Efficiency and Unemployment

Around 35 years ago I attended a seminar presented by Deming, the father of statistical quality control and a major contributor to Japans technological resurgence in the middle of last century. He commented on automation saying that the only times automation is justified is when there is a shortage of labor or where the mechanical motions create a superior product. His argument was that if there is no shortage of labor then automation puts workers into the unemployment lines and they have to be paid anyway.

Last week we elected a conservative House and moved the Senate more to the right. They made promises of austerity and fiscal responsibility promising to cut non-defense discretionary spending by 22%. The Democrats, not to be outdone, will most likely focus on cutting the defense budget. I believe that during a severe and potentially protracted recession, both are dangerous.

Whenever there is an economic slowdown enterprises take the opportunity to streamline their operations, thus improving efficiency. This is natural. Companies with shrinking demands, have the need to lower costs and more time available to focus on improving operations along with a workforce more willing to work harder which in better times it might not. So what happens is that, with excess labor already in the market because of the slowdown, this improvement puts more people into the pool of unemployed. To further aggravate the situation, the politicians react to voters concern about the cost of government and promise to cut costs by cutting programs, eliminating waste and improving efficiency. All these, if successful, further increase unemployment whether directly by cutting staff or indirectly by reducing consumption of material which still boils down to cutting labor somewhere.

We have gotten out of previous economic downturns by waiting things out until demand picks up and the pool of unemployed starts shrinking. We also have been blessed with a slow and somewhat ineffective Congress. So by the time they get around to really cutting costs and reducing waste (improving efficiency) as promised, the recession is over and things are back to normal. The potential risk I see is that this downturn is more severe and different than previous ones and with both parties starting to campaign for the 2012 elections and the electorate drifting to the right, they will have the vigor and the time to start fulfilling their promises before we are out of the hole and extend the period before recovery or even worsen the situation driving us into a depression.

If the number of unemployed rises dramatically for whatever reason, we will be faced with a few choices. Ignore them and face the threat of civil unrest and possibility of either an extreme left of right wing tyrannical dictatorship or we can help them by raising taxes on those not struggling as much or borrowing and printing money. Another option, if the demand for private sector goods and services does not improve quickly, create demand for labor through government intervention and though it sounds counterintuitive, allow the waste and inefficiency to continue until there is strong evidence of an impending recovery. Someone working at 50% efficiency will still be contributing more than they will on the unemployment or bread line. The private sector, driven by self-interest cannot ignore waste but a government working for the common good can.

Something that is even a harder sell relates to the defense budget. The above arguments also hold true for defense. If there was a sudden peace and all troops came home and were demobilized and we stopped producing armaments, not only the troops, but the workers in the defense industries would enter the already surplus labor pool, greatly expanding the ranks of the unemployed. Though we want to reduce and eliminate the casualties of war as soon as practical, during a downturn, reducing military activities will add to and prolong the economic downturn. Maybe we can reduce the fighting but not military activity until we are back on our feet.

“Big Republican gains presage a nasty period of gridlock for Obama” says the November 6th issue of The Economist. In the final analysis, the electorate, unwittingly may have done the right thing by seating a congress that will ensure a complete grid lock, making it impossible to do anything of any consequence when it comes to eliminating waste and cutting costs and maybe only work together on less contentious and more important issues that address the structural readjustment necessary like education, energy, macroeconomics and our relationship with and economic pressure from the rest of the world.