The Dangers of Downsizing
By grandpa_lash
@grandpa_lash (5225)
Australia
October 24, 2012 10:31pm CST
My qualifications are in Economic Anthropology, so I am not actually an economist and may be overdoing some things in the following analysis, but it seems to make sense to me and is in line with the recent IMF rhetoric that austerity measures, downsizing, are not the answer. This discussion is not driven by any ideological construct; it is purely based on economic logic and the facts and situation as they actually are. I hope I am wrong about the potential future.
I live in an Australian state that recently gave an extreme right conservative an overwhelming majority (always a disaster waiting to happen, whichever party wins), and he has taken a chain saw (razor in this case doesn’t begin to cover it) to the public service/bureaucracy, with almost 20,000 jobs being slashed in the first few months of his term. This is downsizing with a vengeance.
So, let me put a possible scenario. Take a man, mid forties, stay-at-home wife and three kids, a big mortgage (keeping up appearances), car loans, credit cards, and a good lifestyle. Suddenly he is out of a job. It happens all the time, and in normal circumstances someone with his skills and experience would have no problem getting a job in the short or medium term. But then consider that he is just one of 20,000 like him, all looking for the same sort of administrative jobs because that is what their qualifications, skills, and experience are suited to.
Australia, like every country working within the neo-liberal economic system of constant growth and globalisation, has a large proportion of private firms which have already down-sized as far as they can in the name of “efficiency”, and many which have also outsourced as much of their workforce as possible to third world countries. I heard only an hour ago from our Real Estate agent that a friend of hers who has been employed by a major bank since she left school, quite a long time ago, has just been asked by her employer to go to Singapore to train people there to take over her job.
There are very, very few suitable jobs available for those 20,000 suddenly unemployed people. What few there are have been turned into contract positions rather than permanent positions, so there is no job security, making it much harder to get any sort of significant credit. Without the combination of unemployment benefit and whatever savings they have managed to accumulate they would be in big trouble, and I suspect will be anyway. If they can’t get one of those few contract positions available, they will have to throw away their skills base, training, and experience and look for menial part-time, casual work in a market that is already glutted with semi-skilled and unskilled workers, many of whom are younger and fitter than these administrative staff and often already have experience in menial work. They will get the vast bulk of whatever jobs are available.
The result is that many of that 20,000 people, no matter how willing they are to work, will become long-term unemployed. That is a bitter pill for them, of course, but it has awful ramifications for the society as a whole. Once their savings run out they will start having immense difficulty in paying off credit cards, car loans, and mortgages with the potential for a large number of loan and mortgage defaults. Younger people coming up, also being faced with no job security, will have no way of getting a mortgage in the first place, and since rental accommodation in our cities is (a) vastly insufficient for the demand and (b) enormously expensive, we are faced with the prospect of becoming like the USA with significant numbers of homeless who are neither drunks, addicts, or mentally handicapped.
If this scenario does develop the way it potentially can, what happens to (a) the housing industry, with all its tradespeople, suppliers, salespeople, and financiers; and (b) to the car industry, which is struggling already here even if not to the extent that it is in the USA, and all its direct workforce, subcontractors and suppliers, and distributors? What happens to the huge number of small businesses who rely totally on consumer sales, when so many consumers have no money to spend? They begin by sacking staff, and then going bankrupt, as small business is always facing that danger in even a minor downturn. And what happens to the middle sized and larger manufacturing companies who supply those small businesses with their products? More sackings, if they haven’t already outsourced their labour force, more people seeking fewer and fewer jobs, more credit defaults. The finance industry by now will also be feeling the pinch, pouring more petrol on the fire as they downsize. This doesn’t even begin to look at the stock market, which by now should be committing collective suicide.
Then we get to the government. All governments in the West are struggling to meet their responsibilities due to the combination of the Global Financial Crisis, ever-increasing downsizing and outsourcing of labour, and a massive drop in tax revenues and increase in welfare expenditure because of the spiralling unemployment. At this point, if not before, the monster of inflation will begin to appear, further driving the downturn.
1930s anyone? With the added factor that we live in a far more violent and crowded society now, with the potential for the sort of civil disorder they are getting in parts of Europe and a collapse of the social structure.
This, or some version of it, is why so many influential economists are beginning to call for a return to Keynesian economics, and why they are saying that austerity measures are counter-productive and simply bring about collapse quicker. Printing money and bolstering the public service (preferably with suitable efficiency standards to ensure as little dead wood as possible) and large infrastructure projects are the only measures I can see that will halt this downward spiral.
Lash
1 person likes this
3 responses
@andy77e (5156)
• United States
25 Oct 12
The problem is, that generally isn't how things go. If it was, then every recession would turn into a world wide economy great depression.
Instead what typically happens is that wages go down. As wages decline, companies can hire people profitably.
As those companies can get the labor they need, at a lower cost they can afford, they start to grow again.
Toyota was building factories in the US during the past 4 years. They had cut their wages prior to the economic downturn. Yes the auto workers in the US were not happy in the beginning, but when GM and Chrysler were laying people off, there was no complaints at Toyota.
I know of businesses that were hiring all throughout the recession. My uncle in 2008, was on a plane flying to China, to seal up a business deal with his company.
The problem comes when government intervention makes the problem worse. Tons of government spending, that snap up labor, preventing wages from falling, and the threat of higher taxes on businesses that prevent them from growing, cause an extended period of lower growth.
Sure government can create a job, or keep people employed at government positions, but then someone has to pay for each of those jobs. That money taken out of the private economy, eliminates one job, for every job the government makes.
Someone has to pay the bill.
@grandpa_lash (5225)
• Australia
25 Oct 12
I can see what you're saying, and from that point of view it makes sense. But I'm talking about a sudden massive sacking of staff, which somewhat changes the situation even as you see it.
My main argument against your view here is, again in line with changing economic views at the IMF and among other economists, is that the system you are talking about is based on constant growth, and that itself is a part of the problem because it perpetuates the cycle. If we returned to a more or less static wealth with static employment scenario, which even mainstream economists are now considering, the whole map changes.
The other problem I see with your view is a typical "liberal" one, so it probably won't impress you, and that is that by continually reducing wages to compete with cheap overseas labour you merely turn a First World economy into a Third World economy, with the concomitant massive and to my view unacceptable disparity between the rich and the poor. Without a strong welfare element to a government, that has the potential to lead to the civil unrest I mentioned above, and this disparity is again something many economists are now suggesting has become an urgent issue in the debate.
Lash
1 person likes this
@andy77e (5156)
• United States
25 Oct 12
Well, in countries that have prevented foreign competition, you see a constant stagnation of the economy.
The problem with the competition of cheap labor argument, is that you only look at that argument from the perspective of the specific jobs in direct competition.
However, if you look at it from a wider angle, there are huge benefits. Thousands more jobs are created from cheap imports, than are ever lost.
For example, the lower cost import of electronic parts, is exactly what fueled the growth of high tech jobs in the US. I specifically worked at a company that made power supplies for commercial vehicles. We used tons of lower cost imported goods in the building of our product.
If we somehow prevented competition from cheaper imports, that business would not exist. The drastically higher price of our product, would put us out of business.
The idea that first world economies can't compete with 3rd world economies has simply never been true in the past, nor is it in the present. As far back as the 1700s, advanced nations have competed against less developed countries for labor, and have routinely succeeded.
Now obviously I can't speak for your country, but in our country the largest problem for the US has been bad labor policy that drives up labor costs. Of course if government imposes high costs on labor, such as the latest Obama-Care policy, that is going to make us less competitive.
But that's more of us making ourselves less competitive, than someone else having cheaper labor.
Back to your static wealth perspective:
The problem here is that static wealth is a guarantee of impoverishment.
Wealth itself, the very concept, is inherently a dynamic thing.
What makes wealth, what it is? What makes a $80,000 BMW M5, worth $80,000? It's because people want it. It's worth something, because other people give it value. If you had a BMW M5, and no one anywhere wanted it, and the dealer wouldn't take it back, how much would it be worth? Zero. Zero wealth. Nothing.
So what people want changes over time, thus what wealth is... is constantly in a state of flux. Portable tape players were $100 in the early 90s. Portable CD players were $400 a piece. Now you can't even find a tape player, and portable CD players are $20.
Static wealth is nearly impossible.
Secondly, attempting static wealth and static employment naturally results in impoverishment.
China tried this. This is why they ended up a 3rd world country. Remember, back in the Ming Dynasty, China was the leading country in the world. Economically, culturally, technologically, they were the most advanced.
But when you institute these policies, impoverishment always follows.
So you take a farm, and create a government run commune. Static wealth, and static employment. The farm creates the exact same amount of food, and the same amount of jobs.
Problem is, the population generally grows. So you take the same amount of food (wealth) created, and divide it up among a larger number of people, the level of wealth per person declines.
Now the problem ideal is that each additional person will create additional wealth, but that simply isn't how life really works.
The amount of ground to plant, doesn't magically increase. The amount of work required to operate the farm doesn't magically increase either.
In order to increase food production, you have to mechanize. Use technology to increase productivity. But using a tractor instead of a mule and plow, means you don't need as many people. Employment is lost.
If you advance, then you no longer have static wealth, and static employment If you have static wealth and employment, you'll end up in poverty.
The same is true in every area of society. From steel mills, to housing construction.
The only situation in which that system *MAY* work, would be in Japan, where the population is falling. As the population falls, a static amount of wealth, to a falling population would mean more wealth per individual.
But they have other problems that are caused by population decline, that offset any value to your system.
@grandpa_lash (5225)
• Australia
25 Oct 12
"Static" growth is never absolute, it is relative to the size of the market. Ordinary population growth leads to growth in markets and growth in production, which leads to growth in employment, all in relation to the size of the population. The unlimited Growth paradigm that we follow at the moment, however, forces companies to extremes to stay alive, and in doing so increases overall unemployment through downsizing and outsourcing, whatever might happen in individual companies or individual industries. This is the rationale behind outsourcing, and the rationale for the aggressive marketing overseas which has led to some particularly immoral acts (see Nestle in India).
Since I never even considered the concept of communes in my argument, I'm a little at a loss as to how to respond to that part of your argument. Static growth does not mean communism, nor does it mean that the pie doesn't grow, as I say above, so it doesn't lead to impoverishment as far as I can see. And the addition of new products, new technology, will always come along to increase the size of the manufacturing sector and take up any slack in employment.
The Growth Paradigm inevitably leads to a small cadre of immensely rich people at the cost of impoverishing the vast majority of workers; static wealth still allows the rich their fair financial advantage and reward for their inventiveness/entrepreneurship etc., whilst at the same time allowing everyone else a chance at some sort of decent living.
Lash
Lash
@knoodleknight18 (917)
• United States
25 Oct 12
I agree with you're assessment of laid off people not finding jobs, causing further layoffs, and down the spiral goes.
Simply put, a news broadcast reported that in 2011 the 400 wealthiest American had wealth equal to 1/8th of the nations GDP. That's a lot of stagnation and shrinkage. The answers are pretty simple, new growth, tax the rich, or have them invest or give away their money. Higher wages could also work. Regardless 20% of the economy here isn't moving and I'm willing to bet it isn't much better anywhere else. 20% increase in GDP would help any economy. I don't think it matter if you use infrastructure or entertainment to get it moving, so long as it get's to moving.
I think as a modernized and urban society we face more complex issues as well. Like the trouble of actually being self reliant in bad times. Technology reducing the work requirement to produce goods, but people getting paid the same wage for work that produces more. The ability of a person to make far more than they can reasonably spend in their life over a very short period of time.
@grandpa_lash (5225)
• Australia
26 Oct 12
I concede that my scenario is a "worst case scenario", and hopefully things won't get anywhere near that bad, but it's not an unrealistic possibility. Note the figure I pointed out in the response above regarding the wealthy as a proportion of population in the US. It is likely worse in some places, better in others, but overall I suspect it is fairly reprsentative of the whole world.
I would modify something you said: unforced, natural grwoth would indeed be a healthy thing for any economy, but the forced growth we are currently experiencing, a large proportion of which is purely on paper and revolves around the totally unproductive earnings of speculators, is unhealthy.
Lash
@knoodleknight18 (917)
• United States
26 Oct 12
I do agree it's a worst case scenario. I also think historically it would have been near impossible. There's just no way to cut more than a very small percentage of a population out of the massive cycle of trade, especially with money making trade so simple.
However. I think we're in this sort of new era. We're so efficient we really don't need work very much. Only 20% of the US GDP for 2011 was goods. That basically means 80% of our labor is spent producing entertainment. Sure health care and other services make up some of that. But for the most part our economy runs on entertaining people because movies are worth more than food. The proofs in the numbers, pro-athletes and movie stars make millions, farmers barely make enough to live on. Even doctors income pales in comparison. This is why we have this crazy and collapsing economy. 4 out of 5 jobs go to entertain the ever shrinking attention span of humans. As soon as people decide they'd rather have a conversation than go to yoga class our economy collapses.
