Wednesday, November 26, 2014

Austerity and Demoralization

NEW HAVEN – The high unemployment that we have today in Europe, the United States, and elsewhere is a tragedy, not just because of the aggregate output loss that it entails, but also because of the personal and emotional cost to the unemployed of not being a part of working society.

Austerity, according to some of its promoters, is supposed to improve morale. British Prime Minister David Cameron, an austerity advocate, says he believes that his program reduces “welfare dependency,” restores “rigor,” and encourages the “the doers, the creators, the life-affirmers.” Likewise, US Congressman Paul Ryan says that his program is part of a plan to promote “creativity and entrepreneurial spirit.”

Some kinds of austerity programs may indeed boost morale. Monks find their life’s meaning in a most austere environment, and military boot camps are thought to build character. But the kind of fiscal austerity that is being practiced now has the immediate effect of rendering people jobless and filling their lives with nothing but a sense of rejection and exclusion.

One could imagine that a spell of unemployment might be a time of reflection, reestablishment of personal connections, and getting back to fundamental values. Some economists even thought long ago that we would be enjoying much more leisure by this point. John Maynard Keynes, in his 1930 essay “Economic Possibilities for Our Grandchildren,” speculated that, within a hundred years, that is, by 2030, higher incomes would reduce the average workday to a mere three hours, for a total workweek of only 15 hours.

While there are still 17 years to go, it appears that Keynes was way off the mark. So was Robert Theobald, who, in his 1963 book Free Men and Free Markets questioned the public’s repugnance toward high unemployment. He asserted that “we can have meaningful leisure rather than destructive unemployment,” and that we do not need “a whirling-dervish economy dependent on compulsive consumption.”

But finding something satisfying to do with our time seems inevitably to entail doing some sort of work: “meaningful leisure” wears thin after a while. People seem to want to work more than three hours a day, even if it is assembly-line work. And the opportunity to work should be a basic freedom.

Unemployment is a product of capitalism: people who are no longer needed are simply made redundant. On the traditional family farm, there was no unemployment. Austerity exposes the modern economy’s lack of interpersonal connectedness and the morale costs that this implies.

Work-sharing might keep more people marginally attached to their jobs in an economic slump, thereby preserving their self-esteem. Instead of laying off 25% of its workforce in a recession, a company could temporarily reduce workers’ hours from, say, eight per day to six. Everyone would remain employed, and all would come a little closer to Keynes’s ideal. Some countries, notably Germany, have encouraged this approach.

But work-sharing raises technical problems if increased suddenly to deal with an economic crisis like the one we are now experiencing. These problems preclude the sudden movement toward the ideal of greater leisure that thinkers like Keynes and Theobald proclaimed.

One problem is that workers have fixed costs, such as transportation to work or a health plan, that do not decline when hours (and thus pay) are cut. Their debts and obligations are similarly fixed. They could have bought a smaller house had they known that their hours would be reduced, but now it is difficult to downsize the one that they did buy.

Another problem is that it may be difficult to reduce everyone’s job by the same amount, because some jobs scale up and down with production, while others do not.

In his book Why Wages Don’t Fall During a Recession, Truman Bewley of Yale University reported on an extensive set of interviews with business managers involved with wage-setting and layoffs. He found that they believed that a serious morale problem would result from reducing everyone’s hours and pay during a recession. Then all employees would begin to feel as if they did not have a real job.

In his interviews with managers, he was told that it is best (at least from a manager’s point of view) if the pain of reduced employment is concentrated on a few people, whose grumbling is not heard by the remaining employees. Employers worry about workplace morale, not about the morale of the employees they lay off. Their damaged morale certainly affects others as a sort of externality, which matters very much; but it does not matter to the firm that has laid them off.

We could perhaps all be happy working fewer hours if the decline reflected gradual social progress. But we are not happy with unemployment that results from a sudden fiscal crisis.

That is why sudden austerity cannot be a morale builder. For morale, we need a social compact that finds a purpose for everyone, a way to show oneself to be part of society by being a worker of some sort.

And for that we need fiscal stimulus – ideally, the debt-friendly stimulus that raises taxes and expenditures equally. The increased tax burden for all who are employed is analogous to the reduced hours in work-sharing.

But, if tax increases are not politically expedient, policymakers should proceed with old-fashioned deficit spending. The important thing is to achieve any fiscal stimulus that boosts job creation and puts the unemployed back to work.

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    1. Commentedphilip meguire

      USA Employment Rate, persons between the 25th and 55th birthdays. This age range is the hard core of the labour market, unaffected by higher education and early retirement.
      First figure is for men, the second for women.

      1956 94.4 39.3
      1968 94.7 46.3
      1988 89.5 69.3
      2000 89.0 74.2
      2007 87.5 72.5
      2013 82.8 69.3
      The 2013 employment rate for women was that of 1988. The second half of last century saw this rate nearly double, to an all time high in 2000. That year also saw the all-time high employment rate for both genders combined. It is not evident that this century's decline in the employment rate for women can be blamed on austerity, or can be offset by macro policy.

      The employment rate for men is both procyclical, and in secular decline, with a majority of this decline occurring this century. The declining labour force participation of men is in part due to Social Security Disability, and is evidence of a growing intractable underclass in the USA. The secular decline in the employment rate for men cannot be blamed on austerity, and cannot be addressed by macro policy.

      The real world unwitting implementation of Robert Shiller's labour market ideas is called Walmart: low wage rates, reduced hours, with employment benefits being a major casualty. Extension of this model to other parts of the US economy is realistic only with a single payer model for healthcare, and some changes in Old Age Insurance.

        Commentedphilip meguire

        The real problem is that the share of labour in national income has been in decline since 1970. In 2013, Wages / GDP were at an all time low. (Wages + Benefits Paid by Employers) / GDP were at their lowest level since 1941, a time when FICA was much smaller than now, most jobs did not come with pensions, and workplace health insurance was very rare. Even (Wages + Employer Benefits + Profits of Unincorporated Firms) / GDP are at an all-time low. So the declining share of wages cannot be attributed to a rising share of self-employment. Meanwhile, the cash flows of corporations, net of the Federal corporate income tax, were at an all time high, again expressed as a % of GDP. Despite the Great Recession, our time is one of capitalism triumphant, achieved on the backs of workers. These results would be ever more marked, if the enormous wages and bonuses of the finance sector could be purged from the data on the share of labour.

    2. CommentedLeo Arouet

      Un libro reciente de Dacid Stuckler menciona los aspectos sociales y económicos, negativos, de la austeridad; claro, aparte de que reducen el crecimiento, deterioran la calidad de vida.

    3. CommentedHeriberto Arribas

      We can join ideas of Laffer and Ludd. In the 80 or 90 we reach the maximum and now started down the branch. Ludd's solution is not a good idea, or even solution. I recommend reading "The Revolt of the Masses" of Ortega y Gasset.
      They work a range of possible solutions, but here there is no room for discussion.

    4. Commentedjim bridgeman

      Try out this idea in 1913. Thanks to new technologies we can grow enough food for everyone if 30% of us work full-time on the farm. It seems that full-time farm work by 30% of us is going to doom the rest of us to destructive unemployment. Let's legislate that farm work hours be capped at 12 hours per worker per week so that everyone can maintain their farm employment. That's no more ridiculous than this proposal of Schiller's. Today, it looks like we can feed everyone and give them all the material goods they can use and all of the traditional services they can use if 85% or 90% of us work full-time to provide those things. (And the alarmists predict that this will drop to 25% or 30% or less with robotics.) Is the solution to restrict individual work-lives so that all can continue to work the existing jobs? Of course not. The sensible thing to do is to expand the sphere of things we do for each other. Since we are approaching full feeding of ourselves and full provision of physical stuff, the place this will go is more services to each other. The expanding sphere is going to be more help to each other in the form of entertainment, healthcare (remedial and restorative), healthcare (preventative), healthcare (expansive), education, social and leisure activity, spiritual care, etc. all very broadly defined and with innovations to come that we literally do not imagine now, anymore than in 1913 we could have imagined the mechanical, electrical and electronic worlds (and jobs) that were about to be created. The biggest mistake we can make is to adopt policies that require or even encourage people to keep doing and viewing jobs as the same things that they have been for recent decades. How much longer would it have taken to transform the material world if there had been policies in place strongly encouraging people to stay on the farm? Yes, those pushed off the farm suffered while we collectively discovered what they could do for themselves and the rest of us but the very fact that they had to figure it out (or work for those who were figuring it out) advanced the world we all live in. The same thing is going to happen now. The fact that we can't imagine (most of us) what the new work and world will be is precisely the reason that we need to allow fairly unfettered innovation to discover it and we need to be careful not to make it too comfortable for people no longer needed in the old jobs to avoid the pain of finding their way into the new ones.

    5. CommentedZsolt Hermann

      Austerity is not the problem.
      Austerity is a reaction or a symptom of a much greater problem.
      It is the whole system that is sick.
      Some comments suggests depressions are cyclical and end after a while and we would return to stability and thriving employment again.
      This is not true because today we are not in a crisis or depression, today we are in a system failure.
      Our present system is unnatural, artificial and since we exist in a vast surrounding natural system with strict, unbending natural laws such an artificial human structure we stubbornly try to maintain cannot be sustained.
      The excessive constant quantitative growth system reached the point of no return, the many inherent factors: social inequality, unbearable debt burden, exploitation of workers, exploitation of natural resources, unequal distribution of resources and profit, etc. combined to such an extent that the system has become self-destructive.
      On top of that the whole human network became interconnected and interdependent creating such a domino effect, contagion that all the negative factors reinforce each other making the collapse even faster.
      Austerity is simply a desperate reflex reaction from those who feel pushing more, "stimulating" the dying horse would bring the end on us faster, but austerity without a viable "growth plan" cannot work.
      And today there is no viable growth plan as it is impossible in a closed and finite system.
      It is the whole framework, paradigm that needs changing, we have to adapt to the laws of nature, to the general balance and homoeostasis requiring a lifestyle based on natural necessities and available resources.
      Just as we cannot cheat the law of gravity for example, we can only use it by understanding its principles, all the other natural laws apply to us just as much.

    6. CommentedAvraam Dectis

      We could have a society that worked less and enjoyed leisure but it would require greater social benefits and trade controls.

      Free trade means, effectively, that anyone can be replaced by someone somewhere who will work for less. This forces compensation down.

      The price for leisure is higher taxes and more expensive goods. What politician could survive that suggestion?

    7. CommentedTomas Kurian

      The work-sharing is trully the solution, but it needs to be paid for. The higher standard taxation is not a good source of funds, as it reduces the incentives of companies.

      The ever increasing productivity will continually lead to less and less people needed to work. Without an institutional mechanism, which will enable passing these productivty gains to people in the form of more free time, we will end up in a diminishing, shrinking society run by robots but no people.

      The way out is subvencing the companies, that hire more workers at lower hours (transform ALL their workforce to the lower productivity paradigma) but at STANDARD ( not lowered) wages. This is essential in order not to negatively influence the rest of the economy through lower demand, stemming from decreased wages against fixed costs of living,...

      The source for these subvences should be taxes on savings in connection with moderate expansionary monetary policy. An essential part of this upgrade of our financial system is move to fully digital system, one that would allow such taxation of deposits without bank runs.

      The mechanisms needed for this are described in my work:, chapters 16-18

      With workers having same money and more free time, unemployment will be history soon and new sectors of leasure, travel, hobby... will get an enormous boost.

      But we need to implement this mechanism as permanent part of economy governance. That way governments will be able to influence employment levels across industries, geographies and allow its gradual implementation. With optional subvences, companies working at this lower productivity will be as competitive as those still at higher standard ( maby not being able to find suitable additional employees, yet).

    8. CommentedG. A. Pakela

      Where does it follow that the "balanced budget" multiplier will increase employment? We have experienced the highest persistent deficits since WWII, almost completely accomodated by monetary policy, i.e., the printing press, and yet unemployment has barely budged after five years.

      The tax increases, particularly those on the "rich," those households that own businesses, will result in a higher after-tax cost of capital and a corresponding decrease in investment, oops, kind of what we have today, and fewer employment opportunities in "fly-over" country.

    9. CommentedJohn Campbell

      Advancing technology is meaning many jobs are going (retail, admin). In the long-term computers etc will do almost all current jobs (except those needing a human touch). This is a good vision; humans will be able to pursue meaning, happiness, service to others rather than 'work'. The question is how do we get there? We are making a very, veyr bad job of the transition so far. Society needs to begin to say, contrary to this article, that a live spent in pursing happiness, meaning and service, without paid work, is a good and valid life. Robert you are such a good writer and force; please pick up this need and help the transition.

    10. CommentedFrank O'Callaghan

      This is a brilliant piece. It says the unsaid truth. Keynes logic was excellent. The twin scourges of our political economy are unemployment and inequality. We have unoccupied poor and unoccupied rich. Neither are productive. We have wasted capacity and unnecessary carnage in society. Many of the employed are time poor. Work-sharing solves much of the twin problems of the poor and the time poor.

      Imagine the Keynsian dream of the 15 hour work week with zero unemployment and the improved social conditions consequent. The angry reactions to this piece show how many are often attached to the condition that harms us.

        CommentedTesh Tesh

        Productivity and performance of each worker isn't equal. Why force the more productive worker to share his 40 hour work week by working only 20 hours, so that another less productive worker can feel better in the other 20 hours?

        Imagine forcing a star cello player to stop half way, so that the mediocre cello player can feel better by playing rest of music for remaining 50% of the time? Is the star, the mediocre player and listeners then better and happier?

        Not everyone is “good” in a Good Society.

        Just like there are good rich people (Steve Jobs) and bad rich people (Bernie Madoff), there are good workers and bad workers, good poor people and bad poor people. By legally forcing corporations and good people to share work, you are not necessarily making society happier, you are redistributing misery, and you are reducing incentive for some to innovate and be more productive. Isn't that a road to serfdom?

    11. CommentedTesh Tesh

      Two issues professor:

      1. Fiscal stimulus pours fuel on the fire that damaged the economy. It slows re-adjustment, re-arrangement, re-invention. Blind fiscal stimulus from big government typically feeds crony capitalism, bad habits, unproductive enterprises. After all, communism was 100% driven by government directed fiscal stimulus programs. People were more unhappy employed under communist plan+spend+stimulate, than they are temporarily unemployed under capitalist experiment+innovate+change.

      2. If fiscal stimulus is that good, why don't you lecture us all about global borrow+spend and massive stimulus for the poor in Africa, Asia, Latin America and East Europe? Spending alone, showing up for a make believe job, meaningless wasteful pretensions do not create a sense of accomplishment, human happiness or sustainable evolving economic ecosystems.

        Commentedlee kus

        I have a couple of questions. You do know that the government contracts with builders to repair bridges and highways, don't you? Secondly I'm curious if you think of Halliburton, GE, Boeing, etc, as crony capitalists?

    12. Commentedjim bridgeman

      The proper question is whether job-sharing or temporarily higher unemployment better fosters growth later. Only that will resolve the problem.

    13. Commentedjim bridgeman

      Nonsense! (a) there was starvation when a down-turn occurred (b) virtually all family farms had a penumbra of local part-time paid (or boarded) help as well as various forms of migrant help. In a downturn these latter had to hit the road, as grievous an employment as any we have. And as soon as the industrial revolution made it possible they hit the road for the cities. There they, then as now, had jobs a certain percent of the time and unemployment a certain percent.

    14. CommentedProcyon Mukherjee

      Robert Shiller's reference to the German "short time work" during recession is an apt description of an alternative to keep people in employment rather than out and thus reducing the social problem. Seeing is believing how the German system acted in the crisis in 2008-09 as opposed to the U.S. system where 'firing' people was the normal reaction. The sharing of the pain between workers, Unions, Management and government (as the compensation loss was equally shared) brought in the immediacy of actions and incentivized the whole system to act to bring an expeditious end to recession.

      I complete disagree with Michael Heller's statement, "Artificial stimuli do have a useful role in in keeping up morale and maintaining the social fabric if need be, but they do not end depressions."

      In fact the German recession was second to Switzerland only in terms of shortest time span, Switzerland had an ever nobler solution to extend benefits up to nine months for those workers who were working shorter hours !

    15. Commentedarnim holzer

      Well said professor. My fear is that goverments seeking to correct fiscal balances will choose unwisely and increase corporate taxes. The damage the developed world is feeling is because we have failed to face demographic realities and have witnessed a growing disparity in the relationship of the returns to capital versus labor over the past 25 years. The combination of disruptive labor supply (not just China), unruly (a euphemism) financial engineering, and degrading demographic trends have led to a perfect storm of unintended consequences and undisciplined fiscal behavior. Whatever happened to the vaunted contra-cyclical fiscal disciplined approach of the Euro-Zone's leaders? Without the coffers filled in the good times how can we expect these leaders to seemlessly execute contr-cyclical policy now. The seeds of this malaise were visible up to 10 years ago as the proportion labor versus capital began to decrease and savings rates similarly dropped. Of course hindsight is 20-20 but in the face of increasing dependency rates housing prices should not have been accelerating at their 2004-2007 pace. While central banks have correctly focused on stimulative and inflation oriented policies to remove depression from possibility, any fiscal approach that simply creates short term stimulus will not change the underlying confidence necessary to create growth opportunities. Conversely, taxing corporate coffers will 'demoralize' firms and will similarly reduce incentives to invest where multipliers can have the most impact. This has led to an uncomfortable dilemma for developed governments. How can they provide investment incentives to corporations now when in many cases these same corporations undertook behavior that reduced tax payments and offshored jobs? Corporate coffers are simply too big to ignore. Industrial development has always had an uncomfortable relationship with labor and transitions have never been easy. But even in our modern society capital still does need local labor. Austerity in some form needs to be implemented but we will be revisiting this issue soon if the developing nations fail to focus on how to create capital and longer lasting growth sector employment rather than safety net salves. I agree, the greatest improvement to any coefficient of happiness is likely to come from labor being correctly allocated and compensated for their contribution. This will improve their perception of productivity and lead to real income and consumption gains. My fear, however, is that corporate coffers will seem like a painless solution. To paraphrase, " Hell hath no fury like capital scorned".

    16. Portrait of Michael Heller

      CommentedMichael Heller

      “Unemployment is a product of capitalism” --
      By default what you would prefer (unless you clearly state your alternative) must be socialism, defined as an institutional arrangement in which public authority manages the economic process, either by providing employment directly or by obliging private owners to provide it and giving them the means to do so (credit, stimulus, and absolution from responsibility for their losses). Professor Shiller, with all due respect, it never works for long. The result is always equality in poverty. Capitalism provides fluctuating but sustainable employment creation, and it rescued populations from the stable misery of family farming. Of course everyone hates the temporary suffering that comes with a depression, but you would be a more useful economist if you told people not to despair because depressions have always ended by themselves. Artificial stimuli do have a useful role in in keeping up morale and maintaining the social fabric if need be, but they do not end depressions. The problem is that unless handled with extreme care and moderation the artificial stimuli will be the greatest obstacle to recovery (or to any recovery worth having).