Preserving jobs at all costs leads to economic stagnation

May 24th, 2009

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In Australia, one of the common political slogans we hear is “Jobs! Jobs! Jobs!” The objective of any politician to win votes is to find ways to create and preserve jobs, either through direct government stimulus spending or subsidies. In this respect, politicians here will have much to admire Japan. It is a country where the culture of lifetime employment is alive and well, with the government playing a major role in preserving it.

But, government interventions to preserve jobs as a sole end have a price to pay. To understand why, let’s revisit Are governments mad with ?stimulating??,

As long as the structural problems are not dealt with, the economic slump will not end. As we quoted Wilhelm R?pk?s 1936 economic classic at Overproduction or mis-configuration of production? in January 2008,

It is an indisputable fact that a general slump, which does not permit of the scale of production reached in the boom being maintained, sets in during the crisis, and it is equally indisputable that this general slump is the result of the total demand suddenly falling behind the total supply. But let us make sure what this means and what it does not mean. Under no circumstances can it mean that the cause of the general slump is to be sought in the fact that production has outstripped consumption and that too many of all goods at once are being produced.

The root of the global economic crisis is the structural imbalance between production, consumption, and real capital investment. Government policies to preserve jobs as a sole end without plans to address the structural imbalance will undermine the future competitiveness of the nation.Β  As this article showed an example from Japan,

When the sheet metal orders coming into his small business, High Metal, fell by half last October, it never occurred to Masaaki Taruki to lay off his workers.

Instead, he set about brainstorming new projects to occupy them. An indoor vegetable garden? A handicrafts workshop?

Because of government subsidies, Mr. Taruki in the last three months installed rows of parsley, watercress and other plants, using factory space that has been empty since the company disposed of unused machinery. High Metal?s staff tend the sprouts religiously, topping up the water supply, adding fertilizer and adjusting the fluorescent lights.

When sales at the machinery maker Shinano Kogyo in central Japan plunged some 70 percent late last year, the company started dispatching its idle workers to sweep the streets and pick up trash in the wider community, while remaining on the payroll.

Such workers’ paradise in Japan must be the dream of politicians. But there’s a nightmare to such a dream,

Companies slash wages, which reduces consumer spending. Businesses become more reluctant to take on new recruits, shutting young people out of the labor force. And productivity plummets, hurting Japan?s competitiveness in an increasingly aggressive international market.

?By helping to maintain excess employment, you face the risk of keeping alive businesses that are no longer competitive, and perhaps whose productive era is over,? said Hisashi Yamada, an economist at the Japan Research Institute, a private research group in Tokyo. ?This could hurt employment in the long run. What you need is more structural change.?

Very unfortunately, in the context of an economic downturn, maintaining employment, and promoting structural change in the economy are opposing goals in the short-term. Structural changes involve creative destruction, which results in loss of jobs and rising unemployment. In countries with excessive private debt levels (e.g. US, UK, Australia, Spain, Ireland, etc), such changes are so painful that any long-term benefits for the economy are currently incomprehensible. But without structural changes, the economy cannot remain competitive and return to a sustainable growth path. If a country loses its competitive edge, the standard of living of its citizens will decline.

In Japan, the result of such lack of courage is economic stagnation for 15-16 years. Today, Japan has fallen into a depression that is the worst since the Great Depression.

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  • Pete

    Fantastic article! πŸ™‚

    The need for structural change does indeed appear to be negated by politicians short-sightedness. The idea of “pain now, prosperity later” has little meaning to them.

    I don’t think we are quite as bad in Australia as the examples listed above, but the point is well heard. Our politicians constantly talk about jobs. The way I see it, if someone is no longer productive, then what is their job? It’s a morally harsh way of looking at things, but if a company/nation is not profitable, then it is not sustainable.

    The secondary issue here is indeed the short-sightedness of the Gov. The Gov. erroneously thinks that Australia (and in fact the world) will have an economic recovery within two years. Now the socialist idea of keeping ‘jobs’ until a recovery can occur is not so bad (but is still bad) if a recovery is to be had soon. But if the expected recovery takes much longer, then the added damage of the extra years of not making structural changes to the system will be amplified.

    See, I think they have it all backwards.

    Thriving economy and sound regulations = jobs

    Not jobs = thriving economy.

    Another point is that some of these jobs were a product of the pre-GFC credit expansion. If there is no longer the capital flow to support those jobs, should they exist? Should Australia be a country of miners? Or do we also do farming? (our farmers have been very neglected lately). Besides coal and minerals, what do we export to the world that the world needs? Is coal and minerals enough, or should we be looking further into the future and diversifying…becoming a world leader in more markets like pharmaceuticals or renewable energy?

    Unfortunately we have got ourselves to a point where a lot of Australians have credit burdens and do not have much or any disposable cash left after expenses. This means that it is almost political suicide for the Gov. to take the hard-line on structural change, and politically favourable to take the “jobs, jobs, jobs” and welfare approach.

    It is all unfortunately like a self-fulfilling prophecy. People may think it, but the Gov. really couldn’t choose a different path if it wanted to. There’s years of labour and liberal traditions (such as “fiscal conservatives”, remember that crap) that almost ensure that the path taken will be the one that is most palatable to the masses (who also think short-term).

    On a side note, I was personally wondering about the likelihood of Iceland making an economic recovery before it’s European neighbours – because it has already hit involuntary rock-bottom economically. They have lots of sustainable energy too, although a pretty awful fishing/whaling economy from memory. Was thinking it might be worth a well-timed visit in the future πŸ™‚

  • Pete

    Fantastic article! πŸ™‚

    The need for structural change does indeed appear to be negated by politicians short-sightedness. The idea of “pain now, prosperity later” has little meaning to them.

    I don’t think we are quite as bad in Australia as the examples listed above, but the point is well heard. Our politicians constantly talk about jobs. The way I see it, if someone is no longer productive, then what is their job? It’s a morally harsh way of looking at things, but if a company/nation is not profitable, then it is not sustainable.

    The secondary issue here is indeed the short-sightedness of the Gov. The Gov. erroneously thinks that Australia (and in fact the world) will have an economic recovery within two years. Now the socialist idea of keeping ‘jobs’ until a recovery can occur is not so bad (but is still bad) if a recovery is to be had soon. But if the expected recovery takes much longer, then the added damage of the extra years of not making structural changes to the system will be amplified.

    See, I think they have it all backwards.

    Thriving economy and sound regulations = jobs

    Not jobs = thriving economy.

    Another point is that some of these jobs were a product of the pre-GFC credit expansion. If there is no longer the capital flow to support those jobs, should they exist? Should Australia be a country of miners? Or do we also do farming? (our farmers have been very neglected lately). Besides coal and minerals, what do we export to the world that the world needs? Is coal and minerals enough, or should we be looking further into the future and diversifying…becoming a world leader in more markets like pharmaceuticals or renewable energy?

    Unfortunately we have got ourselves to a point where a lot of Australians have credit burdens and do not have much or any disposable cash left after expenses. This means that it is almost political suicide for the Gov. to take the hard-line on structural change, and politically favourable to take the “jobs, jobs, jobs” and welfare approach.

    It is all unfortunately like a self-fulfilling prophecy. People may think it, but the Gov. really couldn’t choose a different path if it wanted to. There’s years of labour and liberal traditions (such as “fiscal conservatives”, remember that crap) that almost ensure that the path taken will be the one that is most palatable to the masses (who also think short-term).

    On a side note, I was personally wondering about the likelihood of Iceland making an economic recovery before it’s European neighbours – because it has already hit involuntary rock-bottom economically. They have lots of sustainable energy too, although a pretty awful fishing/whaling economy from memory. Was thinking it might be worth a well-timed visit in the future πŸ™‚

  • pb

    Hi all,

    Just wondering from a contrarian investors point of view, does this ‘structural imbalance’ present an opportuniy? if so what does everyone think the industries/areas where under production is present? interested in hearing everyones ideas.

    thanks.

  • pb

    Hi all,

    Just wondering from a contrarian investors point of view, does this ‘structural imbalance’ present an opportuniy? if so what does everyone think the industries/areas where under production is present? interested in hearing everyones ideas.

    thanks.

  • One business we like in trying to solve real problems is CFCL (and thus, attend to the “structural imbalance” in the economy). See Ceramic Fuel plans 2010 generator sales

  • One business we like in trying to solve real problems is CFCL (and thus, attend to the “structural imbalance” in the economy). See Ceramic Fuel plans 2010 generator sales

  • One business we like in trying to solve real problems is CFCL (and thus, attend to the “structural imbalance” in the economy). See Ceramic Fuel plans 2010 generator sales

  • Hi Pete!

    Good question on Iceland. Got to check out Iceland.

    Actually, there’s a lot of work to be done in Australia. We have neglected our infrastructure and our health system is in need of upgrade.

    Maybe we should let nature take its course. With rising unemployment, we will have vast pool of labour. Then set up national service to mobilise the pool of unemployed labour for nation building. πŸ˜‰ Of course, this idea is politically unpalatable.

  • Hi Pete!

    Good question on Iceland. Got to check out Iceland.

    Actually, there’s a lot of work to be done in Australia. We have neglected our infrastructure and our health system is in need of upgrade.

    Maybe we should let nature take its course. With rising unemployment, we will have vast pool of labour. Then set up national service to mobilise the pool of unemployed labour for nation building. πŸ˜‰ Of course, this idea is politically unpalatable.

  • Pat Donnelly

    Australia is a desirable destination for the cream of the world’s youth. They intend to migrate as there is plenty of space, great housing and a wonderful lifestyle. Our unemployed tend to head to Queensland where odd jobs for the elderly, social welfare and beaches form an attractive lifestyle. Manufacturing can be better performed by machines. As is mining. And warfare.
    I see a problem, but only for those who wish to create a climate of fear. It won’t work in Australia. We have a continent to create!

  • Pat Donnelly

    Australia is a desirable destination for the cream of the world’s youth. They intend to migrate as there is plenty of space, great housing and a wonderful lifestyle. Our unemployed tend to head to Queensland where odd jobs for the elderly, social welfare and beaches form an attractive lifestyle. Manufacturing can be better performed by machines. As is mining. And warfare.
    I see a problem, but only for those who wish to create a climate of fear. It won’t work in Australia. We have a continent to create!

  • Pete

    Ideology doesn’t put bread on the table Pat.

  • Pete

    Ideology doesn’t put bread on the table Pat.

  • Pete

    Ideology doesn’t put bread on the table Pat.

  • the best thing for a government to do is to provide a jobs for their citizens, more jobs means more tax. its a win win situation.