Floyd Norris has a fascinating little piece this morning that constructs a new "misery index" that combines a nation's unemployment rate and its budget deficit (measured as a share of GDP). The point is that the budget deficit indicates to some extent the country's ability to stimulate its economy further in order to reduce unemployment, while the unemployment rate shows the need for further stimulus. The interesting part of the picture is the reversal in positions of relative stars from 2005 by this measure, like Iceland and Ireland, with former laggards like Germany and Italy. Along with the Czech Republic, Germany and Italy boast the lowest misery indexes. Iceland and Ireland are now among the serious basket cases. It is important to note that the misery index is only a partial picture of the economic dilemma facing these countries. While it is possible to reduce unemployment by stimulating the economy and increasing labor demand, it is also possible to reduce unemployment by limiting the supply of labor. This is the reason why Germany is now a high performer on the misery index measure. It has aggressively pushed work sharing. Instead of paying unemployment benefits to workers who have lost their jobs, it is pays companies to keep workers on payroll, but working reduced hours. In a typical case, a company may reduce hours by 20 percent. The government picks up 60 percent of the lost wages that would be implied by this cut. The company picks up 20 percent, and the worker incurs a loss of 20 percent of this 20 percent, or 4 percent. This means that a worker may work 4 days a week rather than 5, and get a 4 percent reduction in their take home pay; probably not a bad deal in most workers' eyes. In short, there is a simple mechanism to reduce the misery associated with the downturn, if those who make economic policy are prepared to take it. The folks who make economic policy weren't thinking very clearly as the housing bubble grew to ever more dangerous proportions. Unfortunately, it seems as though they still are not thinking very clearly.
--Dean Baker