“The rules have changed,” said President Obama in his recent State of the Union address, referring to the loss of job security for American workers. No longer is the willingness to work hard a guarantee of a stable job, decent benefits, vacations and a pension. More and more workers, having played by the rules their whole lives, having gotten an education and lived responsible lives, find themselves unemployed. Today the official U.S. jobless rate hovers at around 9%, while the real figure is much higher — over 22%, including short- and long-term discouraged workers.
That rate is not so different from the shockingly high rates in much of Europe, such as the 22% unemployment rate (and 45% youth unemployment rate) that has sparked demonstrations across Spain. No wonder politicians everywhere,, on both sides of the political spectrum, are talking about creating jobs. Though they disagree on how it is to be done, they agree on the necessity of boosting economic growth to increase employment.
But given that the best efforts of economists and policy-makers have failed to stem a steady deterioration of the economy in recent years, perhaps we should begin interrogating some of their basic logic. Adopting the naivete of a child, we can start by questioning job growth as a long-term goal. Ideally, shouldn’t the rise of technology alleviate the exigency of human labor, and allow us to enjoy more leisure? Instead of enduring a 20% unemployment rate while the other 80% work ever-harder out of fear of losing their jobs, why couldn’t everyone simply work 20% less? (Economists: yes, I am aware of the lump-of-labor “fallacy”, a critique of which is beyond the scope of the present essay, though implicit within it.)
I would like to point out a little bit of insanity. On the one hand, most people don’t really like their jobs; at least, they wouldn’t do them unless they were paid to. On the other hand, we are seeking to create yet more of these jobs — not because we need more stuff on this earth, but simply in order that they have money to live. We already have enough stuff. Why is the only way to distribute it seem to involve the production of even more of it?
Naive or not, this question taps into a paradox that has been with us for several hundred years. After many centuries of invention of labor-saving machines, why does the typical employed person still work longer hours than the high Medieval peasant or the stone age hunter-gatherer? As recently as the 1980s, futurists such as Alvin Toeffler were predicting an imminent age of leisure. It was obvious: the computer and automated manufacturing would soon reduce the workweek to 25 hours, perhaps 20, with 150 vacation days per year. It was the same promise that we heard from the first days of the steam engine: a machine could do the work of a thousand men; therefore, each man would soon only have to work one-thousandth as hard.
What happened instead was that rather than working less, at every juncture we as a society chose to produce more. Today, indeed, at the zenith of the age of the machine we consume a thousand times more than our peasant ancestors did: a thousand times more energy, ground water, minerals, and atmospheric capacity to absorb waste. For centuries, the concern of economic policy-makers has been how to increase demand — how to consume even more in order to absorb the ever-growing capacity of industry to produce. Economic ideology says that this is good — the more we consume, the higher GDP, the better off we are. But there is also a very practical reason to constantly increase consumption: as soon as demand falls behind, businesses suffer falling profits and must cut wages and workers in order to compete. The laid-off workers consume even less then, leading to a vicious circle, deflation, and a Marxian crisis of capital.
How did we get stuck in such a trap? Why are we compelled to always choose consuming more rather than working less? Will we ever reach a point where all human needs have been met, and we can finally relax and work less? Under the current money system, the answer is no. We will never be able to work less. The current money system compels us to grow, exponentially, forever. And so we have, whether by creating new demand through the ideology of consumerism, or by exploiting more natural resources through technology, or by extending the money economy to new parts of the world through colonialism and empire. We have thus preserved the money system, and the institutions and power relationships built upon it. The economic tools we keep hearing about in the news, things like quantitative easing and fiscal stimulus, are all ways to keep the economy growing.
It is becoming obvious now, though, that the effectiveness of these tools is waning. The reason it is waning is that the rules, indeed, have changed, and this rule change goes much deeper than Obama or almost anybody else thinks. What is changing is the deepest ground condition upon which our economic system depends: growth.
As I shall explain in a future post, we are nearing the end of growth. The argument is quite involved, going beyond the usual bogeymen of Peak Oil and environmental collapse, so I will provide the barest summary of it here. It has two aspects. First, I frame growth — the expansion of the monetized realm of goods and services — as an unsustainable depletion of the social, natural, cultural, and spiritual commons. Today, when there is little more of nature to convert into goods or relationships to convert into services, growth is impossible to maintain. Secondly, the ideology of endless growth assumes an infinity of human needs and wants; in particular, an infinity of needs and wants that are quantifiable. This assumption is false: in fact, the only quantifiable thing for which our desire knows no limit is money itself. Why does money have this peculiar property? It is because it is both a medium of exchange and a store of value superior to any other. This insight is key in envisioning a different kind of money system that, by decoupling these functions, no longer compels endless growth.
In any event, without growth, a money system based, as ours is, on interest-bearing debt quickly disintegrates. In a stagnant economy, the owners of capital will refuse to lend it because the risk-free interest rate (say on government bonds) is higher than the average return on capital investment (i.e. the marginal efficiency of capital). The monetary authority can mitigate the situation by lowering interest rates, but it cannot lower them below zero (well actually it could, in theory — more on that another time).
Without lending to businesses and consumers, money does not circulate, because they are not expanding employment or making purchases. It remains in the hands of creditors, circulating perhaps within the small domain of commodity speculation and equities markets, but not creating demand for goods and services. The wealth of those who possess money continues to increase at the rate of interest, however low that may be, while the aggregate wealth of those who depending on selling goods and services, including their own labor, stagnates or shrinks. The rich get richer and everyone else gets poorer. More and more of borrowers’ income goes to servicing debt, until finally they can no longer make their payments. First their assets are collateralized, then their future income pledged; eventually they have no choice but to default. As a stopgap measure, the creditor can lend them even more money to make payments on their existing debt, but unless the borrower has a sudden change of fortune, that only worsens the eventual default.
Let me summarize the problem so far. Without growth, there is little lending. With less lending, there is less money to invest in new production. Without new production, there are no new jobs and no room for raises, so income stagnates. Without income growth, there is no growth in demand. Without growth in demand, there is no economic growth.
We live in an economic paradox: those in greatest need cannot afford to buy, and therefore cannot generate “demand” and hence increase employment; meanwhile, millions cannot find jobs because those who DO have money have few needs to be met, and would rather save than spend. There is, after all, no lack of money in the system. After two rounds of quantitative easing, the base money supply is at unprecedented levels. The problem is that the money is not reaching those who need to spend it: poor people for one, but also such things as ecosystems, the oceans, and the atmosphere that lack economic agency.
One solution to this problem is to give money directly to those who will spend it, whether businesses or consumers, so that demand no longer depends on private investors lending at interest. This solution is known as fiscal stimulus — government jobs programs, tax breaks, debt relief, and the like — which seeks to increase demand by putting money in the hands of those who will spend it, and at the same stroke to alleviate poverty and create social benefits that, because these benefits accrue to all, would never attract private investment. It reverses the lack of purchasing power the deflationary trap described above and enables the economy to start growing again — provided that there are no other constraints on growth.
Politicians representing the interests of the wealthy, such as today’s deficit hawks, typically oppose fiscal stimulus, because it dilutes their supporters’ relative wealth, either by increasing the effective money supply and causing inflation, or by shifting the relative tax burden onto the rich. Their opposition is short-sighted, however. Unless economic growth is extremely high, as in a frontier society or newly industrializing country, the interest rate always exceeds the growth rate, leading to concentration of wealth and the debt crisis described above. If debtors — people and nations — cannot pay, then eventually they will not pay. At some point, the authorities will have to choose between catastrophic system-wide defaults and transferring wealth to the debtors, either directly through relief payments, or indirectly through government jobs programs. This was essentially the solution of the New Deal in America and the social welfare state in Europe: transfer the minimum amount of wealth to the debtor class so that they can continue servicing their debts.
Yet this solution too only works in an underlying context of growth. That is because of the way money is created to begin with — even for the federal government, it comes into existence as interest-bearing debt. That means that the new money the government gives directly to workers is actually just another loan, in this case from bondholders and, ultimately, from the Federal Reserve. As with any other debtor, the government can repay these loans either from income, assets, or with new loans. These correspond to taxation, privatization of government assets, and deficits. Unless the economy grows by at least the interest rate on government debt, taxes will lag behind spending growth and, as privatization and spending cuts are exhausted, deficits will eventually spiral out of control. This is why the Keynesian solution offered by left-leaning economists cannot work in the long run. It works fine to reignite growth after a bubble collapse, but only if renewed long-term growth thereafter is possible.
As a matter of fact, Keynes never advocated fiscal stimulus as a permanent measure, but only as a short-term device to escape a deflationary spiral. If deflation, or at least a non-growth economy, is to be permanent, then we need another kind of money system, one not based on interest-bearing debt. This is one of the primary themes of my book, Sacred Economics. Would non-growth really be that bad? Would it be so bad if we held consumption constant henceforward and worked less and less?
Until we have such a system, or unless I am wrong and there is still some new dimension of nature, culture, or relationship that can be turned into money, the unemployment problem will not go away. It can be alleviated in the long run only by a return to growth, which is one reason why every politician calls for growth, glorifies growth, and celebrates growth. If we are indeed nearing the end of growth, then, absent radical monetary reform, we are also in an era of high and growing unemployment. It is no accident, and no temporary glitch, that the unemployment rate is so high. It is symptomatic of a profound shift in human economy and our relationship to the planet.
Ultimately, we need to reframe the whole question of labor. Another word for unemployment, at least when it is distributed evenly and dissociated from economic survival, is “leisure”. if only money were not an issue, I am sure many working people would welcome a bit of unemployment. And better even than leisure would be the freedom to pursue our noblest and most generous impulses to heal the hurts of the planet and its people. The high unemployment rate is a harbinger of a transition in the nature of work.
While fiscal stimulus under present circumstances doesn’t address the deep issue, it does point toward a deep solution. Stimulus can create jobs doing things that don’t bring a positive return on capital — such things as intensive recycling, restoring wetlands, cleaning up toxic waste, caring for the indigent sick, teaching people to garden, beautifying the urban environment, holding free music and arts festivals, and so on. Happily, these are the things we want and need more of, as opposed to more sprawling suburbs, electronic billboards, coal mines, trash incinerators, nuclear weapons, and plastic bags. When economists speak of (on the Left) increasing demand or (on the Right) increasing productive investment to stimulate growth, aren’t they essentially calling for even more of the things of which we already have enough? Today, every sign of a recovery in housing starts is celebrated as great economic news — all at a time when, in the United States, 19 million housing units stand vacant!
Quite evidently, increasing consumption, increasing demand, and increasing production isn’t going to make us any happier or improve the quality of life. Even in Third World countries, this is truer than most people realize: poverty there comes more from disruption of subsistence farming and networks of social reciprocity by global economic forces than it does from any underlying lack of life necessities. Can you see the insanity of endlessly seeking more, more, more — for the sole reason of keeping people employed? Couldn’t all that labor be better allocated, on this planet in crisis?
Common sense tells us it should be possible: if 80% of the workforce can already fulfill and overfulfill society’s existing needs, the remaining 20% could do other work without any sacrifice of our material well-being. Essentially, the 80% of us who are producing salable product will have to fund, directly or indirectly, the 20% who are not. Today we can only fund them with debt, pretending that one day that debt will be redeemed, and all the while allowing the proceeds of its interest to accumulate in the hands of the few. But we could also, in principle, fund them with taxes on the wealthy, or simply by printing new, debt-free money outside the central banking system. Yes, this would be inflationary, though not hyperinflationary (hyperinflation results not from monetary expansion, but from supply shortages). Such inflation acts very like a wealth tax, but it harbors many dangers. There is a much better solution: a direct tax on liquidity coupled with physical currency that carries a depreciating nominal value. I discuss this at length in my book and will do so again in future posts.