Macroeconomic constraints render individual action powerless

When recessions become prolonged and long-term unemployment rises, the conservative denial machinery always scapegoats the most disadvantaged by recommending cuts to welfare to make people more desperate. This is dressed up in terms that attempt to make this sort of policy sound reasonable – like we should all be adventurous and entrepreneurial. The facts are that mass unemployment represents a macroeconomic failure that can be addressed by expansionary fiscal and/or monetary policy. It has nothing to do with the provision of the miserly amounts that are given to the unemployed via income support arrangements. Cutting those benefits will not cure involuntary unemployment. In all likelihood, cutting benefits will make the aggregate demand shortfall that caused the unemployment to worsen. The result is that the cuts will only make the lives of the unemployed more desperate than they already are. It is time that the conservatives learned about macroeconomic constraints.

The Wall Street Journal (November 25, 2012) article – Deadline Looms for Long-Term Unemployed – documented how:

More than 40% of the nearly five million Americans who receive unemployment insurance are set to lose those benefits if federal programs expire as scheduled at year-end.

This is because the US system of income support is loaded against those who need it the most.

The WSJ say that some economists are arguing that “overly generous benefits are helping to prolong joblessness”.

More than two years ago I wrote about this issue when the mad US politicians were rehearsing all the arguments about how you get more jobs if you cut the incomes of those who spend 100 per cent of their income support to nothing. The jobs will just materialise apparently in the face of falling demand.

Please read my blog – Extending unemployment benefits … an omen – for more discussion on this point.

The point of these attacks is that the proponents of cutting benefits fail to understand the most basic aspects of macroeconomics – as a discipline independent of microeconomics.

Macroeconomics teaches us that individual choice can be rendered powerless as a result of the presence of macroeconomic constraints – most usually spending constraints on the product market that ration the number of overall jobs and working hours that will be on offer at any point in time to an economy.

Once an economy is operating under such a demand constraint, the supply-side of the economy loses traction – that is, no longer influences the market outcome, which renders much of the orthodox labour market analysis irrelevant, if not false.

Before I explain that a brief detour into the thoughs of Lord Freud, a poncy British peer who takes it on himself to hold himself out as an expert on “welfare reform” despite knowing nothing about it at all.

As the recent UK Public Finance data released by the Office of National Statistics last week confirmed the Government’s austerity strategy is failing badly, even on its own terms, the poncy Lord Freud came out of his cave, well appointed I am sure, and claimed the British poor had adopted a “lifestyle of welfare” in preference to being enterprise adventurers.

The UK Guardian article (November 23, 2012) –
Lord Freud on welfare: making the poor pay for the risk-taking of the rich
– covered the story.

The UK Guardian author (Richard Seymour) doesn’t have a lot of time for Lord Freud. It tells us that:

Before assessing this claim, it is worth asking who it is that is taking risks with the livelihoods of the poor. Freud began his work on welfare reform knowing, by his own admission, nothing about welfare. In fact, it seems fairly safe to say that he continued in this vein, as he continued to make utterly ignorant claims about the system in order to justify government cuts.

Foolish they may be; Freud’s views have not been inconsequential. As an adviser to the New Labour government, Freud played a critical role in arguing for single mothers to be forced into work, and in persuading the government to turn over aspects of welfare provision to the private sector.

This advice helped open doors for Atos, the private sector bureaucracy which has been hired to turn people off disability benefits. It also provided a rationale for handing money to A4e, which has been the subject of repeated fraud allegations. For the private sector, there was no risk involved: they would make “masses” of money. Indeed, the fact that A4e has just been awarded more contracts after repeated failure and scandal proves the point. Now, Lord Freud is helping oversee a dramatic reduction of welfare services, under the mantra of rationalisation and efficiency.

I had a meeting yesterday with the Victorian Opposition Leader as part of work I am doing for the CPSU (Public Sector Union) and we discussed the massive labour hire contracts that the conservative Victorian Government is giving to private firms as they proceed to sack thousands of public servants. I will write more about that issue when I know more (that is, more research is needed to dig into the dirty quagmire of corporate feeding from the public purse).

Essentially, on the one hand the private sector calls for wasteful spending to be stopped and the public sector to be downsized and then on the other hand, it is accepting billion dollar contracts from the public sector to deliver public services. The government doesn’t save money at all but transfers it to management consultant and labour hire firms who then create a margin by downgrading the worker’s conditions they hire and sell back to the public sector.

Terms like 48/52 creep into the discussion – meaning that workers who were previously hired for the year and paid annual leave to have a holiday with their family are now sacked by the labour hire firm after 48 weeks and then hired back after they have paid for their own holiday. But it gets worse and I will write more about that another day.

But the trend is clear – there is a new industry of private sector vultures preying on every public dollar they can get while at the same time chiselling the most disadvantaged out of a few bucks of income support. It is the height of unethical conduct.

Organisations such as Atos Healthcare – which is a division of the French IT firm Atos and is being used by the British Department of Work and Pensions to do its dirty work – that is, get people who are legitimately entitled to government disability support benefits off the benefits they receive.

This Daily Record article (September 26, 2012) – Atos scandal: Benefits bosses admit over half of people ruled fit to work ended up destitute – provides some information about what has been going on in the UK.

It tells us that an internal report by the “Department for Work and Pensions, who hired the French IT firm to help them slash the benefits bill”:

… have admitted finding out in a survey that 55 per cent of people who lost benefits in the crackdown had failed to find work … thousands of victims of genuine, chronic conditions have complained of being humiliated by the company’s tests …

And all the rest of it.

Australia set the trend for other nations to follow in this regard. The Brits have their “Work Capability Assessment” process, administered by Atos Healthcare. Australia, the first of the governments to embrace this technique of slimming down income support reciplients brought in the Job Seeker Classification Instrument (JSCI) which was a pernicious survey instrument designed to humiliate the disadvantaged and get them off benefits.

On April 22, 2006 I wrote the blog entry (in my old blog format)

The Federal Government at its finest!

Today I became aware of a case of a person in their late teens who is severely autistic, is stricken by life threatening epilepsy and has late onset Rett Syndrome. We learn that Rett syndrome “is a childhood neurodevelopmental disorder characterized by normal early development followed by loss of purposeful use of the hands, distinctive hand movements, slowed brain and head growth, gait abnormalities, seizures, and mental retardation … gradually, mental and physical symptoms appear … loss of muscle tone … [loss of] … use of … hands and the ability to speak … The loss of functional use of the hands is followed by compulsive hand movements such as wringing and washing … the inability to perform motor functions – is perhaps the most severely disabling feature of Rett syndrome, interfering with every body movement, including eye gaze and speech.”

So this person cannot speak, cannot eat or wash without assistance, is not toilet trained and requires around the clock care and attention from family. She is also on disability support pension (DSP).

Yesterday, she received a letter from the Federal Government which said that because she is receiving DSP she is subject to the new welfare-to-work rules. The letter then said that according to these rules she is now required by law to look for work or face loss of entitlements.

This is a Government who deliberately runs Budget Surpluses such that those who are willing and able to work cannot find enough work because there are not enough jobs or hours of work created in the economy. And at the same time, the genii in FACS and DEWR dream up ever more pernicious ways to humiliate the most disadvantaged of our citizens, including those who are unable to work. So, the Australian Government at its finest.

This is a common example of how these neo-liberal governments, obsessed with the meaningless (running budget surpluses at all costs), inflict inhumane treatment on the poor.

I am reminded of a quote from British Sociology Academic Zygmunt Bauman who wrote in 1999 that:

The poor will always be with us, but what it means to be poor depends on the kind of us they are with …

You can read a version of his 1999 book in this blog – The burning of popular fear.

The idea is that the “way we define the poor is a reflection of the kind of society we live in” such that:

It is the standards reached and promoted by a given society which define the ‘threshold’ of poverty, the ‘breadline’, the point at which the human condition becomes a matter of concern for others, warning lights are lit and the urge to ‘do something’, to help, to censure, or both – prompts people to act or to reproach themselves if they do not. The treatment reserved for the poor, the way in which pity and condemnation are mixed, help and fault-finding are balanced, is a matter for society at large rather than for the poor themselves; a reflection of the standards a given community holds dear and is bent on cultivating.

Lord Freud has a very diminished view of society given his mean-spirited attempts to drive the least advantaged British folk into material destitution.

The UK Guardian article quotes Freud as saying that “people who are poorer should be prepared to take the biggest risks … the least to lose” and “only their attachment to welfare holds them back”.

Seeing people in terms of the material wealth they hold is typical of the neo-liberal era. A poor person has no less need for self-esteem and dignity than anyone else. They have as much to lose as anyone!

The UK Guardian writes on this point:

It is true that the poor have the least to lose in purely financial terms. It is just that this little they have to lose is what is keeping them fed and warm, is not the sort of thing one gambles with and at any rate it yields poor returns. The rich, being more endowed with resources and more secure in their position, are far better placed to take risks. Bankers of Freud’s ilk have an even greater advantage in this respect, as they take risks with the money and livelihoods of others.

The argument that Freud presents is also classic conservative dogma that characters such as Ayn Rand also perpetuate – that the rich are the producers of all wealth, income and jobs and the rest of us are “essentially stagnant and unproductive” and should think ourselves lucky these daring entreprenuers cuts us into the action.

The agenda is clear though – “they are busy attempting to suppress wage claims” and they are busy “making benefits so inadequate that even a poverty wage is an improvement”.

This is the agenda that was rudely interrupted by the financial crisis. But, undaunted, they are back on track – more vehement and full of their own self-importance than ever.

It escapes them that the increased poverty rates and entrenched high unemployment is the direct result of the vicarious incompentence of the entrepreneurial class, particularly in the financial sector, where one Lord Freud operates.

Further, his sector only has been able to survive in its existing bloated form because of public handouts. The bankers are the ultimate corporate welfare parasites.

The UK Guardian says that:

This is, of course, the story of risk that people such as Freud do not want to linger on, for it is not far from anyone’s memory exactly what that risk-taking led to, and who bore the costs. Indeed, it is not irrelevant that the costs of crisis are now being transferred to the public sector, and to the welfare state. The poor, in effect, are now bearing the costs of systemic risk without having enjoyed any of the rewards. And it is no more than predictable that one of those who did reap the rewards in abundance is now charged with ensuring that the costs of crisis are borne by those who were least to blame and last to benefit.

The point about systemic risk brings me back to the theme of this blog – macroeconomic constraints.

What none of these views understand is the concept of a macroeconomic constraint, which renders individual action powerless. This was a major theme of John Maynard Keynes in his assault on the dominant Classical theory of employment.

When there is an overall lack of aggregate demand, measured in relation to the spending that would be required to ensure firms would engage all available workers at the prevailing wage rates on offer, there is nothing an individual worker can do to improve his/her job prospects.

The mainstream response is that the worker has some choices that will improve their outcomes.

First, consistent with their view that unemployment is an individual rather than a systemic failure, the orthodoxy claim that attitudinal and/or presentational changes will be of benefit. While reducing one’s negativity and washing more often might be of use to a person and might give that person an edge in a job interview, it will do nothing to change the aggregate or macroeconomic unemployment rate.

That is because that rates governed by the level of aggregate demand. Unless having cleaner finger nails or combed hair suddenly leads to the unemployed and everyone else spending more, the macroeconomic constraint on the total number of jobs will remain.

My reference to personal hygiene, by the way, reflects some of orthodox literature that focuses on the personal characteristics of those on income support. In fact, the JSCI (mentioned above) had tick boxes relating to these sorts of things.

The point of a macroeconomic constraint is that it creates a queue of unemployed workers. The queue might be capable of being reshuffled – so the newly optimistic workers might move a bit further up the queue – but the length of the queue doesn’t change at all.

Second, another queue shuffling exercise is the ever present call for more training as the means of solving mass unemployment.

Once again, I am all for people being engaged in life-long learning and developing new skills and having a thirst for study and knowledge acquisition. But that will not, in itself, relieve a macroeconomic constraint.

Further, if the aim is to develop on-the-job skills (so skills that transcend what we call general skills such as numeracy etc) then the research evidence is clear – these are more effectively gained within a paid-work environment. Too many of the so-called training programs foisted upon the unemployed are isolated from paid-work and end up being of not use at all.

Third, inasmuch as the mainstream identify any macroeconomic causes of unemployment, their focus is restricted to these-called real wage, which the textbook models claims is determined in the labour market.

The classical framework becomes both the “ideal” that (neo)-classical economics (the mainstream now often referred to as neo-liberals) consider should guide policy and the main teaching model. I know that students find it hard separating the two. The ideal becomes ingrained and is as if the labour market would operate like that if only governments and trade unions stopped interfering with the dynamics of the free market.

It is very insidious. Sure enough they are later told that things might deviate from that but the basic concepts are typically taught within the (neo)-classical framework. There is something in human psychology that finds it difficult to unlearn things.

In Chapters 2 and 7 of my 2008 book with Joan Muysken – Full Employment abandoned – we consider the use of this type of labour market as the primary model upon which the orthodox view of unemployment is based and still pushed down the throats of students today by the mainstream macroeconomics profession in general.

The (neo)-classical model is represented by the following equations and is graphically depicted the graph below:

Labour demand: Ld = f(w)    f’ < 0

Labour supply: Ls = f(w)    f’ > 0

Equilibrium: Ld = Ls

where w is the real wage which is the ratio of the nominal wage, W and the price level P. The real wage is considered to be determined in the labour market, that is, exclusively by labour demand and labour supply. Keynes showed that this assumption is clearly false.

The labour demand (Ld) function is the derivative of the production function with respect to labour input (the marginal product). The ad hoc imposition of the so-called law of diminishing returns ensures this derivative is positive but declining as employment is increased. Hence, the labour demand function is downward sloping with respect to real wages. This is a short-run relation based on the fixity of other inputs.

In English, this means that as workers are added to some fixed stock of productive capital, they become less and less productive. Firms are supposed to only pay a real wage (that is, some product equivalent) that is equal to what the worker at the margin produces. Thus as productivity falls they are prepared to offer employment at lower and lower real wages.

I recall examples used when I was a student was the “Soft Drink Delivery Truck” where apparently a firm has a truck (capital) and a driver (variable labour). Then they add an off-sider to unload the crates at the delivery point (more labour) and marginal productivity rises. Then they keep adding workers who are hanging off the back of the truck getting in each other’s road (diminishing marginal productivity) and eventually tripping over each other and dropping crates (negative marginal productivity).

And, lo and behold, the Wikipedia entry for Production Theory basics uses that example. The most obvious question was why would a firm do that?

But the point is that the labour demand shape is simply asserted by mainstream economists as a religious belief and has questionable empirical relevance. It also cannot hold at the macroeconomic level.

The labour supply (Ls) function, which is based on the idea that the worker has a choice between work (a bad) and leisure (a good), with work being tolerated to gain income. The relative price mediating this choice is the real wage which measures the price of leisure relative to income. That is an extra hour of leisure “costs” the real wage that the worker could have earned in that hour.

The imposition of the ad hoc assertion that the substitution effect outweighs the income effect means that a rising real wage will elicit increased labour supply and vice-versa. What this means is that the rising cost of leisure is deemed (that is, asserted) to be a more important motivator than the extra income that the worker earns and so they work more as the real wage rises.

The following graph (Figure 2.1 in Full Employment Abandoned) summarises these results. The important Classical result is that the interaction between the labour demand and supply functions determines the real level of the economy at any point in time. Aggregate supply (using the aggregation fudge of the so-called representative firm) is thus a technological mapping from the equilibrium employment determined by the equilibrium relationship into the production function. Say’s Law (in whatever version) is then invoked to assume away any problems in matching aggregate demand with this supply of goods and services.

The equilibrium employment level, E* in the graph, is constructed as being full employment because it suggests that every firm who wants to employ at the equilibrium real wage, w* can find workers who are willing to work and every worker who is willing to work at that real wage can find an employer willing to employ them.

The mainstream economist thus considers the preferences of the workers always have a bearing on the labour market outcome and through price adjustment (real wage flexibility) any changes in supply preferences will – via mediation through the demand side – result in a changing full employment level.

In other words, adoption of the competitive paradigm demands that departures from full employment are ephemeral at best. Any sustained unemployment (say BC in the graph) must be due to a real wage constraint (a real wage, w1, above the marginal productivity at implied equilibrium full employment) which would be competed away more or less immediately.

A fundamental aspect of this labour market conception is that fluctuations in unemployment reflect supply-side changes arising from imperfect information or reflecting changing preferences between leisure and work.

This is the model that forms the basis of the way students are taught about the operations of labour markets. Students are encouraged to consider unemployment as being voluntary or because the real wage is fixed above the “market-clearing” level. Governments might be blamed if they set a minimum wage above this level or trade unions might push wages too high etc.

The implication is that individuals are prevented by misguided governments or trade unions from enjoying employment. But more often the unemployment is considered voluntary and the assertion is that if individuals don’t want to be jobless then they will offer themselves at a lower wage and firms will then employ them (given, by assertion, that the extra workers are less productive).

Holding technology constant (and hence the Ld curve fixed), all changes in employment (and hence unemployment) are driven by labour supply shifts.

There have been many articles written by key mainstream economists (such as Milton Friedman) that argue that business cycles are driven by labour supply shifts. Lord Freud is effectively holding out that view although in less sophisticated language.

The most simple examination of the data (as in the above graph from the UK ONS) suggests this theory fails to apply to the real world. An essential conclusion that you would draw from the supply shift stories is that quits (workers leaving jobs on their own volition) should behave in a countercyclical manner.

All the empirical evidence on quit behaviour from every country runs contrary to that construction. US institutional economist Lester Thurow wrote in his 1983 book – Dangerous Currents:

… why do quits rise in booms and fall in recessions? If recessions are due to informational mistakes, quits should rise in recessions and fall in booms, just the reverse of what happens in the real world.

I also recall reading a lovely account of how the mainstream economists explained the rapid rise in unemployment during the Great Depression – that within the elapse of a year or so, around 30 per cent of the workforce suddenly acquired a new found taste for leisure and decided to quit their work – a sudden outbreak of laziness struck the world during the 1930s!

Note the vertical line in the graph at E1. The dotted lines at the top of that line indicate that it has come from somewhere else – another part of the economy. That line is representative of an aggregate employment constraint being imposed on the economy from a lack of spending in the goods and services market. It renders any of the “market dynamics” in the classical labour market irrelevant.

But the other point is that the diagram is an invalid representation of the real world labour market. In fact, the real wage is not determined in the labour market exchange between labour and capital. When we bargain for wages we might be thinking in real terms – that is, what we think the money we will earn will buy – but the wage that is determined in that exchange is the money or nominal wage.

After all, prices are set in the product market by firms not workers. The real wage is a composite of the money wages determined In the labour market and the prices set by firms in the product market.

Workers surely form expectations of what they think the future course of price level movements will be but the fact remains that they don’t set prices and do not therefore have discretion over what the real wage equivalent of their money wage outcome will be.

They can conceptually offer themselves at a lower money wage but that, in itself, is unlikely to reduce the real wage at which they work.

Why? The answer was provided by Keynes and others who argued that if the money wage levels were to fall, then other things equal, unit costs will fall. Firms are likely to respond by cutting prices (competition will force this upon them) and so the real wage may not fall at all.

The point is that the real wage is not a variable that an individual unemployed worker can manipulate to their own advantage.

But the critique of the mainstream position goes deeper than that.

Even if real wage cuts could be engineered they will likely worsen the demand shortfall and so are likely to shift the aggregate demand constraint E1B left rather than right.

But there are also strong grounds as to why nominal wage rigidity is an institutional given and nominal wage cuts are resisted by both firms and workers.

The problem is that the textbook model falls foul of the concept of a macroeconomics constraint as well as failing to understand basic human psychology and firm behaviour.

First, workers will resist nominal wage cuts for a variety of reasons. Wages are not only an indicator of earnings potential but also a social index. We think in relative terms as much as we think in absolute terms. So our place in the wage structure is important to us.

We know that if inflation outstrips the growth in money wages then our real wages will fall. But we know this is happening to everyone and our relative position in the wage structure is not being threatened by this. However, if one segment of the wage structure takes a money wage cut then it alters its relative position and it is unlikely that the loss will be made up when the economy recovers.

So there is no incentive to accept nominal wage cuts even if they deliver the same real wage cut as a generalised inflation might.

Second, our most important contracts are in nominal rather than real terms. When we take out a mortgage at the bank we don’t have a real contract. We have to pay a certain number of dollars per month to service the debt. Nominal income cuts thus may impact on our solvency. A real wage cut resulting from inflation outstripping the growth in money wages is difficult to deal with. But, within limits, we are able to reduce our consumption of certain items and still maintain our solvency with respect to our nominal contractual obligations.

Firms also resist cutting wages because they do not want to be seen as a capricious employer. They know that when times are good they would find it hard attracting labour if they had behaved badly in the downturn when their bargaining power was increased.

You might like to read this New Statesman article (November 23, 2012) – Why don’t wages fall? – which categorises “nominal wage rigidity” as “one of the bigger gaps in theoretical economics” (read mainstream economics). Post Keynesians have always understood why nominal wages do not fall.

So there are solid reasons why economies don’t make downward adjustments to nominal wages in a downturn.

The idea of a macroeconomic constraint informs the notion of involuntary unemployment, which is a fundamental concept in Post Keynesian macroeconomics (and Modern Monetary Theory). The concept is based on the view that individuals are constrained by the systemic failure of the economy to provide enough jobs and have little power to alter that circumstance and thus gain work.

It is is direct contradiction to the view discussed above that unemployment is a voluntary state, chosen by individuals upon the basis of their preferences for “leisure” against work with the choice being tilted towards unemployment by the provision of welfare benefits.

The concept of voluntarism comes from the Classical economists (pre 1930s) who denied that there could ever be an enduring state where the system failed to provide enough work relative to the preferences of those who desired to work. They claimed that output (which drives the demand for labour) could never persist at which would be insufficient to generate a job for all those who desired one.

The Great Depression in the 1930s changed the debate because the notion of voluntary unemployment failed to accord with the observed reality. Millions of workers clearly desired to work but were forced onto the unemployment queue because employers were not willing to provide them with jobs. It was clear that the firms had no desire to expand employment at that time because they could not foresee any potential sales for the extra output that might have been produced.

In the 1930s, the British economist John Maynard Keynes realised that the existing body of macroeconomic theory was inadequate for explaining the mass unemployment that persisted throughout the decade as production levels fell in the face of a major slump in overall spending. He thus defined involuntary unemployment in this way:

Men are involuntarily unemployed, if, in the event of a small rise in the price of wage-goods relative to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment. (Page 15, General Theory)

This definition was deliberately designed to challenge the existing British Treasury viewpoint which claimed that the unemployment during the early part of the 1930s was due to the real wage (the purchasing power equivalent of the money wage) being too high relative to productivity.

So Keynes said that if the real wage falls and workers still supply more labour to the increased quantity of jobs offered by the firms then those workers were unemployed against their will – that is, involuntarily unemployed.

The essential point that Keynes was aiming to instill into the debate was that mass unemployment of the type he saw in the 1930s was a demand rather than supply phenomenon. That is, it is total spending in the economy that impels firms to employ workers and produce goods and services. A firm will not employ if they cannot sell the goods and services that would be produced.

Building on that concept, Keynes introduced the idea of the unemployment equilibrium – that is, a state where the monetary economy could continue to operate at high levels of unemployment and firms realising their expected sales volumes. He argued that if the economy reaches this type of impasse, the only way out is to reduce unemployment by an injection of government spending, which stimulates demand and provokes firms to increase output and offer more jobs.

The debate between Keynes and the Classical economists in the 1930s has resonated throughout the decades since. In the 1980s and beyond as unemployment persisted at high levels in many nations it was clear that firms wanted to increase output at the current real wage levels but were constrained by the aggregate spending available.

Economies thus get trapped in an unemployment equilibrium. The Great Depression in the 1930s taught us that, without government intervention, capitalist economies are prone to lengthy periods of unemployment. The emphasis of macroeconomic policy in the period immediately following the Second World War was to promote full employment. Inflation control was not considered a major issue even though it was one of the stated policy targets of most governments.

In this period, the memories of the Great Depression still exerted an influence on the constituencies that elected the politicians. The experience of the Second World War showed governments that full employment could be maintained with appropriate use of budget deficits (national governments spending more than they were receiving in tax revenue).

The employment growth following the Great Depression was in direct response to the spending needs that accompanied the onset of the War rather than the failed Classical remedies (the British Treasury view) that had been tried during the 1930s. The problem that had to be addressed by governments at War’s end was to find a way to translate the fully employed War economy with extensive civil controls and loss of liberty into a fully employed peacetime model.

Governments all around the world endorsed the emerging Keynesian orthodoxy of the time and committed to the notion that unemployment was a systemic failure in aggregate demand (spending) and moved the focus away from an emphasis on the ascriptive characteristics of the unemployed (for example, whether they were lazy and avoiding work) and the prevailing wage levels.

Many leading economists in the immediate Post World War 2 period pronounced that it was the responsibility of the national government to ensure there was enough spending in the economy such that all the workers seeking jobs would be satisfied.

Full employment was the articulated macroeconomic goal and was expressed as the number of jobs that satisfied the desire of workers to work. It was recognised that at any point in time, some workers would be unemployed because they would be moving between jobs. Economists term this sort of unemployment frictional and consider it provides benefits to the economy because it helps to ensure workers are moving into positions where they are best suited.

Frictional unemployment is typically below 2 per cent of the available labour force and so full employment was defined in terms of this very low unemployment rate.

The result of these new understandings from the Great Depression was that from around 1945 until 1975, national governments manipulated fiscal and monetary policy to maintain levels of overall spending sufficient to generate employment growth in line with labour force growth. This was consistent with the view that mass unemployment reflected deficient aggregate demand which could be resolved through positive net government spending (budget deficits). Governments used a range of fiscal and monetary measures to stabilise the economy in the face of fluctuations in private sector spending and were typically in deficit.

As a consequence, in the period between 1945 through to the mid 1970s, most advanced Western nations maintained very low levels of unemployment, typically below 2 per cent.

Following the first OPEC oil price hike in 1974, which led to accelerating inflation in most countries, there was a resurgence of pre-Keynesian thinking. Inflationary impulses associated with the Vietnam War had earlier provided some economists, who had contested the desirability of full employment, with opportunities to attack activist macroeconomic policy in the United States.

Governments around the world reacted with contractionary policies to quell inflation and unemployment rose giving birth to the era of stagflation (the joint incidence of high unemployment and inflation).

From that time until the present day, many governments have not run large enough budget deficits to ensure that overall spending in the economy was sufficient to generate full employment. The result has been the persistently high unemployment in the 1980s and 1990s and again in the current period.


Mass unemployment represents a macroeconomic failure that can be addressed by expansionary fiscal and/or monetary policy.

It has nothing to do with the provision of the miserly amounts that are given to the unemployed via income support arrangements. Cutting those benefits will not cure involuntary unemployment.

It will only make the lives of the unemployed more desperate than they already are.

That is enough for today!

This Post Has 14 Comments

  1. “Essentially, on the one hand the private sector calls for wasteful spending to be stopped and the public sector to be downsized and then on the other hand, it is accepting billion dollar contracts from the public sector to deliver public services.”

    That’s the key point though isn’t it. The lobby groups of the private sector are obviously going to want to eliminate direct payments to the needy, and instead propose indirect payments to the needy via them – so they can take their cut.

    It’s quite clear, for example, that the most efficient way to pay a pension is directly from the currency issuer to the recipient – possibly slanted so that it is scaled on some factor of the individual’s lifetime earnings (as a proxy for ‘lifetime contribution’). That way it can be tuned to a slice of current production capacity – which is what a pension is all about really.

    Yet we have a massive pension savings industry that (ISTM) does little other than increase people’s insecurity (by providing ‘money purchase’ plans) and generating a huge paradox of thrift issue, while taking a huge cut for themselves. It’s not a system you would rationally design.

    One of the tenets in business is find a huge cash stream and stand in the middle of it. Government spending is the largest cash stream of all – and the most reliable.

  2. “We think in relative terms as much as we think in absolute terms”

    I’d suggest we think in relative terms *more* than we think in absolute terms.

    It seems that people would much rather have the finest mud hut on the Savannah than a slightly better Leah jet in an airport full of Leah jets.

  3. I’m just a follower here, but several things are obvious (regarding the WSJ’s crowing about Moody’s downgrade of France).

    First, Moody’s action is just spite against the French people for electing a party that dares to style itself “Socialist” – on no-matter-how-flimsy grounds. Moody’s seeks to intimidate countries on behalf of their banker buddies, and the Euro framework hands them more leverage to do this. If France still issued the Franc, Moody’s downgrade would be as meaningless and toothless as S-and-P’s downgrade of the U.S. last year.

    Second, regarding the “…world’s longest-running experiments in the real-world effects of stimulus spending. ” The WSJ jerks should save their ink to flavor their crow. Debt-to-GDP ratios being, in reality, meaningless hobgoblins of very small minds. Someone out their would rather own 1.2 trillion Euros’ worth of French government debt than anything else they could buy after selling it. That’s all this number means.

    Third, Francois Mitterrand left office in 1996, replaced by an overtly right-wing party that ran France for the last 16 years – i.e. until the recent election of Hollande. Referencing the two Socialists but leaving out the Conservatives is typical of the WSJ’s general indifference to the truth – a growing characteristic of the Right in America.

    Fourth, regarding the “…supposed growth-killing effects of the spending cuts being demanded of him by the European Union.” There’s no “supposed” about it. The results are in. Austerity has killed growth and ballooned government deficits in every single country in which it has been tried. The WSJ is just miffed because it hasn’t been able to bring more of it to America. Or France.

  4. and instead propose indirect payments to the needy via them – so they can take their cut.

    Well it certainly beats creating goods,services and markets. A siphon economy.
    Nice new trend in America noted by David Cay Johnstone, taking direct payments from the needy:

    Across the United States more than 2,700 companies are collecting state income taxes from hundreds of thousands of workers – and are keeping the money with the states’ approval, says an eye-opening report published on Thursday.

  5. Bill,
    It appears that the UK’s “Work Programme” has missed its target of 5.5% obtaining a job for at least 6 months, at which point the providers get the bulk of their money.

    It is suggested that 5% of long term or unemployed youngsters would have achived this all by themselves anyway, but the scheme has only achieved 3.53% – making it worse than useless.

    Kind regards

  6. Bill, have you considered the pig in a python effect of the Boomers on employment?

    As a cutting edge Boomer, I experienced all the excitement of the 60’s and 70’s. Boomers’ wages were suppressed because we were plentiful, but we spent what we earned on all the innovative products which blossomed catering to our tastes. We married late and did not have kids (the DINK, dual income, no kids). After working 10 years as a scientist, I remember preparing for the yearly review and wanted to answer the question about future goals with “My goal is to earn an income of $30k before the age of 40”; which would have been a stretch. It seemed like all my costs had doubled and I was going backwards.

    About that time, us senior people were interviewing a new crop of college students and HR screwed up, they inserted the salary ranges for new hires. The starting salaries were actually more than our current compensation with 10 years experience. Clearly there was a skilled (college degree) labor shortage during a time that Boomers were reaching mid-career. After some heavy turnover and complaining, our wages doubled and then tripled. We kept spending. Finally in the 90’s, wages flattened and then began the outsourcing and lay-offs as our spending flattened and preferences changed. Companies expanded choices with diminishing returns (marginal utility effect) to grab the last dollar on the table. The credit and housing boom began a 15 year effort that wrung us dry and deflated the economy from our indebtedness. Presumably, marketing has new plans for us as we enter retirement. Our Boomer mistake was not breeding a bunch of consumers to take our place. The neoliberals are mistaken about the causes of inflation. It was the 70’s cost-push price increases from energy that resulted in cost of living pressure on suppressed Boomer wages and a combination of competition for now scarce entry level labor (the tail of the pig) which forced an increase in all wages, coupled with extreme marketing of products, services and eventually credit, to capture market share and grab short term profits.

    My mother told me that after the war, there was a great government effort with all kinds of benefits for those that started a family immediately, even while my father was in college using the GI bill. Boomers were the chosen people, the nation’s future. Too bad it is ending in such a mess.

    As a hiker, I remember the explosion in gear innovation during the 70’s and 80’s. Everyone was starting a business. In the 90’s they became garment merchants and now their doors are closed after the helping hand of private equity. For some reason, businesses are not allowed to simply become smaller as demand decreases, instead they over expand and collapse.

    Pretty soon, Tech Crunch will be evaluating wheel chairs and granny pods. I remember spending big bucks on hand made, custom fitted, Limmer hiking boots that were worn out and rebuilt twice, and the joy of finding a set of mudder cleats for my rugby boots while visiting England. Now I can barely walk. Becoming a worn out Boomer and falling apart sucks. And that dream of sailing around the world, forget it. For the young and unemployed, go adventuring until the banks and politicians stop crippling the economy, fighting over who gets the interest and how many people can be laid off, to be without a living wage so that someone, somewhere, can become even more filthy rich without lifting a finger.

    Avoid becoming a debt slave, do not borrow money for anything. In this this economy, stay light and loose and find time for self-improvement. Explore any vocation that might interest you.

  7. Jan,

    France are constrained by the Euro. That’s the problem. It has nothing to do with deficits being bad or surpluses being good.

    More importantly though is that no sane person would pay any attention to statements made by rating agencies such as Moody’s.

  8. Interesting “leaked ?” report on Greece .

    This document raises much deeper questions.

    The objective seems to be a massive socio – economic change not unlike the cromwellian ranch experiment in Ireland & the later final hanoverian displacement in western scotland.

    Namely to drive the peripheral area into a form of extreme energy surplus that can continue to feed the cold dead heart of the core even if it means massive losses of productivity.

    The implications of this is profound.
    With the final destruction of the nation state after the single European act of 1986 these areas have become rich areas of extraction for the financial capitals and the former nations that give them sucker.

    The similarity with the formation of the early UK in the 1700s is striking , with favoured nation status granted to England and other minor areas such as Dublin & Edinburgh while the remaining areas feed these cities which must always remain in real goods deficit.

    The plan is now finally becoming very easy to read.

  9. Tyler Healey said: “What is expansionary monetary policy?”

    Good question! Answers???

  10. “”

    Tyler Healey says:
    Wednesday, November 28, 2012 at 0:11

    What is expansionary monetary policy?


    Good question.

    I would think, although I am far from an expert, it means actions by the mainstream with respect to; Q/E, ST interest rates and perhaps reserve requirements.

  11. “What is expansionary monetary policy?”
    Using the fiat power of government to provide palliative care to the financial sector while distributing suicide pills to the rest.
    Karaoke capitalism.

  12. In Box 3 they look at car stuff
    The current account with and without the oil bill and interest.

    But the objectives are dark
    They wish to force the country to export at all costs rather then sustain a domestic economy.
    They obviously wish to crush all internal commerce as this will subtract from their clients rental income.
    I feel the EEC from the very start had this as its core objective.
    As slowly over time nation states stopped using their own hinterland for funds (and in the case of semi independent Ireland the Sterling system of integration) and have sent their rations towards the core financial centers , now hoping for some Gruel in return.

    These past 400 + years have not been about “growth” but a concentration of power first in the lowlands as they sucked in resources from as far as the new world and finally the age of oil.

    The privatisation plan appears to be infact a success as the objective is to sell at a low price and not a high price.

    The language in the assessment of compliance section seems to be from a Nazi era (but really we have never left it )
    The government adopts
    The government will define
    The government must
    The Government ?

    Reduced overtime for doctors will surely kill a fair few Greeks as they are running out of doctors anyway.

    This is clearly Basel III dictatorship where the banks stop giving credit yet expect the (puppet) governments not to print.
    Given the BISs dubious beginnings who could expect anything less ?

    The liberalisation of the countries natural monopolies is interesting (“under growth enhancing reforms”)
    This is the blueprint for the modern market state.

    The logic of this is hard to escape.
    This is full on enemy action
    People who aid the enemy are the enemy.

    Billy fails to recognize this goes far beyond ” policy mistakes”
    This is the modern market nazi era.
    Taxation & private rent seeking without representation.
    A total deliberate & systematic collapse of the entire political contract.

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