economists sometimes say it's good for the economy, but are they right?
- Written by Daragh O'Leary, PhD Researcher in Economics, University College Cork
Signs of a global economic downturn are growing by the day. Inflation is[1] still going up, debt is up[2] and interest rates are up[3], which means that projections for growth[4] are down. Put simply, the proverbial something is close to hitting the fan.
Business closures and job losses are likely to become another hurdle for the global economy – and that points to rising unemployment. Yet, while most people would think of rising unemployment as a bad thing, some economists don’t entirely agree.
Economists have long pointed to[5] a counterintuitive positive relationship between unemployment and entrepreneurship, born of the fact that people who lose their job often start businesses. This is often referred to within economic literature as necessity-based or push-factor entrepreneurship.
Where it gets tricky
There is certainly good evidence for the existence of this contradictory relationship. The graph below shows the rates of UK business creation in blue and unemployment in red. As you can see, unemployment started to increase during the global financial crisis of 2007-09 and business creation followed not long after.
UK new business creation and unemployment, 2006-2020
Rural areas like County Leitrim have benefited far less from Ireland’s low corporation tax than more urbanised regions further south.
Julia Gavin/Alamy[10]
We therefore need to stop viewing the free market and government intervention as either wrong or right. In some contexts one is going to be more helpful, while in other contexts it will be the opposite. Recognising this reality would improve on much of the polarised debate in politics and economics, in which those on the right can come across as cold and ignorant, while those on the left can seem self-righteous and sanctimonious, viewing capitalism and markets as dirty words.
How does this apply to today’s gathering downturn? It would make sense for governments to prioritise supporting businesses in more peripheral regions, while leaving those in wealthier urban areas to fend for themselves.
The famous economist John Kenneth Galbraith gave[11] what I believe to be one of the best pieces of commentary on this topic, saying:
Where the market works, I’m for that. Where government is necessary, I’m for that … I’m in favour of whatever works in the particular case.
If we are to survive this upcoming recession and get things going again, we are going to need to acknowledge that centralised “one-size-fits-all” policies won’t be useful everywhere. The solutions to economic recovery are in some cases government intervention and in others the free market, but not always one or the other.
References^ Inflation is (www.oecd.org)^ debt is up (theconversation.com)^ interest rates are up (www.politico.eu)^ projections for growth (www.imf.org)^ long pointed to (www.forbes.com)^ my latest research (www.tandfonline.com)^ corporation tax (12.5%) (taxfoundation.org)^ roughly 20% (enterprise.gov.ie)^ just over 43% (www.cso.ie)^ Julia Gavin/Alamy (www.alamy.com)^ John Kenneth Galbraith gave (www.ft.com)
