Doing the Same Thing…

Doing the same thing but expecting different results.  It’s a shortened version of a quote, “Insanity is doing the same thing over and over again but expecting different results,” often misattributed to Albert Einstein, Mark Twain or Benjamin Franklin but more likely first penned by American writer Rita Mae Brown.  It seems to sum up nicely what certain factions tout as one answer to our near historic unemployment crisis – more tax cuts!  How can we continue to swallow this when it is obvious – based on tons of data – it hasn’t worked?   Rather than continuing to prance down a road that is costing us a fortune and which is not following through on the promise of job creation, why don’t we repeal the tax cuts (or at the very least let them expire) and reinvest the revenue in something that actually has a track record of working?

During the financial downturn of 2008, Germany and the Netherlands didn’t turn to layoffs, a common practice here in the U.S., to counter the slowing economy.  Employers there were able to avoid high unemployment rates because of a policy that calls for reduced hours and job sharing among employees.  According to German Plant Manager, Bernd Schmid, “When you can reach a reasonable consensus between the company and the workers, and this consensus is supported by the government, the Kurzarbeit program is a very good way to prevent unemployment, and all the social costs involved.”

Kurzarbeit,” which literally means short work, involves avoiding layoffs by cutting hours and reducing wages.  A subsidy, funded by the government and paid to employers, encourages across the board reduction in hours worked rather than layoffs.  Bernd Fitzenberger, a professor at the University of Frieburg believes the arrangement is highly beneficial, “Kurzarbeit involves some form of “cost sharing” between the firm, the employee, and the Bundesagentur (Ministy of Economics and Labor).  Earnings are reduced, the firm has lower labor costs, and the Bundesagentur subsidizes Kurzarbeit.  This allows for labor hoarding when the firm faces a temporary reduction in the demand for its goods and the firm expects demand to pick up again in the near future.”

German Prime Minister Angela Merkel believes fighting unemployment was an important component for economic success during the economic downturn.  She stated, “It is only thanks to Kurzabeit that more jobs were not lost.”

In the U.S. we are hearing noise about a possible “double-dip recession,” or in economist speak a “W-shaped recession.”   Germany saw a dip in GDP during the second half of 2008 through the first quarter of 2009 but has been experiencing expansion since.  So what else is different in Germany that has contributed to economic success?

Germany disregarded conventional economic theory.  Let’s segue briefly into an explanation of Keynesian theory, the ideas of renowned British economist John Maynard Keynes, as it relates to solutions for a recession.  According to Keynesian theory a recession can be solved with government stimulus, spending and tax cuts.  The U.S and many other countries have taken the Keynesian route.  Germany did not largely because they also have chosen to focus on balancing their budget rather than economic stimulus.  It is important to note that Germany did have some stimulus spending, but it was substantially less than that of the U.S. and other countries, and they utilized no tax cuts.

Had a Kurzabeit-like program been in place in the U.S. in 2008, it is conceivable that our unemployment rate, currently over 9 percent, would be lower.  With more folks working they have more money to spend, so consumer spending would likely not have dropped to the extent it has – and as we know, consumer spending (GDP is 70% consumer spending) drives our economy.  Jobs = income = consuming.

With many businesses continuing to shed jobs it may not be too late to incentivize businesses to encourage reduced hours rather than layoffs as part of the solution to the unemployment crisis going forward.   To get to a point where job creation occurs, layoffs have to be slowed.  In Germany, the Kurzabeit program was such a success that the unemployment rate fell during the recession.

Change can’t happen if we continue to rely on failed policies.  Kurzarbeit alone won’t solve the economic problems we currently face.  It has, however, proved effective in stemming the flow of more folks to the ranks of the unemployed.   It’s worth serious consideration, don’t you think?

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