Butter or cannons

Butter or cannons

A reduction in a week’s working hours will decrease unemployment. There is a cost that either employees or employers will have to bear. Another option is to split it in half or some other way. Employees gain free hours and increase their well being. There is also a gain from not paying unemployment and welfare benefits. Someone may say;

“Unemployment or low income is not my problem. Other people have that problem and they should do something about it. It is their problem, not mine.”

There are not only humanitarian reasons that a citizen may not want high unemployment or large income differences in his country.

Frictional is the unemployment created because people are in between jobs. They will eventually get jobs. Seasonal is the unemployment created during the period that seasonal workers do not work. These people work but not all year around. Cyclical is the unemployment caused by business cycles. Unemployment is an extreme situation when it lasts for long time, especially when there are no other sources of income.

Some low income people may stay on the righteous path when they are of good nature. They may be poor but will have a minimum standard of living. In the case of unemployment, even the nicest people can’t stay on the righteous path. They will turn to crime, scam or prostitution. People will do anyting to survive, kill, steal, street-walk. Survival instinct is very strong.

This is what happened in Greece during the financial crisis, as reported by  local residents. Many females mostly but males as well became part time prostitutes. Others became small time criminals or were trying all kinds of scams. Of course, media do not present these because they do not want to spoil EU's fake image. They put all bad things under the carpet.

For many years official unemployment was reaching 30% while real unemployment was much above that. Spain had also some very high unemployment rates. Both countries are not only EU members but also Eurozone members, having euro as their currency. These examples show that EU experiment was a failure.

It is not income differences that matter more but having people in poverty. The term poverty is confusing. It can be absolute or relative. In relative poverty, a line is drawn somewhere like lowest 20% or 25% and everyone under is considered below poverty line. These may not be really poor especially in rich countries but are poor compared to the rest. In absolute poverty the criterion is being able to pay for essential needs.

Both definitions have some merit. People compare their selves with others in the same country. Although they may be more comfortable than the lowest percentage in other countries, they may feel poor or even poorer with all the rich people around them. In all occasions, adjustments to purchasing power parity (PPP) are necessary. These calculations take into account the cost of living in some place.

As Adam Smith put it correctly, two and a half centuries ago, inequality causes the poor to invade the wealth of the rich who need the protection of the law. When there are big income differences and high unemployment, people will turn to illegal or unethical activities.

Citizens will have to pay in other ways, for policing, courts, prisons, private security, sophisticated security systems. GDP total does not examine in which sectors it is produced. Prisons and private security increase GDP. This is how the well known among economists “butter or cannons” production possibilities frontier model came up.

The people of a country have no control over the aggressiveness of other nations. Unavoidably, they will have to protect their selves with national defense expenditures to shield from predators and invaders. They have full control though of things inside the country.

They can choose to find ways to decrease income inequality and unemployment or pay for prisons, private security, expensive security systems etc. All those things increase GDP but do not increase economic welfare.

It is not only ending up paying for all these. What good can money do to someone if he is dead? Chances of a fatal incident increase. Even if this never happens, quality of life is diminished when citizens have to live with constant fear or they can’t take a stroll downtown on a Friday or Saturday night.

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