic threat to the continued success of the Kingdom of Saudi Arabia.

Works Cited

Abdel-Rahman, A-M. M. "The Determinants of Foreign Direct Investment in the Kingdom of Saudi Arabia." Economic Research Forum. King Saud University, 10 Oct. 2002. Web. 12 Dec. 2013. <http://www.erf.org.eg/CMS/uploads/pdf/1185355285_T-B_Abdel_Mahmoud_Abdel_Rahman.pdf>.

King, Robert G.. "The Phillips Curve and U.S. Macroeconomic Policy: Snapshots, 1958–1996." Economic Quarterly 4 (2008): 311-359. Print.

"Saudi Arabia." Economy: Population, GDP, Inflation, Business, Trade, FDI, Corruption. The Heritage Foundation, n.d. Web. 12 Dec. 2013. <http://www.heritage.org/index/country/saudiarabia>.

Sennholz, Hans. "Inflation and Unemployment." The Freeman-Ideas on Liberty 1 (1986): n. pag. FEE-Inspire, Educate, Connect. Web. 11 Dec. 2013.

Skaggs, Neil. "Costs of Inflation." Department of Economics. Illinois State University, 1 Jan. 2010. Web. 12 Dec. 2013. <http://economics.illinoisstate.edu/ntskaggs/readings/inflation.shtml>.

"The high cost of unemployment." High unemployment is costly to federal and state governments. George Washington University, 2 Jan. 2013. Web. 12 Dec. 2013. <http://www.facethefactsusa.org/facts/high-cost-unemployment>.