Economic Policy and Unemployment: The Power of Stupidity

Published on Real-World Economics Review Blog, by Dean Baker, March 3, 2010.

The housing bubble and subsequent crash were the result of extreme incompetence on the part of the country’s top economic policymakers. Somehow these people could not see, or did not care about, the dangers of an $8 trillion housing bubble.

Unfortunately, economic policymaking is not like most jobs where workers get fired when they make serious mistakes. In economics, they just keep getting promoted. Therefore, the people who sank the economy are for the most part the same group of people still designing policy today. Now this group of incompetent economists is telling the rest of us that we are going to have to endure five more years of high unemployment. 

However, the rest of the country should not be forced to suffer even more just because those determining economic policy cannot do their jobs. We know how to get the unemployment rate down. Keynes taught us more than 70 years ago that we just have to spend money to eliminate mass unemployment. People work for money, if the government spends, people will work. It’s pretty straightforward.

But, the deficit hawks seems to have largely closed this route. Members of Congress somehow think that they are helping our children by putting their parents out of work.

Fortunately, we can even find a way to create jobs that can keep the deficit hawks happy. It’s called “work-sharing.” The basic point is so simple that even an economist can understand it.

Instead of paying workers to be unemployed – in the form of unemployment benefits – we pay workers to stay employed, but work fewer hours. In effect, to avoid one worker from being laid off, several workers put in somewhat less time on the job and take a small cut in pay. Germany and the Netherlands have used this path to keep their unemployment rates from rising even though they have experienced steeper downturns than the United States.

The way the system works in Germany, a firm will cut back the hours of its workers by 20 percent. The government then replaces 60 percent of the lost pay (12 percent of total pay). The firm is expected to kick in 20 percent of the lost pay (4 percent of total pay) and the worker ends up taking home 4 percent less pay … (full text).

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