The jobs crisis: Did stimulus fail to create 'effective demand'?

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Countries across the globe, especially those hit hardest by the recession, unleashed fiscal and monetary measures aimed at bringing back jobs and growth. Governments also launched short-term work programs, provided unemployment insurance benefits and offered subsidies of various kinds.

The U.S. government has spent almost a trillion dollars to ease the pain of recession and create jobs. In the latest move to inject funds into the economy, President Obama announced last week a $50 billion national infrastructure program.

Fed chief Ben Bernanke assured at the Jackson Hole conference that the Fed was willing to inject even more liquidity into the system.

But the jobs scene hasn't turned sanguine even as macroeconomic policy tools seem to have reached their limits.

Kemal Dervis, a Brookings Institution scholar, writes in his blog that all this liquidity is not helping much. "Fiscal policy too is in a bind, with huge disagreements regarding its effectiveness; estimates of government expenditure multipliers range from less than 0.5 to 2 or more. And policymakers are squeezed between fears of killing the fragile recovery and fears of public debt ratios reaching their highest levels in decades," wrote Dervis, Vice-President and Director for Global Economy and Development at Brookings.

Dervis dissects the expansionary fiscal policy to unveil some underlying ironies. While stimulus has helped ease the recession pain, it also led to increased government debt which is a certain ticket to higher taxes in near future. Dervis says there is a lack of confidence that there will be sufficient effective demand in the years ahead.

"There is little doubt that the massive fiscal stimulus and the accompanying expansionary monetary policy were successful in leading to a recovery in output in late 2009 and early 2010. But the recovery is slowing. The view arguing that fiscal policy should remain at least moderately expansionary in the short run but that governments should announce serious future medium-term fiscal retrenchment raises questions of why consumers, who are told they will have to pay higher taxes in the near future, would spend much more today (except the poorest who spend whatever they can)."

However, cutting off stimulus measures and tightening monetary policy to avert the otherwise inevitable outcome of bigger deficits and higher taxes in future is not a certain cure, says the Oslo discussion paper.

"Many countries, particularly among advanced economies, clearly face the need to stabilize or reduce levels of public indebtedness.  However, a premature fiscal retrenchment could damage growth and lead to even larger deficits and debts. Abrupt shifts in fiscal policy stances, in many countries at the same time, could destabilize recovery and weaken future growth. A credible and gradual return to fiscal stability over several years is likely to be a more successful strategy, not only for recovery and growth, but also for deficit and debt reduction," says the paper.