Stability versus boom-and-bust

September 25, 2008
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Itâ??s a rare person who enjoys the asset bubbles and boom-and-bust cycles that afflict the U.S. economy, most recently the subprime mortgage crisis and implosions on Wall Street.

But Purdue University economist David Hummels contends that the United States deals with the swings better than many other countries.

Boil down the differences between Americans and Europeans, Hummels says, and Americans are willing to let a relative few unemployed people bear the brunt of downturns while Europeans prefer thicker safety nets.

Laid-off Europeans have an easier time when their luck is down, but they arenâ??t forced to get back to work as quickly as Americans, Hummel notes. While the U.S. offers a certain amount of unemployment compensation, it doesnâ??t last long, which pushes people to become productive again even if they donâ??t necessarily like the job theyâ??re forced to take.

Hummel understands something about pain caused by gyrating economies. His father was laid off several times while Hummel was growing up in Colorado, putting a great deal of strain on the family.

Still, if forced to choose, he prefers turmoil over safety.

â??I reluctantly say, I like the American model better, but Iâ??m in a position where I donâ??t get laid off,â?? says Hummel, who is tenured. â??Unless Purdue shuts down, Iâ??m in great shape.â??

If you had to choose European-style stability or American boom-and-bust, which would you prefer?
  • American Boom and Bust. It forces people to get training that they otherwise may not get to futher their skill set. It also helps to weed out individuals who should otherwise not be in that field, as well as thin out the extra fat of companies and businesses so that they can be lean and more efficient and ready to take on more fat when it starts to rebound.
  • And conversely Mike, the European way of doing things has led to stagnation and double digit unemployment in many countries.
  • I agree, good point! Which then leads to people just grabbing any job they can without being trained and then as soon as something else comes along poof they are gone and then its just a revolving door for unemeployment and laborers. Not that that doesn't occurr here, but I think we attempt to do a better job at training for differnt jobs than they do. Hence the training grants we provide to corporations in place of abatements for machinery.
  • Another big factor is Europe's labyrinthine employment rules placed on business. They make it difficult to fire workers which leads to less young workers being hired. Businesses there are much less likely to take a chance on a young kid fresh out of school if the rules and regulations make it impossible to fire or downsize them. The intended goal of course was to help people but the actual effect is that it makes it very difficult for young workers to be employed and to acquire skills in the first place.
  • I work in the tech industry and Americans are the first ones to be fired when there is a downturn, because it is less expensive to lay off Americans. I hear politicians and others say you need to go out and be retrained in the event you lose your job, that sounds logical, but the reality is, that their really aren't that many jobs that Americans can be retrained to perform that cannot be performed less expensively overseas.

    For years our political, educational and business leaders have told us that the US economy would become the knowledge economy. The US would power the world through knowledge. That's not happening. When we start offshoring basic research I think we've got a problem. The reason we are offshoring research is that it's cheaper to hire engineers in China and India than it is in the US.

    I would point out Mike, that when companies start to thin ranks, they don't necessarily cull the incompetent or less able, it's the employee who is between assignments or was reassigned to a new job and has less experience in the new job or for any number of reasons that don't have anything to do with talent, knowledge or experience.

    Finally I don't really think there is an American model. What little safety net workers have, business has been trying to dismantle or limit fairly successfully for years. If there is an American model, it probably revolves around the business/CEO/political safety net ($700 billion for Wall Street, $25 Billion for Detroit). How about the corporate executive safety net, homes in Texas and Florida worth millions of dollars which they get to keep when they are sued for malfeasance and declare bankruptcy or perhaps the Halliburton Safety Net where you get cost plus contracts - the more you run up the contract costs the more profit you get.

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