Austerity and Demoralisation
The current situation exposes the EU economy’s lack of connectedness and the costs to morale that this brings
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, U.S. Congressman Paul Ryan says that his program is part of a plan to promote "creativity and entrepreneurial spirit."
Some kinds of austerity 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 seems inevitably to entail 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 on an assembly line. 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 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 in an economic crisis like the one we are now experiencing, precluding 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, but it is difficult to downsize the one that they did buy. It may also 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, with employees feeling they did not have a real job. Managers told him it was 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 – which matters externally, but not to the firm that laid them off.
We could perhaps all be happy working fewer hours if the decline reflected social progress. But we are not happy with unemployment 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 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 a fiscal stimulus that boosts job creation and puts the unemployed back to work.
Robert J. Shiller, Professor of Economics at Yale University, was recently awarded the 2013 Nobel Prize in Economics. He is co-author, with George Akerlof, of Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism.
Copyright: Project Syndicate, 2013.