Slack Breaks the Cycle of Doom

One of the justifications for the US goverments panoply of bailouts is that a recessionary environment forms a vicious cycle. Here’s Tokyo Rose himself, pimping for porkulus last month:

With the private sector so weakened by this recession, the federal government is the only entity left with the resources to jolt our economy back to life. It is only government that can break the vicious cycle where lost jobs lead to people spending less money which leads to even more layoffs.

And breaking that cycle is exactly what the plan that's moving through Congress is designed to do.

The argument that layoffs reduce spending resulting in more layoffs has tremendous rhetorical value. It sounds like common sense. But it leaves something out: Slack.

Essentially zero businesses run at 100% capacity. In good times, a factory can add overtime and boost output without needing more machinery. A barista spends time wiping and mopping (or so the boss hopes), not just making lattés. If there’s a rush of customers, the mop can wait. In the cubicle farms, workers might have to spend less time reading blogs and do more of what they’re paid for. All these firms can increase sales without needing to hire more workers.

It works similarly in tough times. The line worker gets to spend Saturday with the family instead of the drill press. The coffee shop gleams. And bloggers see more traffic. But everyone is still collecting their pay.

Yes, the vicious cycle does exist. Some factories may cut hours. Baristas makes less in tips. And there might be an empty cubicle where the least productive CSR used to surf the net. But because of the slack in every business, the vicious cycle gets smaller with every turn.

Eventually, as the weakest hands in each firm are let go, and as the weakest firms in each market shut down, most of the slack disappears. The people still working, and the firms still in business, are more productive than before.

This isn’t much consolation for those laid off. Finding productive work for those folks is important, but is a separate issue. In a sense, their unemployment helps break the vicious cycle.

The rhetoric of the cycle is based upon the fallacy that every worker is fully productive and inexpendable. That just isn’t so. In each of our lives, we must know someone who doesn’t seem to be worth what they’re paid. Not just CEOs and athletes. Many of the ordinary workers in the ordinary economy are “that guy”, the lazy, sloppy or dense co-worker we’re always complaining about. The ones we pick up the slack for.

Now, I do not mean to say that everyone laid off in a recession is lazy or worthless. Far from it. I use the example only to show how people can be put out of work without causing a self-reinforcing cascade of doom.