High Unemployment and Inflation Rates

In the free enterprise system, there are numerous ups and downs at the individual level as people change jobs, lose jobs, get new jobs, get raises, or earn money from investments. Any one individual’s economic fortunes have only a minimal impact on the overall economy. When a single individual loses his or her job and maybe even declares bankruptcy, the national economy is unhurt. Moreover, it is comparatively much easier for the individual to recover from a personal economic collapse than it is for the entire nation to do so.

When the entire economy falters and unemployment and inflation rise high above normal levels, however, the state of the economy can have a dramatic impact on individuals who might otherwise be doing well. Just as a growing economy benefits most of the individuals who participate in it, a shrinking economy hurts individuals. While such times can be painful, they have long been recognized as part of a natural “business cycle” in which there are up-turns and down-turns at fairly regular intervals.

While virtually all economists agree that high unemployment and inflation rates are clear indications that the market has failed in some way, there is a great deal of controversy about the proper role of government in addressing such problems. In response to the Great Depression in the 1930s, when unemployment rose to 24 percent, Franklin Delano Roosevelt undertook an aggressive economic recovery program he called the “New Deal.” Among other things, unemployment insurance and the Social Security programs trace their roots to the New Deal era. While many have credited New Deal programs for pulling the nation out of its worst economic depression ever, others have speculated that the entry of the United States into World War II and the retooling of the economy to support the war effort is what really changed the nation’s fortunes.