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Why GDP Growth No Longer Reduces Unemployment

3p Contributor | Friday July 26th, 2013 | 21 Comments

Employees entrance, General Laundry Building, New Orleans

Employees entrance, General Laundry Building, New Orleans

A version of this piece originally appeared on The Daly News

By Herman Daly
Economic growth used to be seen as the means to attain full employment, in fact, full employment was a major goal of U.S. policy. Today that relation has been inverted – economic growth has become the end, and if the means to attain that end — automation, off-shoring, excessive immigration — result in unemployment, well that is the price “we” just have to pay for the glorified goal of growth in GDP. If we really want full employment we must reverse this inversion of ends and means. We can serve the goal of full employment by restricting automation, off-shoring, and easy immigration to periods of true domestic labor shortage as indicated by high and rising wages. In addition, full employment can also be served by reducing the length of the working day, week, or year, in exchange for more leisure, rather than more GDP.

Real wages have been falling for decades, yet our corporations, hungry for cheaper labor, keep bleating about a labor shortage. What the corporations really want is a surplus of labor. With surplus labor, wages generally do not rise and therefore all the gains from productivity increase will go to profit, not wages. Hence the elitist support for automation, off-shoring, and lax enforcement of democratically enacted immigration laws.

Traditional stimulus policies do little to reduce unemployment, for several reasons. First, the jobs that workers would have gone back to have largely been off-shored as employers sought cheap foreign labor. Second, cheap foreign labor by way of illegal immigration seems to have been welcomed by domestic employers trying to fill the remaining jobs at home. Third, jobs have been “outsourced” to automation — to robots in the factory and to the consumer, who is now her own checkout clerk, travel agent, baggage handler, bank teller, gas station attendant, etc. And fourth, quantitative easing has kept interest rates low and bond prices high to the benefit of banks’ balance sheets more than employment. The public benefits from lower mortgage rates, but loses more from reduced interest earnings on savings, which does not help employment.

These facts argue for a return to the original intent of the Full Employment Act of 1946 — which declared full employment to be a major goal of U.S. policy – indicated specifically that full employment, not growth, should be the goal. Let us consider four further reasons for this return.

First, off-shoring production and jobs cannot be justified as “trade.” The good whose production has been off-shored is sold in the U.S. to satisfy the same market that its domestic production used to satisfy. Off-shoring increases U.S. imports, and since no product has been exported in exchange, it also increases the U.S. trade deficit. Because the production of the good now takes place abroad, stimulus spending in the U.S. largely stimulates U.S. imports and employment abroad. Demand for U.S. labor consequently declines, lowering U.S. employment and/or wages. It is absurd that off-shoring should be defended in the name of “free trade.” No goods are traded. The absurdity is compounded by the fact that off-shoring entails moving capital abroad, and international immobility of capital is one of the premises on which the doctrine of comparative advantage rests — and the policy of free trade is based on comparative advantage! If we really believe in comparative advantage and free trade then we must place limits on capital mobility and off-shoring.

Second, for those jobs that have not yet, or cannot easily be off-shored (e.g., services such as bartending, waiting tables, gardening, medical care, etc.), cheap foreign labor has become available via illegal immigration. Many U.S. employers seem to welcome illegal immigrants. Most are good and honest workers, willing to work for little, and unable to complain about conditions given their illegal status. What could be better for union busting and driving down wages of the American working class, which, by the way, includes many legal immigrants? The federal government, ever sensitive to the interests of the employing class, has done an obligingly poor job of enforcing our immigration laws.

Third, the automation of factory work, services of bank tellers, gas station attendants, etc. is usually praised as labor-saving technical progress. To some extent it is that, but it also represents substitution of capital for labor and labor-shifting to the consumer. The consumer does not even get the minimum wage for her extra work, even considering the dubious claim that she enjoys lower prices in return for her self-service. Ordinary human contacts are diminished and commerce becomes more sterile and impersonally digitized. In particular daily interaction between people of different socio-economic classes is reduced.

Fourth, a “Tobin tax,” a small percentage tax on all stock market, bond market, and foreign exchange transactions would slow down the excessive trading, speculation, and gambling in the Wall Street casino, and at the same time raise a lot of revenue to help close the federal deficit. This could be enacted quickly. In the longer run we should move to 100% reserve requirements on demand deposits and end the commercial banks’ alchemy of creating money out of nothing and lending it at interest. Every dollar loaned by a bank would be a dollar previously saved by the owner of a time deposit, respecting the classical economic balance between abstinence from consumption and new investment. Most people mistakenly believe that this is how banks work now. Our money supply would move from being mainly interest-bearing debt of private banks, to being non interest-bearing government debt. Money should be a public utility (a unit of account, a store of value, and a medium of exchange), not an instrument by which banks extort unnecessary interest payment from the public — like a private toll booth on a public road.

Cheap labor and funny money policies in the name of “growth and global competitiveness” are class-based and elitist. Even when dressed in the emperor’s fashionable wardrobe of free trade, globalization, open borders, financial innovation, and automation, they remain policies of growth by cheap labor and financial delusion. And we wonder why the U.S. distribution of income has become so unequal? We are constantly told it is because growth is too slow — the single cause of all our problems! That we would be better off if we were richer is a definitional truism. The question is, does further growth in GDP really make us richer, or is it making us poorer by increasing the uncounted costs of growth faster than the measured benefits? That simple question is taboo among economists and politicians, lest we discover that the falling benefits of growth are all going to the top 1%, while the rising costs are “shared” with the poor, the future, and other species.

Herman Edward Daly is an American ecological economist and professor at the School of Public Policy of University of Maryland, College Park in the United States. Daly was Senior Economist in the Environment Department of the World Bank, where he helped to develop policy guidelines related to sustainable development. He is closely associated with theories of a Steady state economy.

[Image credit: Karen Apricot, Wikimedia]


▼▼▼      21 Comments     ▼▼▼

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  • Eric Justian

    We’re all accustomed to hearing how much stimulus, or tax abatement, or city/state grant a business got followed by the pitiable number of jobs it created and folks quickly do the math and howl “That’s 1.2 million dollars per job!!!”

    No…that’s $40,000 per job and $60 million for machinery.

    With any luck the machinery was built in the US. Though built by other machines, most likely.

    • ssj12

      wrong.. thats 1.2 million dollars thrown out of the economy on worthless projects that create no longer term jobs just temporary ones that while seemingly looking like its helping something is actually taking away employment in other areas.

      Also even machines that build machines need to be built by someone, maintained by someone. Same with the machines built.

      • Eric Justian

        I believe we’re seeing a break down in the old model: Mostly we would distribute goods and services based on a degree of participation in the supply chain that made those goods or services. That’s not going to be viable much longer.

        Patents for 3D printers are ending, and generics are going to hit the scene in a hardcore way. 3D printing is inevitably taking over.

        There simply won’t be manufacturing anymore as we know it. Between advancements in robotics, artificial intelligence, and just printing out the parts you need…..manufacturing as we’ve known it is irretrievably in the past.

        The foundry in my hometown that used to employ 4000 folk in the 1950s……

        ….in the new century it’s replaced by RINO and CAD printed out in massive rooms of 3D printers. File goes in, product comes out. Robots replace the materials cartridges, pattern recognition software examines the parts fro defects to a greater degree than the human eye, and self driving Semis ship them by truck to the Car factory or refrigerator factory that has its own robots assembling them into a finished product.

        Heck…we’re literally just a couple years away from self replicating robots and circuit boards that can be printed out in a matter of seconds rather than manufactured. They’re even printing out solar panels now.

        The good news is that product scarcity is less and less an issue. The issue is……how do we as a society mentally detatch the notion that human productivity is directly linked with how much they deserve to eat?

        • ssj12

          Wrong, there is no breakdown of the old model. As new advancements and technologies are created, new jobs are created as old, unnecessary jobs are eliminated. This is clearly explained. That old foundry might have cut staff, but new jobs in industries creating new 3d printers have been created else where. Jobs developing the new, more advanced models of 3d printers are created by places buying the 3d printers on the market. New methods of construction and model building is being created making new training programs needed to learn them. Retail outlets are being created to sell both the printers as well as products made from them.

          And we can’t detach that notion. If we do humanity as a civilization will die. We need productivity to allow for future advancement of humanity. Without those willing to work and strive for something there is no point in anything we do in our daily lives.

        • Eric Justian

          I’d love if that were true. Unfortunately there’s no 1 to 1 correlation between job destroyed from technology and job created by technology. From where I’m sitting it appears to be magical thinking.

          One thing I’ll agree with you on is this: 3D printers COULD make small scale manufacturing more accessible to entrepreneurs, clearing away the cost prohibitive barrier to entry.

          On the other hand, we’re also in a world where whatever you create can literally be scanned and then printed out by somebody else. So your Better Mouse Trap or New Idea can be pirated and mass produced worldwide by anyone else with a 3D printer in a matter of hours.

          With the household 3D printer just about everything we’d buy can be printed from the comfort of our home. Even circuitry.

        • Dave Shires

          I’m with Eric.. at the end of the day we need a profound cultural and psychological shift… or at least a re-definition of what defines “productivity” ….

        • ssj12

          While it is impossible to know the exact correlation, it is usually never negative job loss unless government is involved.

          If you want to learn real economics, and fully debunk this entire
          article. Read this book by Economist Henry Hazlitt; Economics in One Lesson. Linked below is the free PDF.

          http://library.mises.org/books/Henry%20Hazlitt/Economics%20in%20One%20Lesson.pdf

          In Liberty,
          Matt Schnackenberg
          Libertarian Candidate for US House – Florida District 11

  • ssj12

    Of course, an Keynesian economist wrote this.. sigh… no wonder it is full of fallacies… full employment is only possible with full productivity.

    If you want to learn real economics, and fully debunk this entire article. Read this book by Nobel prize winning Economist Henry Hazlitt; Economics in One Lesson. Linked below is the free PDF.

    http://library.mises.org/books/Henry%20Hazlitt/Economics%20in%20One%20Lesson.pdf

    In Liberty,
    Matt Schnackenberg
    Libertarian Candidate for US House – Florida District 11

    • ab

      Let’s see…In the past three decades we’ve been going thru privatization, market liberalization, reducing taxes on multinational corporates and the super rich, and cutting government services for the majority…and what do we have? avg US worker worse off than he/she was in the 1970s, a dysfunctional “representative democracy” bought and paid for by big business — with Wall St, Big Oil and Big Pharma in control of our lives…What liberty?! Get real…

      As far as economic theory goes, and most of it doesn’t go far if you’re not living is some fairy tale world, the article you refer to is sophomoric, and that’s putting it mildly…

      There is no liberty to be found by following this line of malarkey, only more in the way of economic indentured servitude for most people…Flights of imaginary fancy, unsubstantiated assertions and rhetoric all mustered in support of a foregone conclusion…I can only pray for those you might represent and serve should you actually get nominated for anything…

      • ssj12

        Went through privatization? Where exactly? I have seen more government growth in the last three decades then privatization of any industries currently managed by government.

        You hail government as your answer, but you do realize that corporations are created by government, protected by government. And just to point out, the entire process of incorporation on a federal level is unconstitutional and illegal in this nation.

        Cutting government services? Is that why nearly 1 out ever 5 citizens has food stamps?

        You complain about big pharma and corporations running this nation, but you refuse to mention that the reason they do is because Obama, Bush, Clinton, etc all put executives and former executives of those big national corporations in their cabinets, as supreme court justices, and head of various government agencies. I challenge you with the real question, what is the difference between the Republican and Democrat parties? (Nothing)

        You have zero understanding for freedom and liberty this country was founded upon. You have zero understanding how a capitalist market is supposed to work and that we have not had true capitalism ever in over 155 years. You fail to realize as government grows everyone becomes indentured servants.

        And the “article linked” isnt an article. It’s a book. A book on economics for beginners.

        What is liberty? Liberty is a state of being. What you should be asking is what is freedom. Freedom is the right to do whatever I want with my life and property as long as it does not interfere negatively with the lives and rights of my neighbors.

        • Eric Justian

          The US Economy of the late 1850s wasn’t exactly what I’d call “booming”. There’s the panic of 1857…which was almost exactly 155 years ago. We were essentially a developing nation, an agrarian society, life expectancy of 43, not to mention the slave labor plantations.

          I mean, if that’s the utopian society you’re proposing we return to…no thanks.

        • ssj12

          No I am not meaning that. I am strictly pointing out that the tyrant that was Lincoln fucked this nation’s progression towards a capitalistic society and instead redirected us to mercantilism.

        • Eric Justian

          And yet we went on to become the most prosperous, wealthiest, most powerful nation the world has ever known for the next hundred and fifty years.

          There’s simply no case to be made that Lincoln screwed anything up at all.

          Except perhaps in some vague unproveable theoretical way.

        • ssj12

          I could easily point to the failed railroad of his, the fact he destroyed half this nation’s wealth, and caused the death of over 750,000 people. We would be vastly richer if he did not fight that unconstitutional war. It is easy to see how much better off we would be if he didn’t do this.

          The reason we prospered is because of those capitalists that were willing to not ask waste taxpayer money and work to create things like the Great Northwestern Railroad.

          There are dozens of other instances that display where government has prevented economic growth. Should I point out the New Deal? WWI? Vietnam? War on Terrorism? The Federal Reserve Act of 1913 and the 16th Amendment? 17th Amendment? And even though it was repealed later the 18th Amendment? The war on drugs? The unneeded bailout of GM and the two bailouts of Chrysler? Bank Bailouts?

        • Eric Justian

          Again…and yet we became the most powerful, richest nation in the world.

          There’s simply no evidence anywhere that a full on Libertarian system would have produced a better result. None of the G20 nations are Libertarian. None of the US’s world adversaries have been Libertarian.

          There’s not a single prosperous example of a Libertarian nation in the world. Not one.

          What you’re proposing here is something radically experimental and couching it in vague historical terms. Somehow the past century and a half of growth and prosperity were horrible and awful, and we should go back to some general time back in the 1800s when folks died young, orphans and elderly folks without family starved, and nearly everybody lived on a subsistence farm.

        • ssj12

          Libertarianism is Classical Liberalism btw.. ie Jeffersonianism.. So yes, actually this entire nation is an example of it.

          You really do not understand how life expectancy or anything works do you? Life-expectancy rises as standard of living rises. Standard of living rises as new innovations make lives easier. So yes, life-expectancy was lower in the 1800s, but as new innovations came to pass life improved, and people lived longer due to the savings brought by the improvements.

        • Pokari Sweat

          I dont think anyone here would disagree with you about any of those “dozens of examples” … but is that really government? That’s corporate controlled government. That’s not the same thing as blaming “government”.

        • Pokari Sweat

          Where did he hail government as “the answer” ?

        • ab

          Food stamps?! Sad commentary on the state of US society indeed and indicative of how deregulation and neocon domestic and foreign policy, supported by fallacious economic ideology, has enabled multinational corporates to run rampant over US society…
          Gov’t growth? Overseas wars to assure oil supplies, the war on terrorism, entitlements and demographics — aging of population segments with benefits no longer available to younger generations…

        • ab

          Privatization–how about the military-intelligence sector?

          While I see little difference between parties in terms of campaign finance and the influence of government lobbyists, I’d say there are very real, significant and substantial differences between the policies Obama is trying to enact and those of his predecessor with regard to energy, environment, foreign policy, tax reform and broader social policy, as is apparent in the internecine opposition by House Republicans and apparently irreconcilable differences in Congress regarding these issues…

  • Sarah Roberts

    Economic growth does not reduce unemployment because there is still significant slack in the economy, but there might be a point when it does create employment. It just means that people are becoming more productive at what they do, either because of better technology or because of improving economies of scale and reduce in slack.
    http://www.oracleofinvesting.com