The Demand Economy

Stop the downsizing. So Newsweek – now transformed into a weekly collection of op-ed pieces, presumably the last phase of its life-cycle before extinction. The item, by Jeffrey Pfeffer is not much to read; the argument is that downsizing doesn’t do much for the bottom line. But this is most likely because companies that downsize are already seriously sick anyway. Then there is the effect on the wider economy:
Beyond the companies where layoffs take place, widespread downsizing can have a big impact on the economy—a phenomenon that John Maynard Keynes taught us about decades ago, but one that's almost certainly going on now. The people who lose jobs also lose incomes, so they spend less. Even workers who don't lose their jobs but are simply fearful of layoffs are likely to cut back on spending too. With less aggregate demand in the economy, sales fall. With smaller sales, companies lay off more people, and the cycle continues. That's why places where it is harder to shed workers—such as (can I dare say it?) France—have held up comparatively better during the global economic meltdown. Workers there are confident that they'll remain employed, so they needn't pull back on spending so dramatically.
This is pretty much the mainstream line on unemployment, which is interesting mostly for what it doesn’t say. Its not the loss of productive capacity that counts, something most economists and journalists barely mention. In fact, as anyone who has been to any kind of retail outlet at all in the last year can attest, there’s still lots of stuff. Cars, cameras, groceries, whatever – we’re not missing anything.

Except buyers. The essence of the recession is that people aren’t out there buying stuff. The unemployed in particular. Which implies that their real economic function is not to produce goods and services – the loss of their productive contribution isn’t missed by anyone. It’s to shop.

The reality of modern economies is that there are a heck of a lot of people not doing anything – and not just students, seniors and the un- and underemployed, official or otherwise. There are a lot of people actually in the labour force – notably in public sector unions and corporate bureaucracies, but in lots of other places too – who are taking a paycheck but not actually producing anything of economic value.

But that doesn’t mean they’re useless. They buy stuff. The Keynesian reality, Alice-in-Wonderland as it is, is that given the efficient core system of production which all developed economies have (and places like Haiti or Ethiopia don’t), you have to have shoppers to absorb the output. Otherwise the system grinds to a halt. In this context, massive labour market inefficiencies – which all developed economies also have – don’t matter. People can slack off as much as they like. Just as long as they don’t slack off at the mall. That’s when you get into real trouble.