Contra Vox: "Why we're seeing mass layoffs in the US but not the UK" (5/05)*

*This one has a date on it because it's about current events!

I have no idea why this "totally not socialist" YouTube channel keeps appearing in my recommendations. I'm politically probably the furthest thing from a socialist you could possibly find. And yet YouTube keeps feeding me this stuff. I don't know if I should thank YouTube for opening my eyes as to just how many millions of economically illiterate commies populate the Internet (get it? Vox populi? hahaha). Because that really rustles my jimmies. What also rustles my jimmies is that they use the ancap color scheme while advocating for the most socialist policies possible. I can no longer resist the temptation to watch these videos and rant about them. But if I'm going to sacrifice my dignity and actually sit through these videos, I might as well do everyone else the disfavor of attempting to refute them with my anemic knowledge of economics.

Anyways, the video I'm going to talk about can be found here. It opens by painting a picture of the current, gloomy state of affairs of the US economy: Meatpacking plants, retail stores, and corporate offices are closing, and millions of people are losing their jobs (the figure mentioned in the video is 30 million, which is according to BLS, although there have been some propositions it could be higher, even as high as 50 million).

it's not about jobs; it's about productivity!

The video then proposes: "What if millions of people didn't have to lose their jobs?"

I shall begin by examining this question, which embodies a very popular, but incorrect attitude that permeates common economic discussion and is a major shortcoming of this video's stance. This attitude is that job loss is inherently a bad thing. Austrian economists will tell you otherwise. Here's why:

As with all human phenomena, the economy is characterized by change. Consumers demand different goods and services at different times. At one point in history people bought rocks marketed as pet rocks. Cutting fats from your diet used to be all the rage; now it's all about cutting carbs and using keto-friendly substitutes like almond flour. In the onset of the COVID-19 pandemics, people ran to wholesalers and started stocking up on rice, sugar, flour, beans, toilet paper, and bottled water. (I guess they were prepared for the apocalypse after all, huh?).

Most importantly, in the heat of COVID-19, whether voluntarily or due to government lockdowns, people don't go to restaurants anymore. They don't fly on airplanes. They don't go to movie theaters where they sit in close proximity with people who could give them the virus.

As consumer preferences change, the type of businesses which are required to satisfy their demands will also shift. Inevitably, this means that some businesses become less important than others, and in a free market, these "less important" businesses become less profitable and eventually close, freeing up demand/usage of capital inputs such as land, labor, equipment, and finances for use in more productive ventures. These inputs become cheaper due to the drop in demand, and so the other, more important sectors can make use of the equipment. This is the self-regulating market mechanism by which resources are allocated to their most productive uses.

Considering recent events, however, I should clarify my use of the word "important" or "productive", as some governments have taken the opportunity to arrogate to themselves the authority of determining which businesses are "essential" or "non-essential". Governments are, in actuality, powerless (except in the case of large-scale military crackdowns) to determine what goods are "important". When we say something is "important" in the context of markets, we simply mean that it is a good or service which is demanded most by the consumers. (Even Marxists have to concede that something needs to be "socially necessary" to have value!). Thus all things derive their value from their usefulness to the end consumer, or their contribution to other things which are useful to the end consumer.

an example: the restaurant

To provide an example illustrating the consequences of a shift in consumer preferences such as what we are undergoing now and how they relate to job losses: Let us examine a hypothetical restaurant which has no customers due to the pandemic. The restaurant has certain inputs--it is purchasing food, dinnerware, and kitchenware. It is also using certain capital resources--kitchen equipment, occupying land, and employing workers. It should be obvious that, if a restaurant has no customers, nobody actually wants to eat there--hence the restaurant is providing no useful service to anyone, or at least nothing anyone is willing to pay for.

It should be clear that the resources used by the restaurant are not being put to productive use. There are a few ways we could continue from here:

One: Since nobody is interested in dine-in service during a pandemic, the restaurant could recuperate some of its losses by liquidating some of its capital resources (tables, chairs, dinnerware) and retooling for a delivery-oriented service, which would hopefully be more productive. (Disclaimer: I am throwing out food delivery as a hypothetical example of a more productive service. You could just as easily replace it with any other business model you can think of. I do not have a crystal ball; this is merely an example.)

Two: The restaurant could declare bankruptcy or close--or may simply lay off their employees. The commonalities of these options are that they result in unemployment of the current restaurant workers, which is what we are interested in. Because the workers no longer have a job, they are available for employment at other firms that can afford it because they are providing productive services--such as another restaurant that might be more suited for food delivery. In the case of bankruptcy, the restaurant's equipment might be sold to more productive firms so that they are put to better use.

The crux of this argument is this: Unemployment is nothing more than the reallocation of capital resources (in this case, human capital) from less productive uses towards more productive uses. Many will note (and it is true) that in such situations, wages (i.e. the price of labor) will lower, as the supply of labor has increased. This is true; however, as the newly available labor is bought up, the supply of available labor will decrease, and as companies compete for the remaining labor, wages will be restored to the prior level. Overall, the productivity of the economy will have increased, since the labor is now being put to actual productive use. Absent government intervention, this manifests in deflation--your dollar becomes worth more.

This is a process that most voters and politicians do not comprehend. On a personal level, a job loss almost always feels like a bad thing, and this is why politicians obssess about "saving our jobs"--but what is the alternative? The hypothetical restaurant, clearly operating at a loss, will inevitably have to lay off its employees at some point in the future. Even if the government steps in and pays the restaurant to continue paying its employees (never mind the auxiliary effects of taxes, borrowing, and money printing), that labor will still be tied up in the restaurant. The restaurant might continue to wastefully expend its inputs, which could have been put to better uses by more productive firms. This is why government interventions designed to halt job losses--even if they achieve their intended goal, and they rarely do--are always harmful in the long run.

"what if millions of people didn't have to lose their jobs?"

Now to tie this back to the original question--"what if millions of people didn't have to lose their jobs?" The relevant factors here are twofold: firstly, the changes in consumer preferences due to the coronavirus. Secondly, the changes in both supply chains and consumer preferences due to lockdown measures taken by governments.

This is the part where my crystal ball comes in: I would say both of these have resulted in profound changes in market conditions. The breakdown of supply chains for capital goods (especially due to the collapse of manufacturing in developing countries) tightens costs on lower-order producers. It is likely, barring the discovery of some sort of miracle drug, that this pandemic will result in permanent changes in consumer behavior. People will be less likely to go outside--to go to restaurants, to go to movie theaters, to go shopping at malls. In other words, producers are really getting squeezed at both ends, and the government lockdowns have made things much worse.

I would argue that the unemployment we are facing now has been egregiously aggravated by the lockdown. Even if certain businesses deemed "non-essential" could operate or adapt to operate perfectly safely and productively in this new environment, they have been barred from doing so. Consequently, people who have been laid off will have difficulty finding jobs in productive sectors, because the lockdown has hampered these normally productive sectors from properly functioning, and because they're not supposed to go outside.

The main problem with Vox's question is that due to the shift in demand, some people are inevitably going to lose their jobs, and it will be a necessary step on the step to recovery. No matter what lockdown policy or route to recovery has been or will be taken, bankruptcies, closures, and job losses will be unavoidable in a "return to normal", where capital resources are reallocated to the production of goods and services that consumers are actually willing to buy.

the great depression

To introduce the subject of crisis management measures and establish some historical precedent, the video brings us to the Great Depression. Vox plays out the usual socialist narrative, portraying the federal government as the great savior of the Great Depression through its provision of unemployment benefits and public works jobs. The government is depicted as a force above the private sector, capable of providing a backstop for unemployed workers where private charity (or, you know, getting another job) can't pick up the slack. I won't spend time on this portrayal since it's not exactly relevant to this discussion; but if you care, the standard Austrian stance is that government intervention in fact prolonged the effects of the Great Depression rather than alleviating them.

Vox then presents a simplified model of the economy as a set of interconnected nodes, representing entire industries. Again, I could nitpick some things about the representation, but for expediency I won't say anything. To prepare the viewer for the contrast with European subsidies, Vox depicts the US government's "solution" of providing unemployment benefits and unemployment insurance as only effective in the short-term, failing to account for the failure of businesses.

That last clause is a superficially valid point (but perhaps you can sense from our previous analysis that there is something wrong about what Vox is about to propose). I am surprised that Vox had at all the insight to realize that people cannot go to work if there is nowhere to work. Shitposting aside, a few more valid points are made from here: Small and medium-sized businesses will bear the brunt of the impact. They have less capital to rely on. Rents, mortgage, utilities, insurance, and loans still have to be paid.

I would note that unemployment benefits and unemployment insurance, as measures to protect workers, do have problems of their own (aside from having all the problems that usually come with government-operated programs)--in fact, they are having highly adverse effects on the economy by incentivizing workers to stay unemployed rather than go back to work, in spite of leftists constantly reassuring us that such things could never POSSIBLY happen--but since Vox is proposing another solution, I won't spend more than this sentence talking about them.

everything is awesome in europe

Here is the part where Vox contrasts US policy with UK policy (or Europe in general, referencing Denmark and the Netherlands). The UK policy consists of multiple programs: One is the Coronavirus Job Retention Scheme (not named in the video), which provides employers with a grant to cover the cost of furloughing employees; theoretically, the UK government is paying the salaries of employees who are not working.

If we actually take a look at the UK end, we find that the UK unemployment rate is nominally around 4%. I suspect this is largely a combination of slow statistics and the fact that furloughed employees are not counted as unemployed in UK statistics. As long as the government pays for employees to be nominally employed, they show up as employed in the statistics. But we know from our restaurant analysis that these employees are effectively being paid to do nothing. (Even during the Great Depression, the U.S. government didn't have the gall to label people on make-work jobs as "employed"). And under a lasting change in consumer preferences, as soon as such measures are lifted, it is likely that these employees will be out of a job, even if nobody thinks so right now. I would like to see the statistics on unemployment after lockdown measures and subsidies are lifted.

Vox does something a little bit tricky here. Initially, they appear to be contrasting the UK policy with the US's unemployment benefits/insurance, as though these are the only intervention measures being used in the US ("Instead of waiting for workers to get laid off, the governemnt in the UK is doing something different"). They then switch to an actually functionally equivalent program that is being instituted in the US (though again, not by name)--the Paycheck Protection Program (PPP), which is slightly different.

Theoretically, the PPP involves "loans" made to businesses by depository institutions (banks and savings associations), which in turn borrow money from the Federal Reserve's Paycheck Protection Program Lending Facility, providing these loans as collateral, guaranteed by the SBA. These loans will be "fully forgiven" if the funds are used for "payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll)"; in other words, the government is basically handing out money with almost no expectation of anyone paying it back. (And let's be real--nobody intends to pay it back).

Now, as of April 20, the Paycheck Protection Program is not looking so good. In fact, it had run out of money, and there have been some claims that banks have prioritized large businesses over small firms in providing loans. For many businesses there have been problems with eligibility and massive delays in getting approval for the funds in the first place. The argument Vox makes is that these problems have arisen because the U.S. loans are made via depository institutions (the term "commercial banks" is used in the video), which has led to the delayment of payments to applicant businesses.

This is a drastic and somewhat disingenuous oversimplification of the issues of the PPP. In reality, it has many problems--some of them are, in true government program fashion, bureaucratic in nature, like Congress having been stuck in gridlock and thus unable to allocate additional funds to the program, or Wells Fargo only being able to loan out $10bn of loans due to the asset cap that the Federal Reserve had imposed upon it (Vox is categorically wrong on this point--the PPPLF "running out of money" has little to do with the commercial banks), and some of them may very well be intended features (I'm not saying this is just another bailout, but...). Some of them are just design flaws. You may have heard of Shake Shack returning a $10M PPP loan after significant controversy arose; of course, this begs the question--if we don't want certain people to get a loan, who ought to get a loan anyways?

bailouts suck

But even aside from all of these minor issues with the execution of these government programs, the fact remains that they are all harmful in economic principle, in both their means and their ends.

There is a litany of problems that come with debt-based "free money"--whether it's inflation punishing savers and anyone with a low-middling income, lowered interest rates artificially disincentivizing saving (we can spend all day talking about how the Fed's interest rate policy led to Americans being so unprepared for the current situation), or Cantillon effects leading to a redistribution of purchasing power towards the government, banks, and investors. But we don't even have to look at how these programs are funded to see problems.

Bailing out businesses that are unprofitable due to a change in consumer preferences ties up capital in unproductive sectors. Where there is a mismatch between businesses receiving government funds, businesses permitted to operate, and productive businesses, unproductive lower-order businesses will deplete the supply of capital. This is particularly egregious during a lockdown because restrictions will prevent higher-order businesses from adjusting to market conditions and producing capital which would normally aid in the adjustment to market equilibrium.

The Paycheck Protection Program and Coronavirus Job Retention Scheme, in typical government fashion, government solutions to problems created by government solutions. It is wise before we ask for more government intervention to remember that our current unemployment crisis is partially a result of government intervention. There's an easier way around this "solution": end the shutdown.

Vox concludes with a clever, meaningless rhetorical statement that somehow manages to incorporate some open-borders wordage. It pissed me off so much that I had to include it at the end.

"This pandemic transcends national borders. The solutions should too."

What kind of retarded shit is that?