Tackling the Curse of High Unemployment

WESTERN and emerging nations require common-sense policies and lateral, innovative thinking to combat the curse of high unemployment.

Dated macro monetary and fiscal policies have not worked in the new high-tech robot age of artificial intelligence, so much so that efforts to generate jobs need to come from the micro economy.

Photo: AFP

Current policies have failed to tackle unemployment

Despite quantitative easing (QE), notably excessive monetary ease and ultra low short-term interest rates from the US Federal Reserve and other central banks, the numbers of unemployed people have risen to 47 million in developed nations and more than 150 million in emerging countries.

The essential weakness of the Fed’s QE is the uncertainty which it has created. Business people who invest in long-term job-creating factories and other businesses are fearful of expanding because they are worried that the Fed is repeating the same mistakes of 2002 to 2007 – when the monetary and debt-fuelled boom ended in bust and the Great Recession.

During the depths of the crisis, central banks had to liquefy the system. But the Fed, in particular, continued to do so for five more years. Money has poured into equities, property and other financial assets and the fear is that at some point these inflated monetary drugged markets will tumble and bring in their wake another recession.

Asia and other emerging markets have already experienced the consequences. The flood of money into developing markets reversed course last year, causing financial and economic upheaval. In the meantime, the euro straitjacket, high indebtedness and austerity, have – with the exception of Germany – caused youth unemployment rates to soar.

Moreover, excess monetary expansion and bailouts have brought in their wake “malinvestment”, i.e. misallocation of capital and resources into commodity, art and real-estate speculation. There’s an overabundance of construction that can lead to business failures. China’s current real-estate and banking bubble implosion is a classic example. Because of QE and government bailouts, economies are also encumbered by zombie banks and companies which lay off workers to lower costs and survive.

The following suggestions to bring down unemployment are open to debate:

  • The world is what it is and, regardless of economic mismanagement, people on the ground of the real economy have to find ways to cut the jobless numbers. Central to the common sense thesis is that the market, albeit imperfect, works better than government and central bank intervention. Monetary policy must remain stable as the current erratic, excess ease raises uncertainty. Politicians should not pressurise banks to lend freely, as that is the path to another bubble economy and credit crisis.
  • Economic cycles have to be accepted so prices and wages should be allowed to fall and rise, giving businesses breathing space during hard times. Those periods are uncomfortable but delay brings in its wake the probability of an even worse future recession. Generally Asian and emerging market nations pursue market-orientated policies, but unfortunately these regions cannot divorce themselves from Western (especially European) and Japanese economic failures. They are also dependent on the uncertain outcome of China’s economic strategy.
  • To reduce the army of unemployed swiftly, local community apprentice and technology training and retraining schemes should be financed not only by government but industry bodies and philanthropists’ foundations. Such is the growth of the billionaire, multi-hundred millionaire populace that their individual wealth invariably exceeds smaller nations’ gross domestic products (GDP). Tax incentives and prestigious awards, similar to the UK honours system, are means to encourage oligarchs and others to establish sizeable training schemes. German industry is a case study for a successful apprentice system in a variety of occupations from banking to opticians and plumbers to hotel bed makers. Apprentices spend up to 70 per cent of their time working in offices, on shop floors and in foundries. The remaining 30 per cent is spent in classrooms. Siemens reportedly has 10,000 apprentices.
  • To counter stagflation of flat or declining growth coupled with inflation, entrepreneurs and business should be backed. Companies should not be threatened with excessive regulation as economic growth comes from the private sector, not the state. The surge in stock prices in the past five years enables companies to issue equity and reduce debt, so that business can be on a sounder footing and employment more secure.
  • The demographics of ageing baby-boomers cause a logjam in employment as older workers hang on to their jobs because of inadequate pensions (one of the unintended consequences of QE’s almost zero interest rates). First, retired people could be employed in training schemes to apply their experience and knowhow to train the youth in a variety of occupations. Second, retirement villages with healthy, enjoyable living – for example, exercise, diet and interesting, creative activities – would also open jobs for young and old. The same applies to caring for the growing numbers of old.
  • Taxation should be simplified and slashed to counter time-wasting non-productive, expensive avoidance schemes and raise the performance of the job-creating private sector. This would involve state bureaucrat redundancies but civil servants can be retrained for employment in companies or even start their own businesses.
  • High taxation in Europe, the US and elsewhere has created a massive grey, informal, illegal tax-free cash economy. In 2001, Russia introduced a flat tax of only 13 per cent to encourage tax dodgers to declare earnings. Government revenue and growth has increased since it was introduced and tax evasion has fallen considerably. Illustrating the economic myth that high taxation is the best means to raise revenue, Russian government debt to GDP has declined from 48 per cent in 2002 to 8.4 per cent currently while GDP per capita has risen by 67 per cent to over US$15,000 on purchasing power basis. Russia’s unemployment rate is below the European average of 5.4 per cent compared with highs of 9.4 per cent in 2002 and during the recession.
  • To boost productivity and corporate loyalty there should be worker participation in profits of large, medium and small corporations. Basic salaries and wages would be lower so that companies can survive with minimal layoffs. Germany has a policy that encourages employers to shorten work hours rather than fire workers. In good times employees can bank extra time which offsets the lower pay during a downturn.
  • The state’s role in employment creation should be decentralisation. Governments should provide finance to local authorities to embark on highly selective infrastructure improvements such as roads, bridges, railways, canals, hospitals, schools, affordable housing and clean air and water projects. The money could be borrowed initially but the building would be self-funding with road tolls and regional and local taxation tied to usage. Taxes on petrol could also help the funding and reduce dependence on oil. These projects would employ more workers and private companies, causing them to spend money and thus boosting business, growth, revenue and employment elsewhere. Countering bureaucracy, these projects should be micro managed in local regions and communities and the law should lean heavily on potential corruption.

To sum up: Devolution towards micro-economies from centralisation and a variety of reforms would free the market to generate more employment.

 

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