This post is inspired by the Swedish election campaign. More specifically on estimates about how the previous centre right governments actions affected unemployment. The main policies has been to reduce taxes and unemployment benefits. A lot of people claimed this reduced unemployment with no reference to the business cycle. This is absurd, surely the effect would be depend on whether the economy is demand or supply constrained. Something like this:
100% demand constrained economy: Reducing uneployment benefits serves no purpose. Employers don’t benefit from getting 300 instead of 100 applications. Shifting income from poor to rich is counter productive. The rich will just waste the money on socially useless savings while less money in the pockets of poor people mean less spending.
100% supply constrained economy. This will be just the opposite. Reducing unemployment benefits will lead to gaps being filled faster. The extra money the rich have will be spent on useful investments that will benefit everyone in the long run.
So which of these two cases has been closer to the truth? Looking at unemployment and inflation one could possibly make the case for supply side policies up until 2009. From then on though, Sweden has been demand contrained meaning government policies have had negative or no effect on unemployment.