When in mid-2013 the unemployment rate reached 27% in Spain, frustrations over the government tightening its fiscal belt and the European Central Bank's contraction of the money supply reached fever-pitch. The common view defended in the media and by academics, business, and politicians was: unorthodox fiscal and money policies and near-zero interest rates were the only cure for mass unemployment. They saw the same policies that caused mass-unemployment as the most appropriate ones for restoring full-employment.
The conviction that printing money is the solution to unemployment has led the US central bank, the Federal Reserve, to claim for itself the mandate of full-employment. After six years of frightening money and fiscal expansion, the American economy
has been stagnating with unemployment and the lowest rate of labor participation. This causes more frustration and yet more calls for renewed money expansion. To cure the disease you have to kill the patient.
Why unemployment has been intractable at 10%-15%, and even as high as 27%? The answer is very simple: abundant government subsidies to idle workers. When the government pays a substantial lifetime compensation, large food stamps, free housing, and tells a worker not to work for less than US$10.10 an hour and no more than seven hours, then no worker will ever look for a new job, learn any skill, seek a higher income, and pay high taxes. He is are already in heaven. In addition to these generous gratuities, an idle worker can enjoy unlimited cheap loans to buy luxurious cars, furniture, and the like. How does the government pay for these subsidies? The answer is very simple: through confiscation from remaining active workers through taxes and inflation tax. As long as the poor of Bangladesh and Mauritania pays the cost, the pain is not felt.
"I live to work and I work to live," so the saying goes. More accurately, in wealthy industrial countries such as Spain and the United States, "I live to enjoy life and never to work". Nature does not reward idleness. Nature never provides subsistence to the idle. It created the sense of survival. A bee flies distance to seek its food and produce honey. A bird never remains in its nest and wait for food. Hunger and thirst will force it to remain active. Only governments cherish idleness and subsidize it.
We should be thankful to our ancestors of past centuries who did not cherish idleness and subsidize it. Otherwise, Christopher Columbus would have had no ship to sail to America. We would have no science, no technology, and no medication. Government hoarding millions of workers is extremely dangerous, utterly anti-human and anti-civilization. It encourages people to become idle and to hike unemployment ever higher. 27% unemployment means 27% of lost output every year. Moreover, it destroys capital.
Unemployment is a purely luxury phenomena. You have to be rich to afford. Measuring unemployment has been a delicate issue. There is voluntary and involuntary unemployment. Voluntary unemployment blurs totally the picture. Certainly 27% unemployment cannot exist in a free society; it exists only under the tyranny and confiscation of government. It shows the powerful reward of government labor laws in promoting idleness. If we remove workers who are paid directly by the government to do nothing, who receive free food, housing, loans, and workers who are not allowed by law to work below the tyrannical minimum wages, what will be the unemployment rate? Most likely, 27% becomes 1%.
Labor economists faced difficulty with measuring unemployment in India, Columbia, Kenya, and Philippines. They realized that open unemployment did not exist in these countries; however, there was a large informal sector where people were employed with rudimentary capital and small incomes. They renounced measuring unemployment and adopted an income approach to determine the percent of workers below an income threshold. The problem became one of growth and not of unemployment.
In 1939 at the eve of World War II, the unemployment rate in the United States was 20%. President, Franklin D Roosevelt, the fanatic architect of the New Deal, declared war on unemployment and in a few months, the rate fell to 0%. Roosevelt would not accept any longer to pay millions of workers to remain idle, and deprive his soldiers from food, clothing, medications, and resources to fight the war. He would never accept paying huge subsidies to millions of idle workers while women, children, and elderly were working around the clock in factories and farms to produce resources for fighting the war. If he kept his adored New Deal and showered resources on millions of idle workers, the enemies would have occupied the US, the United Kingdom, and many other countries, following the total occupation of France.
Hence, during the war, minimum wage laws, labor strikes, and unemployment benefits were all banned. Roosevelt, a fervent socialist, decided that the wasting of productive capacity could no longer be tolerated. Politicians are moved only under forced conditions, of wars or revolutions.
A French official gathered merchants and asked them how best the government could help them. They responded in three words: Laissez nous faire.
This principle applies to labor market. Labor is considered a commodity; it is analyzed by the classics as a commodity market. Each commodity market clears on its own. If a farmer has a large quantity of watermelons in July and is told by the government to sell at a minimum price of $30 a piece, then he may sell only a small quantity and the rest will be bought by the government and dumped into ground. If he is free from government dictation, he will change quotations until he sells all his produce. Consumers would enjoy all watermelons.
Brokers of stocks, foreign exchange, and futures change their quotations every five minutes to balance demand and supply. The price of a share or a foreign exchange is never fixed forever regardless of demand and supply. In labor markets, the government makes it a crime to hire workers except on the terms dictated by the government such as wages and number of hours. The government compensates handsomely the unsold labor.
In linear programming, the more you impose constraints, the smaller the opportunities set become; constraints kill opportunities. Free trade was seen to increase trade considerably. Interference with free trade damages the economy. A classical restriction was the corn laws in the United Kingdom, which were imposed by landowners. The corn laws were repealed in 1848 after inflicting great damage. Trade unions and minimum-wage laws caused disastrous consequences on the United Kingdom and the United States. Both countries lost most of their manufacturing to countries with less rigid labor markets such as China, Twain, South Korea, and India.
Consider a patient who is heavily addicted to tobacco or liquor; he is suffering pain, headaches, and poor health. A medical doctor cannot ignore these contributing factors and prescribe an irrelevant treatment. He would require the patient to quit smoking and drinking so he could evaluate his health conditions once those debilitating contributory factors had been eliminated. We will not be able to cure unemployment until government labor legislation is abolished. This legislation was introduced by corrupt politicians and is in its very nature un-humane and unconstitutional. During the 19th century, there was no labor legislation and hence no mass-unemployment. Trade unions became powerful through violence and bribery.
Government can maintain labor laws only through sheer theft, high inflation, and misery imposed on poor people. Both the UK and the US renounced gold standard to be able to apply their labor laws. These laws are chains on present generations and should be removed.
Industrial countries can afford the luxury of 10%-27% unemployment as long as their currencies are accepted everywhere in the world; more specifically, as long as the poor in Bangladesh, India, and Tanzania pay the bill. Obviously, Bangladesh cannot afford to shower gratuities to millions of idle workers; it will starve within weeks. Frustrated Spanish journalists should have called Spain to abolish absurd labor laws as well as labor unions. While many people in Africa can afford only one meager meal a day, industrial countries hoard millions of workers who consume the fruits of millions of poor in Africa and elsewhere.
Politicians have no courage or conviction to address the roots of unemployment. They force laws that make unemployment totally intractable. To solve unemployment they ignore the labor market and turn to creating money out of thin air and unrestricted fiscal deficits, hoping money and fiscal instruments are the solution. The result is more chaos, more redistribution, explosive asset markets, high inflation, and more poverty.
Hence, in the US to solve mass-unemployment: the balance sheet of the Fed has to increase from $4.2 trillion to $10 trillion; the US government debt from $17 trillion to $50 trillion; the dollar from $1.4 per euro to $3 per euro; the S&P 500 index from 1,900 to 5,000; and gold from $1,400 an ounce to $4,000 an ounce. For governments, super-inflation is the only solution to unemployment. Speculators and fund managers are amassing huge free wealth as a side effect of that state strategy. To the waste of subsidies for millions of workers to remain idle, we should add the amazing subsidies government strategies hand to speculators and financiers.
Noureddine Krichene is an economist with a PhD from UCLA.