Unemployment turnaround?

If you consider the supply side argument of economics, the argument is that if you make supply more abundant, it will drive down prices and create demand. The way to increase supply is to incentivize the businesses with tax breaks.

Businesses pass the cost reductions on to consumers as lower prices leading to the greater consumption, leading to additional production, more jobs, more demand, economies of scale, and so on and so on.

The only potential flaw in this approach would be if the cost reductions are not passed along, or not passed along fully. In classic supply and demand analysis, the price reductions must be significant enough to truly stimulate demand.

Now, in our recent economic contraction, we saw significant price reductions because of the fall in demand. In order to sell off inventory businesses were required to reduce prices and those that survived then reduced costs in order to return to profitability.

To some extent, some of this cost reduction was enabled by the cheap credit policy the Government has followed. The other cost reductions were primarily achieved by reducing locations and employment. Now, these type of cost reductions, lead to reduced demand and the cycle will continue until at some point demand is increased in some fashion.

We have seen one program on the demand side that may actually have the potential to reverse the cycle. This was the so called cash for clunkers program. This program increased demand by stimulating the demand side and effectively reducing the cost of product via a Government subsidy.

As the Auto manufacturers start to ramp up to cover demand, the wave of hiring will spread throughout all their suppliers including commodity suppliers. Will this be enough of a spark to reverse the cycle? By itself, maybe not, but if we start to see the stimulus create additional jobs in road construction and infrastructure repair or creation we may see a bottom.