The EAST cure for unemployment

By Edward Hadas
October 3, 2012

The winner of the presidential election should do something about U.S. unemployment. The current rate of 8 percent is high by America’s historical standards, and that measure does not capture the gravity of the problem – too many people have spent too long out of work or have decided to leave the workforce because jobs are too hard to find. European leaders face an even greater challenge. The EU unemployment rate is 10.4 percent, and during the last decade it has been below 7 percent for only half a year.

What is to be done? Neither Mitt Romney nor Barack Obama has a clear plan. The Federal Reserve has an idea, but it is hard to see how $40 billion a month of newly printed money will actually help create jobs. I have an alternative approach: EAST. It is both an analysis of the problem and a solution.

E is for Efficiency. The industrial economy continually makes more stuff out of less labour. More efficient workers, machines and systems constantly add to consumption, and constantly subtract jobs. The lost labour has mostly been dangerous or tedious, so there is little to regret.

Still, the job drain presents a social challenge. Unemployment is an affront to people’s need to do something meaningful. Fortunately, for more than two centuries advanced economies have more or less managed to compensate for increased efficiency. New jobs have been created to provide consumers with additional goods and services. Labour-intensive bureaucracies have expanded in law, finance and government. The available labour has been shared out over more people, leaving more time for education, leisure and retirement.

A is for Asymmetry in the labour market. Despite the success at keeping people busy, job destruction remains much easier than job creation. Destruction is the natural result of the relentless increase in production efficiency. It also fits in with the productivity mindset; employers are always thinking of ways to cut unproductive headcount.

Conversely, job creation is much less natural. While companies often need to add staff in order to grow, it is still risky for employers – the new employee may not earn his keep. Tax and benefit payment reduce the odds of success. New initiatives are often thwarted by social inertia, powerful incumbents, unsympathetic banks and smothering regulators.

S is for Surplus, the structural surplus of labour. The asymmetry of job creation and destruction creates a perpetual risk of persistently high unemployment. The actual problem is much more serious in poor countries than in rich ones, but unacceptable levels of unemployment are always and everywhere a threat. Crises are especially dangerous. When U.S. financial system stumbled badly and when the Greek government ran out of money, old jobs were quickly lost – and replacements have not yet been found.

Economists often get this wrong. They worry far more about insufficient GDP, a mythical problem in already rich advanced economies, than about the structural challenge of a potential oversupply of labour. The blind spot leads to backwards analysis. It is misleading to say that a decline in GDP caused the current U.S. unemployment problem. The predominant causality goes in the other direction: excessive job destruction led to a fall in GDP – and the GDP recovery will come only when new jobs are created.

Finally, T is for Target. Employment is best increased by making it a direct target of public policy. The old communist governments did this well. They provided jobs for all. Their method was frequently wrong – the police and domestic spying services were big employers – but the goal was right. Non-communist economies should also make full employment the first goal of economic policy.

In the long run, the goal can only be reached through a determined fight against labour asymmetry; governments should discourage job destruction and encourage job creation. Germany, where unemployment has shrunk steadily for six years, has shown the power of relatively minor changes in regulations. In the United States, hiring is probably less of a problem than firing. Law, custom and lenders all push employers to rush to let people go when times are tough. The incentives should be pushing them in the opposite direction.

The long-term goal is not to make factories less productive; that would be mad. It is to support valuable activities, from highly skilled crafts to labours of care, which are too easily judged to be marginal or “uneconomical” because they are insufficiently efficient.

In the short term, the government should be an employer of last resort, just as it has become a lender of last resort. It can create jobs directly – for example through public works projects – or indirectly by subsidising new jobs in the private sector. Right now, all the Fed’s newly created money is flowing into the financial markets. The next president would be wise to look EAST and put cash into the pockets of newly hired employees.

10 comments

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Mr. Hadas. You were one of the few writers who liked classical references. And I think it was Sigfried Gideon who mentioned that fact the the old Roman Empire could have actually started to use steam engines had they had sufficient need for them. They knew about Hero of Alexandria’s Heliopyle but had so much cheap labor in the form of slaves and freedmen, they had no incentive to develop it. They built massive public works to keep as many people employed as possible. I think the ancient Egyptians and even the Chinese emperors were doing the same thing for the same reason. I learned recently on a Chinese site that the Forbidden City is enclosed with a wall that is actually made largely of rice, sand and shells. The material is very hard and long lasting and I think it may have been an attempt by the early Ming Dynasty emperors to soak up excess rice production to preserve price stability. An Emperor in Japan once paid a quart of rice for every smooth pebble brought to him to pave the shore line of a decorative pond in his Kyoto garden (it’s till there) and that may also have been a way of keeping food in circulation at a time of economic slowdown. It’s a bit pricey for small stones.

But today, the US and European governments can’t really afford to make many changes in unemployment if it means lowering the wages. That would tend, inter alia, to drop the wages overall and undermine housing prices and tax revenues. It might also cost less to pay them and cost more for health care benefits.

Politicians have to cater to their constituents and they are working at cross-purposes as much as the King’s ministers were during the closing years of the monarchy in France. The monarchy couldn’t make a move without disturbing some interest that preferred the status quo.

It is too complicated to try to list all the dichotomies at play but one obvious one is – the western developed economies are adapting to aging workforces while the developing economies are trying to employ massive numbers of young people who have educations but can’t find economies sufficiently active to absorb them. But the development of the rising economies also undermines the dominance of the developed economies.

The slowdown in the affluent countries makes it harder for the developing countries to continue to grow and makes them more politically volatile, further aggravating the stability of the industrial economies that feel they must preserve political stability globally. They cannot exert dominion over the world Roman Style and therefore, cannot rape the countries quite as baldly as the Romans could. It costs a bundle to play global cop. And everyone, everywhere, is more astute and sophisticated than at any time in history.

The US can’t institute any massive public works projects or react to changing global environmental or political changes now because it will cut across the interests of the vested in, or dependent on, the status quo at all levels.

To make matters worse: People will live with massive inequality of wealth as long as their own smaller needs are met. But when the wealth becomes moribund at the top and the rest start to hurt – not even wealth will be quite able to “buy happiness” the same way it did when the economies were more liquid. It’s not much benefit being rich if one has to eventually live bunkered against or guarded against the wanting and those desperate to fill the shoes of the well fixed at almost any cost That is the built-in threat of global depression and great income inequality. That is a constant theme throughout history.

The story of the Titanic is so iconic because it shows modern industrial life baldly and all the same class distinctions and attitudes are very easy to update for modern times. And the tub sank. Even the Arab spring is walking on quick sand. “Liquidity” tends to make sand a dangerous substance under foot.

I’m not at all optimistic anymore. For one thing – I’m one of the old and dependent now and whatever gets done isn’t going to do much to help me anymore. I’d be a revolutionary if I could think of one revolutionary move that might actually have a chance of surviving and winning. But it’s so soul and mind numbing boring sitting in the graveyard of Thorton Wilder’s “Our Town” watching endless repeats of the Titanic.

Posted by paintcan | Report as abusive

So it is Communism – wow that is new..Obama is right with your thinking…every time there is wavering of the economy the freaking bleeding communist come out. This is pathetic. this is just conversation – the reality of the communist world is depraved.

Posted by xit007 | Report as abusive

Are you really as S-T-U-P-I-D as you sound?

The ONLY thing that will bring back US jobs is the reversal of free trade and tax policies that have made the wealthy class richer and everyone else poorer for the past 30+ years!

YES, it really is as simple as that.

ANYONE, whether the person is a government official, politician, business leader or economist, etc. who says otherwise is either a fool or a liar.

Posted by PseudoTurtle | Report as abusive

Kudos, Mr. Hadas! You understand that the first step in solving any complex problem is properly perceiving and defining it. Appropriate remedies are then, and only then, easily seen.

“In the short term, the government should be an employer of last resort, just as it has become a lender of last resort. Right now, all the Fed’s newly created money is flowing into the financial markets. The next president would be wise to look EAST and put cash into the pockets of newly hired employees.” Well, yes and no.

On the other hand, the WPA in the thirties did what needs to be done rather well at relatively low cost. Everyone knew those “jobs” were temporary and none would become a permanent place at the public trough. I don’t think they had much in the way of “benefits” either. Such an approach in the near future (after the election) would be a MUCH better move than the cash presently flowing into the financial markets.

Thinkers who not only can see the REAL problems but propose practical solutions to genuinely address them in a feasible manner are, perhaps, society’s greatest resource”. Well said, indeed!

It can create jobs directly – for example through public works projects – or indirectly by subsidising new jobs in the private sector.

Posted by OneOfTheSheep | Report as abusive

Delete last sentence above, included in error.

Posted by OneOfTheSheep | Report as abusive

@Pseudo Turtle,

I am neither a “…fool or a liar…” and I ask you to repeat your first sentence aloud standing in front of a mirror.

America’s embrace of capitalism and historical results has long been a shining beacon to the rest of the world, a promise that, in so many words, that if you do as we do, you, too, can EARN a better life.” You would have us betray that promise? Shame on you.

You have heard the parable of “give a fish and feed for a day, teach to fish and feed for a lifetime”? Well, it doesn’t do much good to teach someone how to fish if they cannot fish where the fish are.

Grow up. It is folly to believe America can stand alone in singular economic success while the rest of the world starves. The ostrich with it’s head in the sand is not nearly as safe as it thinks it is (if it thinks at all).

Posted by OneOfTheSheep | Report as abusive

@ OneOfTheSheep –

If you read what I said, I did not offer a third choice because logically there is none — ignorance is no excuse at this juncture with the state of the US economy such as it is presently.

This advice isn’t for you because I know you will not take it, having been sold a total “bill of goods” by “America’s embrace of capitalism and historical results (that) has long been a shining beacon to the rest of the world”.

I refer anyone interested in learning the real truth about the US economy from (my favorite) a series currently running in the Asia Times called “CREDIT BUBBLE BULLETIN, Commentary and weekly watch by Doug Noland”.

His weekly commentaries on the financial and economic aspects of the global economy are a “must read” for anyone who wants to understand what is going on with the global economy that is totally free of US censorship. http://www.atimes.com/atimes/Global_Econ omy/NJ03Dj01.html

A collection of his commentaries for the last few months can also be found at http://prudentbear.com/index.php/comment ary/creditbubblebulletin.

Or, simply do a Google search under his name.

Those of you accustomed to reading the “vege-pap” in US “news” are in for a surprise (shock) on how well real news can be covered, and how different reality can be from what those in power want you to believe.

Even The Guardian (UK) business section provides more information than any US source is allowed to do.

The choice is entirely up to you.

PLEASE don’t take my word for it. There are reliable sources outside of the US that will tell you the truth.

Posted by PseudoTurtle | Report as abusive

@Pseudo Turtle,

You ignored what I said, but purported a “response” utterly lacking. Who asked for a “third choice”? I didn’t. Who asked for your “advice”? I didn’t. You used my identity to get others to read an unrelated rant.

You don’t seem to like debating ideas in public with the “hearts and minds” of readers at risk. The perspiration of American taxpayers that has made America and the associated inspiration America has provided by example and in help and hope to countless countries again and again for well over two hundred years is not something for the likes of you to so casually and contemptuously dismiss.

Posted by OneOfTheSheep | Report as abusive

interesting thoughts! no doubt, might be very useful short-to-medium term. what happens though when machines are able to do just about anything better, faster and cheaper than humans? are we still going to create artificial and pretty much meaningless jobs then? or, maybe it’s time to start thinking about how to organize life around something other than jobs? …just asking, i don’t have any proven answers. here’s an interesting blog on the subject and a free book in .pdf: http://econfuture.wordpress.com/

Posted by ParadigmShift | Report as abusive

@OOTS- America could afford to “embrace capitalism” as you put it – because there was an undeveloped continent waiting to be exploited.

That is not the case today. The US is not the new world anymore. We have become Europe and Tsarist Russia and are as class ridden as they were. If 80% of Chicago school children are qualifying for free lunches that means most of the better off kids aren’t attending public schools but their own better-staffed, better disciplined and more expensive charter and private schools. If times get too rough here they will have the educations and influence to pack up and leave for better pastures.

The United States hasn’t actually been totally enthralled with capitalism. It values social equality more to keep some semblance of democratic values alive and a level of income equality most of all. Newports versus Hell’s Kitchen neighborhoods were not considered healthy signs of American values even 100 years ago. Roosevelt used taxation to level the peaks and to fill in the valleys more or less the way they use earth to provide a smoother gradient for railroads and interstate highways. I have been hearing about the control of the top wealthiest tier since I was in high school in the 60′s but I never went unemployed for so long as today. The top layer was also larger than to the so-called 1%.

The United State was actually a primitive and mostly agricultural economy until about 100 years ago. Now it is post modern, post industrial and not even money seems to have the solidity it was once assumed to have. Gold has traditional creds with most of the world but gold bugs might be wise to know that if the world monetizes it again it would have to be controlled exclusively by the government and those may very well set a standard value that is far lower than the bugs would like. And they will have to give it up to central government for the value the government sets. Or it is just another speculative commodity.

It is quite possible there is no solution. Alexis de Tocgueville maintained that the French Monarchy tried everything it could to develop the industrial base, to make significant improvements to infrastructure and to see to social welfare needs before the revolution. Nearly everything the Revolution said about the monarchy was a lie and the revolution was the product of the most sophisticated media then existing. It lived on theories and slogans. The state suffered from insolvency and military defeats. And that’s the fact that made the Revolution so deadly for the same reason the Bolshevik Revolution was so destructive for the Russians. A lot of people died for nothing.

Most people underestimate OBL. He knew just what he was doing. He knew that the USSR was made bankrupt by its adventures in Afghanistan and set us up to do the same thing and it’s working. Perhaps he wanted the developed economies to retreat to within their own borders? Perhaps he wanted them bankrupt and forced to attack each other?
I never read a word of his about his theories but I heard he could be pedantic and very boring actually. But I’ll bet he was accurate. Hitler was an accurate critic of prewar Europe. And he hated their guts for what they did to Germany after WWI.

OBL probably knew that capitalism doesn’t live without something cheap to exploit and made more valuable by employing labor. It’s finding resources or labor that are cheap that kept us going for the last 50 years. The old colonialism was how the west kept its standard of living so high and he knew it was ending. The US lived on commercial colonialism and increasing the effectiveness of labor and that was its advantage over Europe. Now it is far more difficult to find cheap resources or labor. In fact: Mr. Hadas, among other things, is saying that the benefits of making labor more effective is almost working against itself now. If technological advance is making the worker obsolete, what benefit is it bringing to the people it is intended to help? Can the machines be taxed to keep the rest of the country alive? That defeats the purpose of using them.

That’s why our time is up. OBL knew that all he had to do was increase the cost of “overhead” and the house would come crashing down. How could he not appreciate that fact? He was the son of a family of wealthy contractors. The Fed is trying to keep the cost of capital down but somehow that isn’t the same thing as “overhead.” for USA Inc.

That’s why the Fed can’t get the ball rolling again. WE are trying to live on the illusion that somehow money can make money all by itself. It’s an optical illusion that lives in Bookkeeping.

Posted by paintcan | Report as abusive