AS THE LABOR DEPARTMENT REPORT SHOWS, THE hysteria over downsizing – whipped up in part by Labor Secretary Robert Reich and a massive series in The New York Times–is just that. Companies are resorting more often to layoffs, but there never was a time of absolute job security, and down-sizing doesn’t destroy most stable jobs. I have written about all this before, but now I want to extend the discussion and suggest that, in some respects, down-sizing may improve the economy.
It seems counterintuitive. We are uneasy with the possibility that what’s bad for individual workers and firms–job insecurity, bankruptcy–may be good for society. But this may be, and the argument is not simply that down-sizing enables some companies to survive. The notion is broader: it is that the anxieties and uncertainties that unsettle people may make them more prudent and productive in ways that strengthen and stabilize the economy.
Though little noted, the present economic expansion recently became the third longest since World War II. It has lasted almost five years and is exceeded only by the expansions of the 1960s (106 months, from February 1961 to December 1969) and of the 1980s (92 months, from November 1982 to July 1990). But in some ways, it is superior to these because it hasn’t yet spawned higher inflation. Since 1990, inflation has dropped from 6.1 to 2.5 percent. By contrast, it rose in the 1960s, from 1.4 percent in 1960 to 6.2 percent in 1969.
The 1960s boom is often viewed nostalgically as a “golden age,” when it actually set the stage for the most turbulent and least productive economic period since 1945. The severity of the two worst postwar recessions (those of 1973-75 and 1981-82, with peak monthly unemployment rates of 9 and 10.8 percent, respectively) stemmed directly from double-digit inflation (12.3 percent in 1974 and 13.3 percent in 1979). And the global competitiveness of many U.S. industries eroded; between 1971 and 1980, for instance, car imports rose from 15 to 27 percent of U.S. sales.
We are much better off today in most respects. What happened? The answer, I think, is that there has been a profound shift in economic ideas, which, though improving the economy, offends Reich and the Times. From the 1960s to the early 1980s, government officials and corporate managers consciously strove to expand employment, eliminate recessions and enhance job security. Keynesian economics dominated; “responsible” companies promised, implicitly or explicitly, lifetime jobs.
The experiment failed: the concerted pursuit of these worthwhile goals–total job security and economic stability–gave us higher unemployment as well as higher inflation. In the 1980s, economic ideas changed. The Federal Reserve moved ruthlessly against inflation; now the Fed worries most about attaining “price stability.” Meanwhile, companies grew less concerned with saving jobs and focused more on raising market share and profits.
The result is that, since then, average unemployment has dropped, the one subsequent recession in 1990-91 was fairly mild (peak monthly unemployment–7.8 percent) and industrial competitiveness has advanced. One reason for improvement is that we finally recognized that the promises of economic stability and job security were self-defeating; they perversely inspired behavior that made both goals harder to achieve. When people expected government to avoid economic slumps, companies and workers raised prices and wages more quickly. And why not? Excessive prices and wages wouldn’t matter in a permanent boom. As for competitiveness, why worry?
Quelling inflationary behavior has aided economic growth. Job fears have also reduced inflationary pressures by lowering wage demands. What economists call the “natural rate” of unemployment–the rate at which labor bottlenecks trigger wage inflation–may have dropped. A crude consensus had put it around 6 percent; but in 1995, unemployment averaged 5.6 percent with (as yet) no sharp rise of inflation. Every 0.1 point shaved off the “natural” rate means an additional 130,000 jobs. Uncertainty about the future may temper the excesses–overborrowing or overspending–that trigger slumps.
None of this means that there won’t be future recessions (there will), that all down-sizing is justified (it isn’t) or that some workers don’t suffer terribly (they do). But in a market economy, job loss is unavoidable, and the social harm may be muted if layoffs are spread out and not concentrated–as in the past–in slumps or periods of industry crisis. Fired workers can be rehired more quickly in a growing economy. The Times visits Dayton, Ohio, where “everything, seemingly, is in upheaval,” in part because NCR (absorbed into AT&T) is down-sizing. Belatedly, we learn that the county unemployment rate is only 4.8 percent. Contrast that with Flint, Mich., in the early 1980s, when auto layoffs sent the jobless rate to 20 percent.
What’s missing in this debate (and the Times’s series) is a sense of how jobs are created. Companies hire workers to make a profit; workers take jobs to make a living. If profitable hiring becomes too hard, firms won’t do it; if being unemployed becomes too easy, people won’t look for jobs. Europeans increasingly admire our flexibility, because their system–though outwardly more compassionate–stifles job creation. They have more generous jobless benefits, steeper payroll taxes (to pay for the benefits), more restrictions on firing and higher unemployment. In Germany, the jobless rate is 10.3 percent and headed up.
What Europe teaches is that societies can’t outlaw job insecurity but they can inadvertently outlaw job creation. The Times ignores Europe’s experience and our own recent experiment with economic security, as if they’re irrelevant. Our system isn’t perfect, but we shouldn’t trash it unless we know how to improve it. We don’t.
