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Thursday, 30 May 2013

How to fight unemployment during a general reduction of excess production capacity?!

It is one of the most important themes in The Netherlands currently. How can we fight the soaring unemployment that is holding the country in its grip?!

The fact is that the general unemployment in The Netherlands has been soaring during the last 6 months, bringing the seasonally adjusted unemployment rate to the unprecedented level of 8.3% in April 2013.

To make clear how the general unemployment is built up in The Netherlands, I took the unemployment rates for males and females in the most important age groups and put those in three graphs. All data is courtesy of the Dutch Central Bureau of Statistics:

Dutch unemployment in %, age 15-25
Data courtesy of:
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Dutch unemployment in %, age 26-45
Data courtesy of:
Charts by
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Dutch unemployment in %, age 46-65
Data courtesy of:
Charts by
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For the Dutch youngsters (age 15-25), the development of unemployment is definitely worrisome. For both male and female youngsters the unemployment rose to 16% from 8% in 2008. This means a bad start for many youngsters, who finished school and want to work. However, compared to countries in the Southern and Eastern European areas, the development of youth unemployment is still very ‘containable’ in The Netherlands. Nevertheless, the general outlook is poor, for the time being.

The unemployment of ‘elderly’ workers (age category 46-65) also doubled, since 2008. In general, male unemployment rose sharper than female unemployment. However, during the last year, the female unemployment rose sharper than male unemployment, due to the fact that the unemployment of the elderly males recovered slightly during the last two months. Nevertheless, the rising unemployment is only moderate for both men and women, when it is compared to men in the age categorie 26-45.

The chart that worries me most is the graph for the age category 26-45 and especially the development of male unemployment in this chart. The male unemployment soared to 7.9% in April 2013 from 2% in January 2008: almost a 300% increase.

Since December 2012, the male unemployment jumped by not less than 1.7%(!). Also the female unemployment jumped by an impressive 0.6%, since last year. Due to the spectacular recovery of the female unemployment in April in this age category, this figure remained relatively limited.

Then there is of course the question, why especially the male unemployment in the age category 26-45 rose so sharply?! I guess that this is caused by the circumstance that especially these men often work in industries, which have been severely hit by the crisis: building & construction, the manufacturing industry, transport & distribution, the financial industry, the ICT-industry etc.

Women and elderly workers probably work in other industries, which are less vulnerable to the crisis: for instance healthcare and commercial services. However, this is all speculation on my behalf, as I don’t have more detailed data at this moment.

One thing, however, is clear: the unemployment is on the rise and it appears to me that the momentum for unemployment growth is rather growing than declining at this moment. To make things worse: there is no signal whatsoever that the unemployment will soon change for the better, as all the economic signals are currently set to "red".

This brings me to the point of this article: what should the Dutch politicians do or don’t do in order to fight unemployment.

That is a rather difficult question: if it were not so difficult, the crisis would have been solved a long time ago. Yet, I want to answer this question, by looking at the solution from four different points of view:
  • The ‘Keynesian’ solution;
  • The Monetary solution;
  • The ‘Healthy National Budget’ solution;
  • The ‘Ernst’s economy’ solution; 
The Keynesian Solution

The Keynesian Solution would be, summarized: if you would bring in government stimulus at a number of strategic areas in the economy, it has a cascading effect that helps the economy as a whole.

In plain English, if you f.i. build / refurbish roads, build new houses and commercial buildings and if you instate subsidies on high value items and services, like new cars, home improvement and durable consumption goods and services, the workers, shopowners and other people that build, produce or sell these items earn extra money in income.
Theoretically, these involved parties spend this extra income again on other consumption and durable goods, services and items and thus help other people to earn extra money.  This cascading effect is said to reinforce itself, according to the theory: one billion of government stimulus is said to trigger various billions of extra economic growth through this cascading effect.

First, I have serious doubts about this cascading effect. It sounds like a perpetuum mobile: an object that remains moving for eternity, after it has been put in motion. You (as a government) add one euro to the system and the system itself produces many euro’s on top of this euro. It sounds almost too good to be true, doesn’t it?!

Further, during the first decade of this century we have been involved in an economy of structural overproduction and (almost hedonistic) excess consumption: too many luxury houses have been built and too much Commercial Real Estate, too many cars, too many consumer goods and too many services have been produced and sold, with often borrowed money. There were just too many objects, goods and services in those days, that people could easily do without.

The final result was that people and companies borrowed themselves into misery, in order to buy these luxury houses and office buildings and to buy all these services and consumer goods. Risk awareness was virtually non-existent and banks were happy to lend excess money to everybody and their sister, in order to pay for or finance these excess goods, products, services, houses and buildings. After all, that was the main reason that the crisis started in 2008.

At this moment we are at a crossroads: at one hand we are still in this situation of excess production, as still too many people produce too many goods and services that are in too little demand nowadays. At the other hand, the process of 'moral cleansing', debt destruction and austerity makes that people become less and less interested in hedonistic consumption and debt hoarding.

It is my firm opinion that Keynesian stimulus is exactly the wrong method in such a situation, as it could lead to ‘bridges to nowhere’, 'buildings and shops for nobody' and probably fails to trigger higher consumption anyway. At this moment, the mindset of people is just aimed towards more austerity and less debt, as people got acquainted with the dark side of debt, during the last five years.

This diminishing debt and increasing austerity of households will definitely lead to less consumption, instead of more consumption. This is the reason that Keynesian stimulus will fail, in my humble opinion: the time is just not right for it. 

The employment situation might be increased slightly in the industries where the stimulus is distributed, but this won’t be a long-lasting effect. The mindset of people yet didn’t change from risk-averse and consumption-avoiding to risk-loving and consumption-minded. When people remain spending less money and getting rid of excess debt, instead of taking more debt, this will definitely lead to reduced consumption and reduced employment.

The Monetary Solution

The monetary solution is – roughly – to supply loads and loads of cheap money, by letting the money presses run overtime.  The central bank distributes this cheap money to the banks, hoping that the banks subsequently redistribute it to their customers: companies and private citizens. 

It is true that this solution could eventually help to reduce debt, by diminishing its value through inflation. Nasty side-effect is, however, that it "kills" the savers and cautious people, in favor of the ‘big spenders’ and people with large debts. Besides that, it doesn’t change the mindset of people and companies and thus their current risk averse and consumption-avoiding behaviour:
  • Banks, which learned their lessons from the crisis, hoard most cheap cash as a buffer, instead of lending it to companies and private people. This reduces the effect of the monetary solution;
  • Nevertheless, theoretically healthy companies still can borrow money at much lower rates than normally and therefore they can produce cheaper goods and products, as their financing costs are reduced;
  • However, as a result of this crisis and especially the consequences it had, normal citizens don’t become more willing to borrow and spend money from low interest rates alone anymore, even when these rates are close to zero. Many people paid a high price for their hedonistic consumption and took this to a lower level during the last two years, especially as their jobs are not exactly safe at this moment. 

And if people and companies are not willing to do extra consumption and investments (that is exactly the point during this crisis), the extra production capacity that companies have due to this cheap money, is futile in reality. 

Hence, the effect of monetary stimulus on unemployment is futile too. This is the reason that this monetary solution won’t have much effect on unemployment in The Netherlands.

The ‘Healthy National Budget’ solution

The Netherlands should get its national budget balanced out, in order to help the Dutch economy. This is the solution that is currently advocated by the Dutch government and the European Commission. Goals is to bring the Dutch national deficit below the ‘magical’ 3% threshold from the European Stability and Growth Pact (SGP). 

The opinion of PM Mark Rutte and his henchmen: “if the state budget is healthy and within the boundaries of the SGP, this increases the trust of the Dutch citizens in their government and in the stability of the Dutch economy. When people have more trust, they are more at ease with spending money on consumption and durables again. Hence, the economic situation will improve again”.

Through a system of fierce austerity measures, mass lay-offs among civil servants (the “smaller government” doctrine, where government tasks are increasingly delegated to the “market”) and tax increases in all kinds of direct and indirect taxes, the state budget becomes healthy again. Or doesn’t it?!

The positive effect of Keynesian and Monetary stimulus on unemployment is probably quite small. However, the negative effects of mass lay-offs, widespread austerity measures and tax increases on the unemployment situation are devastating. 

All these measures lead to increasing unemployment, more general insecurity, diminished consumption and thus – as a logical consequence – to less tax income. And when tax yields are indeed disappointing, another round of tax increases, mass lay-offs and austerity measures seem inevitable, leading to a vicious circle.

This is enough to smother an economy into a deep coma, where everybody (the government, companies, banks and private citizens) keeps their cards to their chest. As a consequence, the ‘holy grail’ of the 3% budget deficit becomes a mirage: you can see it, but never touch it. This is the situation that The Netherlands is currently in. The result: soaring unemployment.

The ‘Ernst’s Economy’ solution

There is no “quick and dirty” solution to fight unemployment. The overproduction in the economy must disappear and the process of debt destruction among banks, companies and private citizens must be finished first, in order to get a healthy economy again. This is a long and painful cleansing process and the more governments do to avoid it, the longer this process will take.

Still, this ought not to be a hopeless situation.

What can be done to reduce unemployment within a few years, is: 
  • Governments should make strategic investments in education. Good general and targeted education is very productive. Innovation-spurring studies and fundamental research are often even more productive, at least in the long run.
  • Innovation among companies, universities and science centers should be stimulated. This can be done through special subsidies, but also through the creation of preconditions and a special infrastructure, wherein innovation can be triggered more easily. A good example is the ‘Brainport’ near Eindhoven, where local governments, universities and high-tech companies are all working together towards innovative solutions and thus create much added value.
  • Governments should not per sé want to liberate the labour market as a goal by itself. By doing so, the labour market could become a ‘wild west’ situation, where people and companies bend and break the rules at will. What the government should do, however, is enabling a level playing field for everybody and all parties involved: foreign and domestic.
    • When some companies are allowed to cheat upon the labour laws and collective labour agreements, in order to hire foreign personnel at discount tariffs, this is not a healthy development.
    • It is also not good when labour rights and dismissal laws are all bluntly dismantled, in order to make it much easier for companies to ‘hire and especially fire’ workers. When companies can virtually do what they want and workers lose almost all of their acquired past rights, it won’t improve the national labour situation eventually
  • What the government should do, however, is taking away obvious boundaries for companies to hire people:
    • Softening labour and dismissal laws, when these laws are obviously withholding companies from hiring people. The functional parts of these laws should be maintained, while the disfunctional parts should be skipped;
    • Diminishing the void between the gross and net salary of workers, thus making it cheaper for companies to hire people;
    • Partially subdizing job-trainings and extra educational programs-on-the-job in order to make people more flexible and more multi-functionally usable.
    • Investing in the education of unemployed, but enthusiastic people in order to make them more fit for the labour market.
    • Taking away boundaries in the labour laws on a pan-European, supranational level. If people can easily move to places where ample labour is available, this leads to better functioning labour markets in all European countries and thus in The Netherlands; 
Neither of these measures will lead to a quickly dropping unemployment. 

People should get rid of their excess debt first and than they should regain their trust and confidence in the economy and especially their own future again. This will require political change at many fronts in the Dutch economy. The labour market, the RRE/CRE market, the building industry, the financial industry and local and central governments. Change that many politicians still scare away from.

However, by spurring education and innovation and by investing in people and companies as a government, you increase the odds that you see the train with ‘the next big thing’ arrive.  When this train comes, your country can step in at it, instead of waiting for improvement at the sidelines.

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