You know the global recession is real when some of the bluest chip companies announce job cuts.
The latest of the iconic companies to do so is Sony Corporation. The electronics giant announced it would lay off 8,000 workers or a tenth of its global workforce. The move intends to save the company a billion dollars a year in payroll costs.
This is not an isolated case, to be sure. Over the past few weeks, some of the world’s most respected companies have announced labor force reductions.
The obvious result is a sharp rise in the unemployment rates of even the strongest economies. Latest jobs data in the US, for instance, show an unemployment rate unmatched in decades.
If the US Congress fails to achieve a working consensus on emergency funding for the Detroit automakers, the three biggest car manufacturers could suspend production in a matter of weeks. That, in turn, could cause additional unemployment running into the hundreds of thousands. The so-called Rust Belt in the American Midwest could be reduced into an economic wasteland.
Rising unemployment rates produce tremendous social tensions. Sometimes, as we saw in Greece the past few days, those tensions could explode in days of rage at the slightest provocation.
More decidedly, rising unemployment puts pressure on aggregate consumer demand. When consumer demand falls, producers cut back on production. That, in turn, causes more unemployment. This is the vicious cycle that creates economic depressions.
What began, last September, as a worldwide financial crunch is now quickly turning into a more comprehensive contraction of the global economy. Like firemen desperately trying to tame a rapidly expanding inferno, governments and central banks are acting in concert to stimulate economic activity and avert a deep downward spiral of company closures, job losses, dropping consumer demand and, in a word, economic panic.
The financial crisis, when it was just that, at least allowed us to hope that the phenomenon was driven by exaggerated panic. Being primarily driven by an emotional phase, it could quickly come to pass and things might somehow snap back to the status quo ante.
But the crisis, as it has now evolved, is more than just a passing emotional phase.
When people lose jobs, it is not easy to get them employed again. In many sectors, the job loss could be permanent: obsolete skills overtaken by new technologies.
For instance, the Detroit automakers are so way behind the technology curve in making fuel-efficient engines and cars that run on substitute fuels that the jobs lost there could never again be restored. This is why whatever bailout package Washington may finally agree upon for the carmakers will inevitably demand a rapid retooling of that industry.
Before this whole episode of global economic contraction descended upon us, when the world economy was expanding at a rather impressive pace, analysts were already concerned about the phenomenon of jobless growth.
Jobless growth happens when an economy expands without a proportional rise in demand for labor. It occurs because production becomes more efficient so that increased economic wealth is created without increasing the need for additional labor input.
From the strict point of view of economic efficiency, jobless growth might be a good thing. It indicates that every worker is increasing his productivity, enabling him to demand a commensurate improvement in pay.
Individual companies try to achieve higher levels of efficiency in a setting of borderless competition. That enables them to employ less and reward those employed with better pay.
But that does not always work out to everyone’s advantage in a larger setting. When the demand for more labor declines, unemployment rises — even when economies are growing. Those who are employed are better rewarded. But those who are unemployed will see opportunities narrow and face the prospects of permanent exclusion from the mainstream of economic life.
When the global economy was in the pink of health, jobless growth was a problem. Now that the global economy is in an episode of difficulty, where major components of it are contracting rather than expanding, unemployment could produce social dislocation of such scale and intensity that the economic order itself becomes incapable of sustaining itself.
The maxim in the social sciences is that economic distress leads to political and social distress. There are higher suicide rates in distressed economies. And higher probabilities for political turbulence.
Watch closely what is unfolding in Greece at the moment. It is a phenomenon that could repeat itself in many other places over the next few months.
Three months ago, the concerted effort of the world’s central banks to stem the tide of bankruptcies was most important. A financial meltdown could lead to unimaginable consequences.
Today, with the financial system steadying more or less, the fiscal and monetary stimulus packages put together by governments is most important. They are the final trenches we have in heading off a depression that could spark unthinkable social and political consequences.
In times like these, economic firefighting is entirely what government is about.