Debunking Those So-Called “revenge”/”Obamacare” Layoffs (w/Math)

Did you know that 355,000 people were laid-off last week because Obama was re-elected?  Or, at least, that’s what many Conservative activists would have you believe.  Apparently, there is this growing meme going around the internet that companies are laying people off because Obama and “Obamacare” is here to stay.  This is all likely to be typical partisan bull-crap.  I never thought I’d have to explain the inner-workings of the Free Enterprise System to the party that claims to love capitalism.  But… here we go.  We’ll start with basic concepts and then move on to “the math”.  By the end of this post, you’ll know why this meme is likely to be crap, the numbers backing up that assertion, and when (and how) we’ll have the numbers to prove it.

First of all, this is a huge country with a huge economy.  Large numbers of people are being hired and fired, laid-off and brought back every single day.  Additionally, large numbers of business are being started and bankrupted, growing and shrinking, every single day.  The beauty of free enterprise is that nothing ever stands still.  Things are moving and changing all the time which causes other things to move and change and so on.  This is the reason it is so hard to study macro-economies.  There are so many micro-economic things going on you can never be 100 percent certain of which event caused another event.

The best anyone can do to understand how an event affects the economy is to gather economic numbers(like jobs and sales data) and compare trends to certain events.  Unfortunately, even for the professionals, that is not an easy task.  Nor, can many things be definitively proven.  That’s because, as any scientist will tell you, “CORRELATION DOES NOT IMPLY CAUSATION“!.  That phrase should be tattooed on the wrists of every economist so they have to stare at that phrase while typing up papers and reports that make that very claim.

In the beginning of the post I claimed 355,000 people lost their jobs last week because of the election.  That of course was a half-truth.  In an economy as big as ours we have 100s of thousands of people losing their jobs every. single. week.  Even in a healthy and growing economy.  The fact is, we have even more people being hired every week to offset that.  But, the right-wing aren’t using employment numbers to make their current claim(we won’t actually know those numbers until Thursday).

The right-wing is pointing to companies that are announcing massive lay-offs as proof, PROOF! that Obama and “Obamacare” are killing jobs.  So let’s look at those numbers.  Fortunately, the department of labor keeps statistics on how many companies have a “mass layoff event”.  Their definition of a mass layoff event is when at least 50 initial claims are filed against an establishment during a consecutive 5-week period.  Fortunately, they have the entire archive of their past data posted online.

As it turns out, there are a lot of mass layoff events every month.  For the last year there are usually over 1,000 mass layoff events every month (not seasonally adjusted).   I add that “not seasonally adjusted” because mass layoff events tend to fluctuate depending on the time of year.  For instance, post Christmas time will have a lot of lay offs as stores get rid of their extra holiday help.  Therefore, instead of comparing month-to-month numbers, it is sometime better to compare this months number to this month of last year.  That is what we’re going to do.

November 2011 had 1393 mass layoff events.  Last I looked at a calendar there were 30 days in November.  So that means, on average, there would be at least 46 mass layoffs every single calendar day during a Normal November.  This is assuming mass layoffs happen on weekends as well.  If we assume mass layoff events only happen during the week the average would be even higher.  But since I want to give the right-wing the best chance to prove their crazy theories, I’ll stick with the lower number.

Let’s compare that number to right-wing doomsday claims.  If there are mass layoffs we should be seeing an increase over the average rate of 46 a day.  We should be seeing 50, 60, or 70 a day to register an increase in layoffs.  If there was a massive movement I would expect to see double of the average(like happened in 2008 when the Bush economy was spiraling downwards).

Exhibit A: The article I linked to earlier has a scary-sounding tweet that claimed that “45 companies announce layoffs in last 48 hours[after Obama’s re-election”.  In a 48 hour period, we should see an average of 94 mass layoff events.  That means their scary claim would be less than HALF the pace of mass layoffs during a typical November.  If their claim is true, that would be a low number and something to be celebrated.

Exhibit B:  The Blaze, home of Right-Wing Glenn Beck, has a B.S. article listing 37 layoffs and “closure” announcements in a 48 hour period.  Even smaller than the claim in exhibit A.  Additionally, they cheat by listing EVERY layoff announcements, even ones that are less than 50(my 46 number counts only those over 50).  They are still very VERY far short of an increase, let alone a doubling.

Exhibit C:  These right-wing bloggers have now setup a website to try and document supposed mass layoffs.  Here are their numbers since the Wednesday after Obama was elected(combining layoffs and storeplant closures):  Wedenseday was 25, Thursday was 23, Friday 17, Saturday 25, Sunday 1.  I don’t know if this site cheats like the Blaze and lists layoffs that are less than 50 – I’ll let somebody else click and read each announcement.

As you can see these listing are far short of even reaching the typical November rate and therefore offer absolutely ZERO proof of mass “revenge” or “Obamacare” layoffs.  I suspect that not all mass layoff events are reported.  I’m guessing the real number is higher than these articles report, but they are also likely at a typical November rate.

Unfortunately, the mass layoff event data isn’t printed quickly.  It takes time for the department of labor to compile the statistics and interview companies about their layoffs.  For instance, September’s numbers weren’t reported until October 23rd.  Which means we won’t get November’s number until around December 23rd.  (November 23rds report will be of October, before Obama’s reelection).

When the report does come up, I recommend looking at seasonally adjusted numbers, to see how much different the number is from October.  The seasonally-adjusted numbers averages out seasonal affects.  As long as that number is near October’s it will mean there was no mass “revenge” or “Obamacare” layoffs.  Additionally, you can check the raw numbers and compare them to the previous November numbers.  Unless that number is twice it was last year, it’ll mean no mass layoffs happened above and beyond normal economic activity.

My educated guess is that these layoffs would’ve happened anyways.  For those claiming they are laying off because of Obama, I think some business people are making political claims to serve a personal agenda.




Types of Unemployment

Modern, mainstream economics universally recognizes three types of unemployment:  frictional, structural, and cyclical.  Some people add in seasonal unemployment to give us four types of unemployment.  These types of unemployment are pretty universal.  Not only on the net(see here, here, here, and here), but in N. Gregory Mankiw’s Intro text book, Principles of Economics, as well.  Let’s take a brief look at each kind.

Frictional Unemployment are workers who are literally “between jobs”.  It is only the time lag it takes for a worker to leave one job and go to another(or become self-employed).  There might be some delay while a worker works on her resume` and goes through the interview process and possible wage negotiations.  Frictional unemployment is normal and healthy in any economy.  In fact, not having any, I speculate, would be inefficient and have a lot more unhappy workers who are stuck in their jobs.

Structural unemployment is the type of unemployment that comes up when the jobs employers are offering do match the skill or desire of those who are looking for work.  In a way, this could be considered long-term frictional while employees get new skills or employers adjust their requirements.  But I think that it is right to separate this kind of unemployment from frictional.  It’s causes are different and therefore solutions would be different.

Combating structural unemployment seems to be the one issue that unites liberals and conservatives in the United States.  Reducing structural unemployment seems relatively simple.  If workers don’t have the skills they need, then they need training or education.  Job training appears to be the only “jobs” program conservatives are willing to fund.

Cyclical unemployment is of course unemployment related to downturns in the economy.  Classic Keynesian economists will say it’s from a lack of demand in the economy.  Monetarists or neoliberals like Mankiw will call it a downturn out of sync with the “natural rate of unemployment”.  Austrians will deny that such a thing exists(claiming it’s a type of structural unemployment created by bad policy) .  Unlike structural unemployment, conservatives are usually less willing to do anything about this.  Although not always, since the Bush tax prebates in 2001 that sent money to people is a Keynesian solution to driving up demand.  It might not be considered an orthodox approach, but it accepts the Keynesian precepts of driving up demand via government.

Finally, we come to seasonal unemployment.  There are some jobs that are only demand for part of the year.  For instance, retail stores hire extra people before Christmas.  Another example are farm workers who are only needed during the planting season and harvest time.  These are jobs that naturally don’t exist year round.  When the demand for those jobs end, workers are left unemployed.  I understand why some people don’t consider this a type of unemployment.  Some might just call this frictional since, presumably the workers will find other seasonal jobs once laid off.  I can understand that reasoning of both sides.  Seasonal employees will likely have more than 1 job, but seasonal unemployment poses unique problems from the other types so it makes sense to track them separately.

So that’s the three (or four) different types of unemployment.  Not a lot of controversy for the most part.  The only part up for debate between the different economic schools is the existence of cyclical unemployment, and how best to understand it.

The Cost of Labor SHOULD be High

Conservative politicians and commentators repeatedly assert that employers need to reduce “labor costs” to stay competitive(Examples here and here).  They assert that lower wages will be better for the country by creating more jobs and cheaper products.  These assertions do not standup well against 30 seconds of critical thinking.  Putting aside the morality of lowering wages, The cost of human labor should be high for very practical reasons.  High labor costs is what drives employers and customers to find new ways to automate everyday jobs.

Despite the current depression we are in, the manufacturing capability of U.S. factories is greater than it’s ever been.  This may go against conventional wisdom that says manufacturing is dying in the country.  That is simply not true, it just quit hiring as many people.  Of the people who still work in U.S. factories, their productivity is so great that even with fewer workers, they are able to produce more than their counterparts of 50 years ago.  By automating factories, employers can produce more with fewer people and the result is cheaper prices.  In a perfect economy, those no longer needed to work in a factory would get different jobs and produce something else and we’d all end up with more overall wealth. Now this is progress that liberals should cheer(Of course, in today’s economy, those employees have no where else to go. The reasons of which are far beyond the scope of this post)

Employers automated all those factory jobs because it was cheaper than continuing to pay workers for the same work.  If their cost of labor had been low, as conservatives want it to be, that automation would never have occurred and auto workers would be putting together Ford cars the same way they assembled Model Ts.  Conservative policies of lower wages holds society back.

You might think, “Sure, that works in factories, but you can’t automate services or retail jobs– their wages must stay low for my benefit.”  This is not true, automation in retail has already occurred and will continue to occur.  Think of how much time is saved by bar code scanners.  How much time is saved by a clerk no longer needing to manually type in the price of a product.  Add to that automatic inventory tracking.  Also Security tags that sound alarms when leaving a store reduces the cost of having to hire an army of security guards to prevent shop lifting.  If the cost of labor was low to hire these people, employers would never have been interested in investing in these things.  And These are just the things that have already been automated.  Heaven only knows what else might be automated if the cost of labor was higher.  Maybe automatic baggers at the grocery store.  Maybe carts that restock the shelves.

With higher labor costs even services that seem impossible to automate might be ripe for an enterprising entrepreneur.  It is not unheard of for services to be automated.  The number of household with maids went down considerably with the invention of things like the washing machine and dishwasher.  If the cost of hiring a maid was low, these inventions would not have caught on because it was still cheaper to just hire someone to do it.  Just like in retail, there are still several services that could be automated.  For instance, there are already robotic lawn mowers.  How long will it be before owners of golf courses or other owners of other large tracts replace yard workers with automatic mowers and leaf baggers.  The answer, of course, is as soon as the machine costs less than labor.  If the cost of labor was higher, this automation would happen sooner.  If we continue to follow conservative policies of low wages, progress like that will never occur.

I don’t mean to belittle or down play the suffering caused by people who have their jobs replaced by a machine.  However, I think that calls for a much stronger social safety net, and does not justify holding back progress.  Technology and putting it to use by investing in new automation is what helps increase overall wealth in the economy.  Conservative policies of low wages are not only heartless, but hold back the economy and our country from greatness.

Unemployment Vs. Economic Efficiency

Nothing makes an argument more frustrating than when 2 people are using the same words to argue over 2 different things.  When discussing strategies to get out of the recession, market fundamentalists (usually conservatives) argue to let the markets work.  Others, usually liberals who sorta-kinda understand Keynesian economics, argue that we need more stimulus to jump-start the economy.  Then the market fundamentalists respond with “markets are more efficient than government” it is always better.  Then they give some example of the government, in fact, screwing something up.  Then the liberal Keynesian says, free markets got us into this mess, and then gives an example of a corporation, in fact, either screwing something up or doing something evil.  This goes back and forth and is never resolved because they are talking about two different things.

If you’re arguing for more stimulus or increased aggregate demand and end up arguing over how much governments and markets do or don’t suck, you’ve lost the argument or – at best – will stalemate.  The reason is that in most cases markets are more efficient than government trying to do it.  Be it selling shoes or setting apartment rent prices.  The liberal position is not to suggest otherwise.  The problem is that it has nothing to do with your argument for demand management.  An economy that is deficient of aggregate demand can not fix itself because it has nothing to do with an individual product or industry.

To understand why these are two different things, let’s take a look at a proto-typical private market.  Let’s say that you run a company that sells dish soap and one day people  buy less dish soap.  Pretty soon you’ll notice you’re selling less dish soap and will start making less of it.  You’ll now need fewer employees and equipment to make that dish soap.  You can either move those employees and equipment to make other things(like paper plates) or you can lay off your employees and sell the equipment.  In a good economy those employees and equipment would eventually go to a company making other things.  That is economic efficiency that government should stay out of.

What happens when people start buying less of everything?  Those employees that were laid off would have no where to go because all companies are making less things because they are selling fewer things.  That’s what happens during a recession.  Now you have high unemployment and nowhere for those employees to go.  It is the difference between micro and macro economics.  If one is thinking “micro” they will think that the economy will simply sort things out – “let the markets work”.  However, when one looks at the big picture you’ll see that private markets can’t sort it out because it has nothing to do with the efficiency that markets are good at.

Additionally, if one takes a micro approach to a recession and sees that workers are being laid off, they might (rightfully, in a “micro” approach) suggest that the workers need to take a pay cut to stay employed.  Take our dish soap example.  If consumers are buying only less dish soap, then workers could take a pay cut to keep everyone employed.  If workers demand less money, then it might be better for the company owner to hire people instead of buying and maintaining expensive machines and computers to do the same work.  If however, the problem is that consumers are buying less of everything, pay cuts for all workers will only make the problem worse.  If all workers in an economy take a pay cut, those workers will then turn around and buy less of everything because they now have less money.  That must then be followed by another pay cut which would then lead to another general drop in people buying stuff which would lead to another pay cut… etc…

To suggest that an economy needs increased demand does not require one to reject free enterprise.  The private market cannot deal with a drop in aggregate demand because no single company or person can control overall demand.  John Maynard Keynes was the first to show this systemic problem.  His recommendation was for the government to be that outside force that adds demand to the economy by doing social investment.  The idea was that government would give more people money to work, and then they would spend that money which would then cause people beyond the government to get jobs.  Doing this restored demand and had the bonus of providing public works that society could benefit from like parks and libraries.  Since his time, economists have come up with further refinements to his original recommendation.

For market fundamentalists of course, this is all heresy.  Instead, the market fundamentalists continue blaming the government for everything.  To any other reasoned person, you see a deep systemic problem that requires outside intervention to balance.  These two concepts don’t have to conflict.  You can advocate for private markets and government intervention to restore aggregate demand.  Only dogmatic market fundamentalists can’t see the difference between that and eliminating free enterprise.

Job Guarantee: Zero Unemployment Without Causing Inflation

Once when I was explaining Modern Monetary Theory(MMT) to someone in person, she asked me in a very irritated tone, “what is your point?” I realize now that getting too far into the details about government spending, trade deficits, and bond markets can make some people’s eyes glaze over without assuring them that the end goal is worth it. So today I’d like to introduce one of the primary policy goals that most economists of the MMT school advocate. You see, once you realize that the federal budget is constrained by inflation, not revenue, that bond vigilantes raising our interest rate isn’t a real thing, and there is no such thing as a crowding out effect, new policy options become available in the fights against unemployment and inflation.

One of the primary policy goes of most MMT economists is a Job Guarantee. Sometimes we’ll refer to it as a Federal Job Guarantee(FJG), Employer of last resort(ELR), Labor Buffer Stock, etc… It’s all basically talking about the same thing, A job guarantee. A job Guarantee would be a permanent job offer from the federal government to all citizens of a certain age for a basic wage to anyone who is ready, willing, and able to work.

The first thing to know is that heading into this discussion you should already understand that the federal government is constrained by inflation, not revenue. The United States, like any country that controls it’s own currency cannot be forced into default. Therefore, we can do “radical” things like setting our own price and letting the market decide quantity. As opposed to setting the quantity we want to purchase and letting the market decide price. That is what a job guarantee does. Instead of asking for x number of workers and letting the market determine how much we pay them, the federal government can say we will pay any worker y wages, and let the market decide how many people will take it. The amount of money spent is irrelevant as long as inflation is controlled.

So how will a Job Guarantee achieve both full employment and price stability? Well, first of all, it will, by definition, eliminate unemployment. Everyone who is ready, willing, and able to work will be able to get a job that is funded by the federal government. That pretty much wipes out unemployment as we currently define it. Of course, there will be some people who refuse the job offer because they’d rather spend time looking for higher paying work. There may be others who refuse to work at the set wage. That’s fine. The program is meant to be completely voluntary.

Now, why won’t something like this be inflationary? Wouldn’t the increased expense of the program increase inflation? The answer is no. Because the program would never demand more labor than is available, it would be impossible for it to cause “demand-pull” inflation. In a recession, employment and aggregate demand decrease which has a deflationary effect. However, with this program in place those workers have the ability to get a job from a job guarantee which would counteract the falling demand. Sure, the increased federal spending could be inflationary, but it’s more than offset by the falling demand caused by the recession.

What about during economic expansions? As the economy recovers people leave the job guarantee program and enter the private workforce for more money. People leaving the program would cause government spending to go down which would cause deflationary pressure, but would be offset by the potential inflationary pressures of a rapidly expanding economy with rising wages.

*poof!* You now have full employment with non-accelerating inflation. You know, when I first started writing this diary, I thought it was going to be long and complicated, but it’s not. It really is so simple that it can be summarized in about 4 paragraphs. Now… time for all the caveats and frequently-asked-questions.

Are you saying there won’t be inflation?
No. I’m not saying that inflation can’t still occur in the economy. There could still be cost-push inflation(like oil prices). There could still be demand-pull inflation if some commodity other than unskilled labor is in short supply. The point is however, we can give everyone a job, without causing accelerating inflation.

One more caveat about inflation. Depending on what we set the “Basic Wage” to be, it could cause a one time hike in prices. If the basic wage is set to be higher than the current minimum wage, then that could cause a 1 time rise in inflation. That’s because whatever the basic wage is will also be the minimum wage. The reason? Most people aren’t going to work for less money in the private sector if the federal government is offering them more. While there might be individual cases where a person may choose to work for less(a “fun” job or with the promise of future pay, like an internship), most will choose the better pay. So, while there might be a one-time rise in prices when the program is put into place, it won’t last and will eventually lead to stability.

If unpaid for, How can it not be inflationary?
This is the last thing I’ll say about inflation. When you add up all the benefits, it’s extremely easy to imagine how A “job guarantee” program could actually be less inflationary than what we currently do with our unemployed workers.

First, There’s the automatic stabilizing effect that I talked about above so I won’t repeat myself.

Second, the unemployed will be working instead of doing nothing. Right now unemployment pays people to not work. The job guarantee puts them to work. Not only them, but the part time “underemployed”, the discouraged workers, and maybe even those who have never worked before. With all these people doing something, even semi-useful, it’s better than doing nothing.

Third, a lot of the cost of the program will be offset by a reduction in spending on other social programs. As it turns out, when people work, they need less government assistance.

Fourth, there will likely be faster movement of workers from the job guarantee to the private sector than under our currently unemployment regime. Even if you don’t believe that SOME(not all, not most, but some) people will take their unemployment until it runs out before getting a new job, you have to recognize that employers are hesitant to hire someone who has been unemployed for a long time. They believe that people lose their “good work habits”. In a job guarantee regime that won’t happen because people will be working.

What programs could be eliminated?
The program is not meant to replace any existing government assistance such as food stamps or medicaid. While many households could be brought out of poverty if only 1 more adult started working full time, it will not work for all households. So while the program might reduce the size of other programs, it will not completely eliminate their function.

Even the concept of unemployment wouldn’t necessarily go away. You would still want people to spend some time looking for a new job before entering the job guarantee program. However, there could be a move to reduce the number of weeks that unemployment is offered. Once anyone can get a job, they won’t need to rely on unemployment checks. Plus, depending on what the basic wage is set too, they would benefit overall by being paid more than what unemployment benefits pay them.

What will these people do?
More often, this question usually comes from conservative leaning people. I guess only a conservative could look around this country and say, “eh, there’s nothing that needs to be done”. However, occasionally a left leaning person will ask the slightly more intelligent question, “with so many unemployed and underemployed are you sure we could find work for everyone? Let me assure you, there is always more work to be done. First, look up everything done by the WPA. If looking at that doesn’t convince, let’s list a few more jobs that almost any worker would have the basic skills that are required.

  • Reading to Children at the library.
  • Library assistant. If they know the alphabet and their numbers, they can haul around books and put them away.
  • Teacher’s assistant: Grading multiple choice tests and making copies
  • Low level aid for elected officials. Every office could use an intern
  • Neighborhood watch. Bunch people into groups and have them patrol neighborhoods and report to police anything they see.
  • Clean and maintain Parks and playgrounds
  • Clean graffiti
  • Pickup litter from the streets
  • Dig trenches to bury electric wires
  • Plant trees along major highways

Those are just jobs for low to unskilled workers. The possibilities are endless if someone shows up for a job that has a particular skill. You could pay musicians to give free performances at local venues, a handyman could repair dilapidated public buildings, child care professionals could open a free or low-cost day care. Better yet, You could pay those with skills to teach those skills, and pay the “unskilled” workers to learn them. I’m not saying that these workers would do all, some, or any of these things. The point is, if you spend 10 minutes thinking about it, there are a lot of things that can be done.

What if somebody never leaves the Job Guarantee program?
So? Seriously, so what? If someone wants to work for minimum wage for the rest of their lives, it isn’t going to hurt you and I one bit. In fact it just means we’ll have a very experienced public worker working for minimum wage, so it would be beneficial to society if this happened. We should thank the individual for not demanding more money and moving to the private sector.

But won’t people [insert scheme to cheat the system]?
There is always the possibility for people to ‘game’ the system. When it happens we’ll just have to be nimble enough to recognize it and correct the problem.

You’ll be replacing existing jobs
This is a strong concern for many. However, I think it’s not a likely scenario. The Job Guarantee “employees” will have a very high turnover rate. Jobs that require a large amount of knowledge and experience could not be replaced by people who may only be there 3 weeks and could quite without a single day’s notice.

How would the program be administered?
There is no strong consensus on how to structure the program. Most MMT economists who want to be apolitical just say, “that’s a political question”. Less cautious individuals give some suggestions. Some advocate it being managed nationally like the WPA. Others think it should be administered by states. Others by non-profits. Those details aren’t as important as buying into the idea of a job guarantee. Once we all can agree on the idea, we can start talking specifics – I have my own thoughts on that topic. The only requirement is that no matter how it’s administered, it must meet the 2 most important criteria: One, everyone can get a job that is ready, willing, and able. Two, the jobs must be completely federally funded.

What will the “Basic Wage” be?
The basic wage should be what a full time employee needs to live. I don’t know what it would be, but I think it should higher than what our current minimum wage is, but that’s just my opinion. Also, the basic wage should not be inflation indexed. Otherwise it’ll spiral upwards and downwards along with the economy instead of providing an anchor for prices. Of course, congress can change the basic wage at any time, but it should not be automatic.

People will be lazy and not work if the job is guaranteed
This is a very common critique. One that has a simple answer. Give whoever is administrating the program the authority to fire people. We can get into the details of how it would work, but just because you are willing to hire anyone who wants a job, doesn’t mean that you can’t also have the ability to fire them. If people don’t show up, or don’t do the work they are assigned – as long as they are capable they can be fired. Depending on how the program is setup you can have other rules like, once fired you can reapply for the job guarantee for a specified amount of time. Other rules would have to be in place to prevent discrimination as well. The point is, there are simple ways to solve the incentive problem without violating the spirit of the job guarantee.

zOMG!  Communism!  USSR!
Communism, you couldn’t be fired.
Communism, you can’t leave the job and join the private sector for better pay.
Communism, you get paid the same as those in other industries.

None of these things apply to the job guarantee.  You can be fired, you get paid the least(so you have every incentive to leave to work in the private sector), and the work is voluntary.  It is only a last resort for people who can’t get work in the private sector.

Finally, I want to say something about the intangible benefits of the program. There will be intangible, nearly impossible to measure benefits to the system as well.
1. Stronger Families. A full time job, even minimum wage job will bring many families out of poverty. Poverty and unemployment has been observed to correlate with kids not doing well in school, and putting strains on marriages.
2. Dignity. Those who depend on the government will have a real chance to have a job and earn the pride that comes with a paycheck.
3. Economic Security. Everyone will know that, worse comes to worse, they can get a government job and at least they can earn enough to feed themselves.

An entire book could be written on a the Job Guarentee so I can’t fit everything into one diary. Other aspects to be explored are comparing it to our current inflation fighting techniques, exactly how it can be structured, and other angles. There will be followup posts on the topic.

The Cost of Unemployment

Economists and the fed talk a lot about inflation and it’s huge costs to the economy.  However, since the fed currently controls inflation by wrecking the economy and causing unemployment, we should be aware of all the short and long term consequences of unemployment.

Unemployed is the state of wanting to work, but not able to.  Of course, the most obvious consequence of this is on the people who are unemployed.  They lose their wages and means to support themselves.  That means they have to spend less, tap into savings, and possibly disruptive events such as losing a home, a car, or other assets bought on credit.  These are just the short term consequences of short-term unemployment.

Long term consequences of being unemployed can have devastating effects on a person’s family, their physical and mental health, and potential income.  Studies have shown a correlation between unemployed spouses and divorce.  It can even affect children of the family.  The mental health of a person who’s been unemployed for an extended period of time is enormous.  For reasons that should be fairly self-evident, the unemployed are more likely to suffer from depression and anxiety than those who aren’t.

Finally, the financial hit taken by the unemployed isn’t just the immediate loss of wages, it is also lost future income.  If you are unemployed for a year or more, then that means you’ve lost an entire year’s worth of experience.  That’s a year that will never be gained back and can mean less earnings than someone who had managed to stay employed.  The loss of savings can add up as well.  Spending a year reducing your savings instead of increasing it through investment can be a long term hit to one’s saving goal.

The societal costs of lengthy unemployment is also high.  It can raise poverty, loss of labor hours that can’t be regained, and a deteriorated workforce.

Long term or high unemployment can cause more people to slip into poverty.  The strain of poverty on a society is very high.  All the strains it puts would require it’s own post to go into.  Just so highlight some of the thing.  Higher poverty often(not always) leads to increased crime, decreased opportunity, and bigger strain on government services.

The cost to society of unemployment isn’t best measured in dollars and cents, it is best measured in hours lost.  Labor is a unique resource in that every hour it’s not being used means that income is lost forever.  If someone is unemployed for a year, that means an entire year’s worth of labor that could’ve been spent creating something or providing a service is now lost.

Finally, this is a problem economists and many employers have noticed.  The longer someone is unemployed, the more likely they will lose their effective work habits and experience.  The Fed recognizes this.  They said, “Long-term unemployment not only imposes exceptional hardships on the jobless and their families, but it also erodes the skills of those workers and may inflict lasting damage on their employment and earnings prospects.”

So when someone is unemployed, not only are their lost hours of work gone forever, but when initially returning to work the person will sometimes be less effective then they were before.  To top it all off, an unemployed person will more likely need government assistance once they reach the poverty level.  That makes unemployment to be a very costly thing to a society.  One would think that we all would spend more time worrying about such a thing.

How We Currently Control Inflation

I laid out all the bad things about inflation and why it should be kept low and steady.  So how does our policy makers currently control inflation?  By trying to wreck the economy.  Long ago, congress entrusted the federal reserve to conduct monetary policy to promote “promote maximum employment, production, and purchasing power“.  The people at the federal reserve have tried many different things to stop inflation and encourage “full employment”.  In the end, the tool they use most often is by setting interest rates.

When unemployment is high, the federal reserve leaders lower interest rates.  This encourages people to borrow money to buy stuff which creates demand.  It also encourages businesses to expand and invest which increases demand and creates jobs.  Unfortunately, all that borrowed money increases the money supply and all that spending and investing can increase demand faster than supply.  All of this combines to cause the inflation rate to rise.  Once that happens, the federal reserve leaders decide to raise interest rates.  This discourages consumer borrowing and business investment.  Those two things cause unemployment to rise.

So, when I say that we control inflation by wrecking the economy.  This is such an accepted and non-controversial idea, that the federal reserve freely admits that they willingly cause unemployment.

Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services.

So why do these people constantly vote to wreck our economy, and why does congress let them?  It’s not because their evil.  It’s not even because their stupid.  It’s just that it’s the only way they know how to control inflation and think it’s the best way to control unemployment.  It’s a way of thinking based heavily in the Monetarism school of economics.  It is pretty much the dominant economic theory in congress and government, business, and even the International Monetary Fund.

They believe that both some inflation and some unemployment is a good thing.  The belief is that having a little bit of each will keep both of them low.  It’s a good theory that I think is a correct observation.  My problem is with the solution.  Causing unemployment and all the problems it causes society(poverty, loss of work ethic, disrupted families) is a very high price to pay for price stability.  Unfortunately, it’s the best our mainstream thinking offers.  Given that, I understand why they do it, I just think we should be actively looking for a way to lower inflation without causing massive unemployment.

I bring this up for a reason.  When talking about other possible solutions, I think it’s important to compare those solutions to what we currently do.  Right now our only solution to lowering inflation means that people must be laid off and rendered unemployed.