Every country has something to offer to another; and every country depends on another for some resource to either produce or use. To offer something, the country needs people to do the job. So if the demand is low for what the country has to offer, then it will require less people to do the job. If the country doesn’t have the right people to do the job then it can’t supply to meet the demand and therefore potentially lose out on sales. The more people with job, increases the demand for housing, infrastructure and tourism. When there is a right balance of trade and employment, the country will prosper. If there is an imbalance or the growth rate of production and employment is far below sustainable growth, then the economy is in trouble. It will require a push from the government and the monetary authority of the country i.e. people in charge of printing money (e.g. reserve bank) to get it back on track.
The push is referred to as economic stimulus, i.e. stimulating the economy.
What causes the imbalance?
Simply put, lack of demand. The lack of demand for what the country has to offer can be due to different circumstances. Such as increase in competition from foreign producers with similar offerings; the offerings are no longer attractive due to high currency value; a political situation blocking other countries from importing; the offering is outdated or loses value due to technological advancements; or something else.
The economy is hardly every perfect. The politicians won’t allow it to be prosperous, because the opposition will not get a chance to be the ruling party. So there is always something wrong with the economy and that is what drives the politics. Every political party has ideas to improve the economy and needs the other party’s support to implement it successfully. This is where election promises comes in. This is also where the current government blames the previous government for messing it up and the opposition for not supporting their ideas. While the opposition, almost always opposing to the current government’s ideas, blame the current government for not doing anything about the economic malaise. It’s a never ending loop that only and always affects the electorate.
What can be done?
To reduce the unemployment rate and increase production rate, the monetary authority can play with the monetary policy and the government with the fiscal policy.
Monetary policy is used to manage the money supply in the country, by means of interest rates, open market operations (buying debt from banks), discount window for lending money to the banks, requiring the banks to set money aside for reserve and quantitative easing. It is an independent body free from political influence. The blog post on Monetary Policy goes into detail about the policy.
The fiscal policy allows the government to play with public spending and the taxation. One of the tools available for them is the federal budget. Important thing to note is that the aim shouldn’t be to balance the budget but use the budget as a tool to stabilise the economy. Ideal scenario is that the government spending is fully backed by tax revenue and the budget outcome shouldn’t effect the economy.