For growth, focus first on jobs

May 23, 2012

In the labour market, there is a fine line between inefficiency and wastefulness. “This place is so inefficient,” it is said, often with justification, especially in rich economies. “We could do everything we’re supposed to with a third fewer people.” Factories can be streamlined, high quality new equipment can save on labour, and offices are prone to the incubation of worthless bureaucracy.

It also said, sometimes by the same people, that “The unemployment situation is terrible. My young friends can’t get jobs and lots of not-so-old people I know are retiring early.” Such statements are also accurate. In many countries, the Lesser Depression has sharply worsened a longstanding problem of inadequate job creation. Spain’s official unemployment rate is 24 percent. Almost half of the young adults in Greece are jobless. And the employed portion of the working age population in the United States has fallen by three percentage points over the last four years.

Politicians and other leaders have watched the job destruction with something like horror. They shouldn’t have been surprised. The unending fight against inefficiency leads to a natural employment asymmetry. As technology advances, businesses and governments usually find it easier to cut than to add jobs. Some businesses can progressively expand headcount, but in tough times there are more employers looking for ways to use less labour.

Most politicians and economists believe that GDP growth is the cure. It is considered not only the highest economic good but also the best way to create jobs. In search of higher output, governments run huge deficits, while central banks pass out money for free. The policymakers often invoke the name of John Maynard Keynes. But they twist the great economist’s ideas. As Pavlina Tcherneva points out in a recent article in the Review of Social Economy, Keynes thought “the real problem” governments should address during the Great Depression was “to provide employment for everyone”. In Keynes’s view, output follows jobs, not the other way around.

Keynes’s own preferred solution was for governments to organise projects with a high “elasticity of employment”. “There are things to be done; there are men to do them,” he said. “Why not put the two together? Why not put the men to work?” The best way for governments to create jobs quickly is still to hire people directly. A look at the dilapidated infrastructure of the United States suggests that Keynes’ prescription is still relevant.

Enthusiasts for small government might want to privatise such programmes, but they should still agree with the true Keynesian principle: it is better to pay people to work than to pay them not to. Programmes which protect the unemployed and disabled serve a valuable social purpose and payments for early retirement may be defensible, but programmes which create jobs are far preferable to either.

This Keynesian message has largely been lost in the current official policy mix, which aims at growth and hopes for jobs. Policies which support the financial system, put money in consumers’ hands and cut bloated government bureaucracies may eventually encourage job creation. Four years into the Lesser Depression, however, these highly indirect methods are at best working slowly.

Employment asymmetry should be attacked more directly. Governments are even better placed to lead the charge than in Keynes’s day because their economic role has expanded so much. An eight-year experiment in Germany shows the power of relatively minor tweaks to the rules on jobs and benefits. Little more than tougher conditions for unemployment benefits and more helpful employment agencies have cut the number of people unemployed for more than a year from 1.7 million, about 4 percent of the potential workforce, to 800,000.

The precise German recipe is not applicable everywhere, but the principle is. The prime goal of government economic policy should be to fight the natural employment asymmetry of industrial economies. Lower taxes on workers’ income would make new jobs cheaper for employers and more lucrative for employees. In many countries, more stringent limitations on benefits would also help. Almost everywhere, the desire to establish and expand enterprises should be encouraged. In the United States, it would be helpful to find a way to give the rich a smaller share of the nation’s income. The money they don’t receive could be paid out to workers in newly created jobs.

The employment problems of the Lesser Depression are not grave enough to require a major reconsideration of the economy’s goals. A combination of short-term programmes and more gradual shifts in regulation and taxation should do the trick. But as the economy becomes more efficient, the surplus of labour is likely to become a more pressing social challenge. Keynes wondered “how to organise material abundance to yield up the fruits of a good life.” The answer is certainly not found in frequent periods of wastefully high unemployment.


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Excellent article.

Posted by Adam_S | Report as abusive

Good points. Even those normally inclined to conservatism may be coming around to the principle that government may have to be the employer of last resort.

Posted by SayHey | Report as abusive

“Policies which support the financial system, put money into the consumer’s hands and cut bloated government bureaucracies may eventually encourage job creation.” Since 2008, our federal government has: killed a job creating project that would have spanned the country from north to south (Keystone XL), shut down coal-fired power plants on principal rather than reason (a double play which will remove thousands of jobs and increase consumer’s power bills by as much as 30%, and has the added bonus of being worse for the environment), and slowed the flow of credit instead of increasing it. Thumbs up!

Posted by smanchwhich | Report as abusive

I have a lot of respect for you, but I completely disagree and you are making things worse with this article. But good for you, you will get a lot more applause. I do understand you don’t have the luxury of writing anonymously though so I can’t say I want to blame you.

Anyway, more comfy government job is not the solution, especially taken into account how overpaid and wasteful in nature these jobs are. Maintaining the current bureaucracy and government dependent class without causing more serious internal bleeding to the system is already a MIRACLE. Going this route is exactly what causes current problem in the first place, going further into it is a disaster.

government printing money and borrowing indirectly from central banks, diluting the value of paper money in order to give more handout and easy comfy jobs is very short-sighted.

What is the additional side effect of this?
An extremely wealthy tiny class of well-connected people with insider information that takes tremendous advantage of this maneuver.

What is probably the good solution now?

2 things: short-term and long term.
In the short-term:
– Unclog the money hoarded by well-off people and corporations to increase demand. Stop the psychological war on them to buy votes! Once surplus people (and country) start spending (and importing) there will be more jobs.
– Clean up all the crony rich that doesn’t produce real value. This includes overpaid lawyers, stupid managers ,executives and political leaders, manipulative financiers. Also in the US, a considerable number of vampiric doctors, health provider system and insurance. And of course government jobs in Europe.

In the long-term:
– Equality of wealth generating vehicle (stop the stupidity of equality of outcome, it’s equally of source of outcome which goes together with equality of opportunity creates equality of outcome). This includes the physical one which is capital. Whether it is physical hard capital like land, building, factories, oil fields, corn fields or non-physical one like voting right as in shares and stocks.
– Equality of innate ability to generate wealth and accumulate capital. Enough with the clueless high-breeding welfare dependents as well as the Ken and Barbie dolls with little employable skills.
– Make sure the people at the top have the morality and ability and competence so that they deserve to be there.

We have to evolve forward in a more balance way, yes we want ALL good characteristic not just one, but we have to have a balance of how many of each type. The bloated welfare system and government job is unintentionally social engineering the society to evolve in a very Mike Judge’s “Idiocracy” and unbalanced way.

The way we move forward in a more sustainable manner is more people become self-employed (so they have more influence on the unemployment situation) as in the usual self-employed and in workers owning voting right in the corporate world (not through stupid unreasonable and militant unions, but it’s ok for union if the company is not public).

We have to stop the crooks from killing the second way. Sorry Larry Page, I used to have respect for you, no more now after that evil stock split. And I am boycotting as many Google’s services as I can.

I am ok with super low interest rate so people can go forward with the first way easily. The banks just need to do more diligent work to determine who to give loan to instead of spraying credit around and then package the bad loan into sophisticated securities to scam others.

Either way, we need morality, integrity, honor and compassion to actually achieve it in a positive way. We don’t want a brutally competitive uncivilized jungle society. Life in that kind of society is not worth living. That kind of society will also kill off the genius who are capable of major discoveries and inventions to move us forward because these are often very nice, very honest and even gullible people.

Sigh…. telling these facts really has given me chronic depression now. Can somebody else do this too? I am sure there are people who are well aware of these facts as well. You need to come out of your nice (but coward) outer shell and tell!

Posted by trevorh | Report as abusive

Excellent article and timely. In Germany there is a strong moral imperative to have a job. When unemployment rises, worker hours are cut back but everyone is still employed. They are ‘paid to do something rather than nothing’. Germany is far and away the dominant economy in Europe, but the Germans work among the lowest annual hours in the OECD. Keeping the wheels turning is critical to the overall economy.
@trevorh. I sympathize with your concerns about giving people ‘cushy’ government jobs, but that is not thrust of the argument. Under Roosevelt during the Depression, the government created exactly the sort of infrastructure jobs Edward is talking about. All of the projects did something that needed to be done like building roads and dams, but when the project finished, the job finished. But all of these taken together started the wheels turning and the whole economy started to recover. Despite the hype about the Keystone project, it will only employ 20-25 thousand and for a relatively short time. Only the government has the power and incentive to do these things on a large and quick scale. Private businesses would, if it were physically possible, fire every one of their employees. Continual cutting of costs and continual increases in profitability are what they are all about. And while I agree that morality, integrity honor and compassion as the basis for the economy would be great, governments and religions have been trying to achieve these for four thousand years or more with a notable lack of success.

Posted by steve778936 | Report as abusive

Reliance on the same old mega companies and industries to create jobs (Keystone, for instance) is not going to solve the problem. Only by breaking up the huge corporations, inventing new products and new companies to build them and sell them, will we change the system of upper management ensuring it’s own grotesquely inflated financial rewards by cutting jobs on the low end of the spectrum. That’s basically what’s been happening for the last thirty years. In the meantime, the government stepping in and putting people to work on roads and infrastructure would start the ball rolling.

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Great article. It needed to be said.

Life moves so quickly. A kid graduates from high school, and a year later he/she is greatly changed. If his early adult life is spent unemployed, the effects are permanent.

This greatly damages our culture, the American culture.

Better to have him working at anything than at nothing. If he is working on a public road construction or even digging ditches, it helps him and his family and relatives, and binds our culture together.

Posted by AdamSmith | Report as abusive

Thank-you Mr. Hadas for continuing this discussion. However, I would change the focus from growth to health. I think we can all agree that it’s far better for someone to work to earn their livelihood than to receive a handout, and thus unemployment is a much better measure of societal health than is gdp or the djia or housing starts for that matter. But if the goal Mr. Hadas endorses is full full-time employment for all who want it, then here is where we disagree. Such a scenario would destroy what’s left of our life support system in short order. The fact is that we don’t all need, nor is it desirable for our overall health, to all work 40 hours per week.

trevorh’s rant covering “comfy government jobs”, the “bloated welfare system”, and “stupid unreasonable and militant unions” has provided me with some insight into a conundrum pointed out in the 50’s by JK Galbraith (“The Affluent Society”). He acknowledges that there are indeed union workers who use the union to avoid doing their fair share, but notes that all the lost productivity and inefficiency attributable to slacker union members doesn’t amount to a hill of beans compared to the loss of productivity found in one typical cyclical recession (sorry, I’m paraphrasing b/c I don’t have the book with me). Yet with regard to recessions, we throw up our hands and say that they are some sort of natural phenomenon and the best we can do is to weather them as best we can. But based on trevorh’s comments, I now see that this seeming hypocrisy is rooted in our sense of morality. It’s better to have inefficiency due to incompetence than due to laziness. I don’t think I agree with this prioritization, but I certainly believe it is strongly entrenched in our culture. So thank-you trevorh for giving me this insight.

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It was easier in Roosevelt’s time to employ people. There really was no welfare support to speak of, most of the major public works projects involved heavy manual labor. Bricklayers, concrete workers, carpenters, even ditch digging, etc (some still using hand mixed cement and mortar, and armies of men planting tress. In fact, I live in an area that was once a CCC white pine tree plantation. They were paid enough to keep them and their dependents alive. Women, for the most part, worked at home and not in the wider job market. Child labor had been outlawed decades earlier (except for family farms). I believe almost half the country still lived on family farms and were more or less able to supplement their diets with home grown vegetables and some meat. Higher skilled people like architects and engineers were employed measuring the historic structures of this country (see HABS and HAER), or designing the post offices and government buildings at all levels. Artists were employed recording and decorating public works. People who worked for the local and state government were considered well off and stable. There were usually few of them to begin with and they were little more protected than the average laborer. The idea that government should be honest and accountable also got more firmly established. Organized crime was very active and actually became somewhat more legitimate with the end of prohibition. They were able to grow on the capital made during Prohibition.

The Empire State Building and Chrysler buildings were completed at the start of the Depression and sat mostly unoccupied until the War, I think. The wealthy didn’t have unlimited ability to do much of anything, and they still don’t. Those who could draw salaries or other compensation for sitting on corporate boards (Frederick Vanderbilt actually got much wealthier) did very well. Most had to be careful but could live on family wealth or personal fortunes but couldn’t grow them easily. I think it took many a long time to recover from the crash.

The entire US economy is based on the need for much higher pays and nearly the entire stock of residential real estate in this country has risen in price during the past few decades so that two wage earners are needed to pay the note.

I have read – and even heard it expressed in comments here – that in fact it may be easier for the modern economy to accept unemployed people living at basic costs of living rates than to try to fully employ them with all the costs associated with benefits; especially health care coverage.

The Great depression wasn’t cured by Keynesian economics. It was cured by the War. The national debt and the imbalanced budget didn’t matter. The national debt skyrocketed. Millions of men (surplus labor to the economist and many people shared the pseudo rationality of the Nazi party actually)) were killed off and (and with them went “a brace of kinsmen), women were employed at low wages but enough to pay their costs of living and even save because most consumer goods were rationed. There was a large pent up savings pool for the post war years.

Perhaps the modern very urbanized societies are making a huge mistake. WE insist on building vast, nearly homogeneous networks than tend to work in very tight interdependence. They are too vulnerable to shocks to the system. There is something fine about countries working in interdependence to ease the tensions and waste caused by war. But there are comments in these pages that seem nostalgic for the the days when war removed surplus labor or surplus population, but only as long as it is someone else’s surplus. They have an undo fondness for countries with natural resources and surplus funds.

I am wiling to accept that at 61 I am an early but unprepared retiree. I know a lot others are doing the same thing. The school aged don’t cost much until they enter colleges. They will probably be paid in inflated dollars someday so those drawing small interest earned incomes will see a lot of it pulled back. House prices will probably only fall in spite of global population pressure because population doesn’t really have a direct correlation with housing costs. They are too much a luxury item. People who think land is a limited commodity are actually dead wrong. Land is not that rigidly limited and access to it – by any means – can make it available to higher and better uses. Means of access can be manufactured. Modern zoning laws have morphed into restrictive use laws designed to artificially limit the development potential in favor of existing property owners to preserve the value of their investment.

What we may have is a fatal interplay of competing interests and forces that nothing can cure. The old regime in France and most of Europe, prior to the revolution, was just such a interlocking and opposing needs and desires. But now the dependencies are international.

Hope is wonderful and it springs eternal – but I wish it had better ideas for the future than the very abstract Facebook like technology industries. They are so abstract and require relatively few people with computer skills who cannot possibly own or occupy so much of the over priced real estate of this country. And it was the huge appetite that real estate created for the rest of the productive industries of this and other countries that really kept the fires lit during the last two decades. It was one of the most important contributors to the GDP.

Warfare is obsolete to cure depressions. The developed world is aging and is relying on automatic warfare as a Keynesian perversion. It’s primary victims are civilians and the obscenity of it is that there are industries willing to make money on it all. It is ironic that the modern world has to eat the less protected to protect their own ways of life and it resorts to some of the flimsiest excuses to do that.

If their is life on other worlds they may be very ready to put the self tortured animal species out of its misery. There aren’t many animal species that will resort to cannibalism as human beings will. It’s probably fatal if they do it too long under pressure from too large numbers or too little food.

If the modern world engages in too much cannibalism – it may keep its tottering economies alive (sustainably?) put it starts to loose it’s mind. It doesn’t seem to be able to make necessary economic changes in one area without causing someplace else to sag. It doesn’t seem to be possible to invest in new industries without destroying the old. And it happens so quickly, who can really stop to anticipate effects before it is too late or the damage was done?

Posted by paintcan | Report as abusive

While I’m no match for Keynes, I submit the counter argument that employment is not the issue, capital is. It’s not that the desire to keep spending is not there, it’s the fact that the market will not allow them. The investor flight from national and local bonds restricts each government’s ability to carry out such projects. It’s not the job market that worries European investors; it’s the bond sales that continue to run the government.

Greece, and the rest of PIIGS, are in trouble because of the potential for capital freezes. These nations, because of their reliance on government sponsored decadence, have mismanaged public funds to the point of insolvency. Because some local and state governments have overspent, investors cannot, with any semblance of reason, risk their capital.

If Greece could continue Keynesian borrowing and spending, Greece would. Germany , the ECB, and the bond markets reject this strategy due to the specter of inflation. Deficit spending has growth potential, if and only if, the government has the confidence of the investor and the people to repay the debt. Because once that government faith vanishes, there is both investor and citizen flight. This is doubly dangerous. The tax base weakens and borrowing costs increase. Once slated for bankruptcy like La Jolla or Harrisburg or Central Falls, economic activity slackens and decay sets in. The government, then, responds by slashing public services and raising tax rates, further depressing the general mood of both residents and private enterprise.

Credit has been lost somewhere, I don’t believe the economists or the politicians anymore. I do not think they are competent enough to institute, to lead or to execute any policy of worth, like FDR’s CCC. The rhetoric has been so shallow politically lately. There seems to be a lack of real imagination or perceptive foresight from those who are tasked with adequately responding to economic, social and environmental problems that will impact the well being of citizens.

But anyways, nice article. Keynesian stimulus seems to working in the short term for the macro United States. Not really for budget burdened local places like Greece and La Jolla, though. I think you’re on to something with the inefficiency/job destruction problem, you should look into automation in the service industry. President Obama mentioned it a while back, something about ATMs. I’ve heard that S. Korea is working on a robot that does household chores. Then think about the impact on the fast food or the hotel industry.

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Excellent article! With high employment rates there would be economic confidence, and hence sustainable economic growth. On the other hand, if people fear losing their jobs then they will not go out and spend and the economy will therefore suffer as a consequence.

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