Home > shorter work time > Deflation without depression: Could fewer hours of work mean lower consumer prices and greater exports?

Deflation without depression: Could fewer hours of work mean lower consumer prices and greater exports?

We revised this entry for clarity.

What is the difference between a depression and a 20 percent reduction in hours of work? We got to thinking about this and ran into some intriguing questions which we think should be pursued.

What is a depression?

There is some controversy over the definition of a depression, but sources we have read generally list these essential features:

  • A fall in GDP of 10% or more.
  • A fall in GDP for over 3 years.
  • Very high unemployment – over 20%
  • Deflation, i.e., falling prices for asset and goods
  • Contraction of credit

Depressions also appear to differ from the more typical recessions of the post-war period by proximate cause.

According to the Economist:

…a recent analysis by Saul Eslake, chief economist at ANZ bank, concludes that the difference between a recession and a depression is more than simply one of size or duration. The cause of the downturn also matters. A standard recession usually follows a period of tight monetary policy, but a depression is the result of a bursting asset and credit bubble, a contraction in credit, and a decline in the general price level. In the Great Depression average prices in America fell by one-quarter, and nominal GDP ended up shrinking by almost half. America’s worst recessions before the second world war were all associated with financial panics and falling prices: in both 1893-94 and 1907-08 real GDP declined by almost 10%; in 1919-21, it fell by 13%.

The Great Depression, according to the Economist, was by far the steepest collapse of economic activity in American history – initially sustaining a 30 percent drop – but, surprisingly, not the longest – the record for that is still the 65 month depression of 1873-1879.

Eslake, according to the Economist article, believes depressions begin in the financial sector with a fall in asset prices and credit availability. As a diagnosis this explains much of Washington’s preoccupation with propping up failed banks and guaranteeing the value of bonds and securities.

Unlike a real depression,  depression-like recessions began with the artificial tightening of  money supply, as has been the case with recessions after World War II, and the implementation of National Security Council Memorandum 68.

Since the cause of the downturn is entirely artificial, it would be misleading to refer to the event as a depression: It is, in fact, a government engineered event as stated in the above article: “A standard recession usually follows a period of tight monetary policy…”

But, suppose this government engineered depression-like event began not with the policy driven tightening of money supply, but with the policy driven reduction of the labor supply, as in, for instance, the reduction of working time by 20 percent – from a five day 40 hour week to a four day 32 hour week.

We have been told by policy makers, business and economists that such a reduction would be inflationary, i.e., that it would lead to higher prices, and no improvement in employment.

But, there are some logical questions about a reduction of working time which suggest the outcome may be similar to a depression in certain features: deflation of asset prices and the prices of consumer goods and services, but without the massive and sustained unemployment of a depression.

Shorter working time could, in other words, pop credit and asset bubbles without throwing millions of working families into the streets.

Here are some of the assumptions and questions about the economic impact of shorter working time which occur to us:

Hours of work: A reduction of working time by 20 percent is clearly not much different from 20 percent unemployment of a depression except in the source of the event: In both cases the economy experiences a twenty percent reduction in the number of hours of work.

In our economy with an estimated 153 million participants in the labor force, a reduction of working time from 40 hours a week to 32 hours a week would mean about 1.2 billion fewer hours of working time per week. The same holds for a depressed economy experiencing 20 percent unemployment. In the latter case, however, that 1.2 billion hours of reduced working time roughly translates into about 30 million people without work.

Asset prices: Although we are not economists, based on our experience investing and day trading, it seems logical that the market value of the total national capital must be in some way related to the hours it is employed during a given period of time: if those hours are reduced, and the national capital is being utilized at, say, only 80 percent of its former rate, we would expect the total market value of the national capital should fall accordingly – leading to the kind of asset deflation seen in a depression.

If there is asset deflation how likely are consumer prices to rise overall? How likely is it that shorter hours will lead to inflation?

Availability of credit: What happens to credit availability and the value of the existing stock of debt – which must be  related in some fashion to the market value of the national capital? What would happen to the value of bonds? Would a fall in market value of the national capital lead to Paulson’s and Bernanke’s clogged pipelines in the credit market?

Again, we are not experts on such things, and our support for shorter working time does not hang on some “right” answer, but, it seems probable that any reduction of working hours should lead to a general contraction of credit. The question is, again, given this credit contraction, how could a reduction of working hours be inflationary?

Consumer prices: And, given a contraction in the availability of credit and falling asset prices, combined with reduced nominal wage income, how is it possible to assert, as economists do, that shorter working hours are inflationary? Isn’t it more likely consumer prices would fall as well?

Exports: What effect would a reduction of working time have on US exports if the prices of goods and asset are deflating? Shouldn’t this lead to more affordable American made goods for consumers in other countries as well?

And, if so, doesn’t this imply increased demand for labor – additional hiring to meet export demand?

Wage effect: We do agree with economists on one thing: Reducing hours of work would tend to push up labor costs. But, given a reduction in hours of work isn’t this a favorable effect? And, it may not mean higher prices for consumer goods and services: it could, for instance, simply mean lower profits.

In a depression companies tend to conserve capital by discharging workers and reducing labor and operating costs, and, this a real difference between depressions and reduced working hours: Shorter working time, while reducing hours of work, would tend to insulate the labor force from a general fall in real income. Although working families should experience some fall in nominal wages due to fewer hours of work, would not the deflationary effect on asset and goods prices lead to an actual increase in the real wage?


These are the questions we have based on our brief experience with the deteriorating economic conditions the global family faces in the present crisis, but we will leave you with one more thought:

Government spending: During all depressions prior to the 1930s the standard operating procedure for government was to balance the budget in line with tax revenues. This has since been replaced with counter-cyclical policy which has been tested in recessions, but never during a depression.

There is a significant body of opinion which says it can’t work.

Which is surprising until you recall it was the greatly increased demand by government for war materials and munitions and years of support for a mobilized and militarized labor force, followed by a virtual monopoly on industrial goods production after that war, and the establishment of the dollar as the world reserve currency, which finally allowed Washington to break the back of the Great Depression.

At one point as much as forty percent of the US economy was devoted to the war. And, after the war other industrial powers lay in ruins.

Britain, by contrast, was less sanguine about efforts to stave off domestic depression after the war:

One underlying theme in the war time discussions was terror — I do not exaggerate — about the future balance of payments. The greatest exponent of balance of payments pessimism was Sir Hubert Henderson, who had been an ally of Keynes during the Lloyd George campaign for public works in the 1920s but had since become an in intellectual reactionary. (Milton Friedman once said of him that he began his career by writing a very good book on supply and demand and spent the rest of his life finding one area after another where he alleged they did not apply.) The official Treasury was nearer to his pessimism than to the Keynesians. The fear was that an economic downturn might be triggered by a fall in exports.

Owing to the unique position of the United States following WWII it was possible to maintain an unnecessarily long work week, but even with those unique factors the US eventually began running an unsustainable balance of payments deficit.

If that is the standard for government intervention to support asset and goods prices and economic activity in general, what does it take when, as now is the case, nearly forty percent of the economy is already government spending, and China – not the US – is functioning as the world factory?

  1. March 7, 2009 at 4:11 am

    I really like your articles…but I have trouble navigating. I know I read one before that I can’t find. Well I will keep working on it. Smart articles though! Love your work.

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