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November 21, 2005

Jobs and Social Justice - But How?

How unemployment arises and how it can be eliminated

by Wolf von Fabeck
Director of the Solar Promotion Association (Solarenergie-Förderverein Deutschland e.V.)
 

Foreword

This article arose in connection with lectures and discussion forums in which the author spoke on the topic of "Jobs and Social Justice". It aims to inform the public about a solution approach that has been formulated as a result of interdisciplinary collaboration between economists, physicists, mathematicians and engineers, and which is being expressed in ever more concrete terms. Comments and suggestions for further concretization are welcomed.
 

Counter-Productive - Making Employers Pay Social Security Costs

In the past year, gross domestic product (GDP) in Germany grew once again. Hence, despite a number of companies going bankrupt, Germany as a whole continues to be represented by successful businesses. We are not therefore dealing with highly visible one-off occurrences, but of a statistically demonstrable real trend, if we state with great concern that:

  • Employers are cutting jobs despite large corporate profits.


  • But any "critique of capitalism" that intervenes at this point with moralistic arguments would simply be missing the full picture. It overlooks the fact that the underlying economic conditions reward precisely this job-destroying behavior which is criticized, leaving even responsible companies with little choice if they want to stay ahead in competition with more unscrupulous competitors. Obviously - and everyone is in agreement here - personnel costs are too high. It is not that everyone envies employees for the salaries they take home after tax. What is at issue is the many extra costs that employers are burdened with when they want to employ staff. After all, the income tax and all the social security contributions that employees pay are ultimately paid for out of the companies' personnel budgets.

    It is particularly counter-productive to make companies liable for social security contributions according to the number of people they employ. In addition to the gross salary which in Germany is usually decided according to collective pay agreements, employers also have to pay some 50 % of the social security insurance contributions against sickness, unemployment and age-related joblessness. This is known as the "employer contribution" (Arbeitgeberanteil).

    Employer
    contribution
    Employee contribution
    Taxes
    Take-home pay
     






            Gross





            Net





    The assessment scale according to which the required insurance contributions are payable generates a NEGATIVE INFLUENCE on companies' behavior. For each person that they employ, companies have to pay the employer's social security contribution. By cutting jobs, they can free themselves of this obligation. As a result, socially desirable behavior is punished and undesirable behavior is rewarded.

    For the whole of Germany, employers' social security contributions add up to nearly 200 billion euro, outweighing all revenues from income taxes or value-added tax (VAT). This accumulated financial burden virtually forces employers to make job cuts.

    Really this ought to be the other way round. Why shouldn't employers who employ relatively few people pay a kind of "social contribution" in compensation, so that they meet their social obligations? But then what kind of assessment scale should be imposed on companies that employ relatively few staff? What about them should be made taxable? At this point we ask ourselves the following question:

  • What is the source of profits in companies that employ relatively few personnel?


  • For decades a mysterious kind of "replacement personnel" seems to have been in action, ousting regular employees from their jobs because the replacement is more productive and costs less. Using economic terminology, this could be called a "production factor X" that substitutes - i.e. replaces - the production factor "labor". (Note: Here and in the following, the term "labor" is not used in the physical sense but - as is usual in economics - as a collective term for employees.)

    In order for this substitution to end, the incentives for substitution have to be removed. The unknown production factor must not yield more profits than the production factor labor while at the same time contributing less to financing public expenditure. We therefore propose that production factors should be taxed or have charges imposed according to their productivity. But first of all we have to identify the production factor X.
     

    Fear of the Stone Age

    Ever since the beginning of industrialization, the search has been on to identify the mysterious production factor X that carries out labor in place of now redundant personnel. Some social commentators believed they had found it in machines and robots that took work away from people. They made repeated proposals to impose a machine tax on these machines. But do we really want, say, to make construction workers start carrying bricks and mortar up to the top of new buildings again, or to make bank clerks calculate and write out our bank statements by hand? On the one hand, everyone longs to be relieved of physically strenuous or monotonous work. But on the other, the fulfillment of this wish has seemed to deprive people of work, ultimately leading to mass unemployment. Conventional economic theory has not been able to point to any satisfactory way out of this dilemma - either we have the Stone Age or we have mass unemployment. Let's take a look at previous attempts:
     

    The Growth Fetish

    In the years following Germany's "economic miracle" it was still possible to absorb the effects of technological advancement by shortening the working week. Because blue and white collar workers were getting ever faster at production, they could go home sooner. But now there is no more scope for implementing further reductions in working time. Instead, we are told, the "problem of technological progress" is now to be solved by a continuous increase in demand, production and consumption. This is supposed to work as follows:

    If managers and employees can produce more and more, then - driven by competition - this is what they should do. But then the population here in Germany, and wherever possible in other countries too, must also buy this increasing volume of products, otherwise companies will have to restrict their production and lay off workers.

    Since the working population is largely identical to the consuming population, they are now engaged in the business of producing that which they must then themselves immediately consume, throw away or export. This hectic pace of growth is becoming increasingly unsupportable for two reasons. Firstly, its failure is becoming increasingly clear. Despite almost uninterrupted growth since the start of reconstruction after World War II, unemployment has been increasing for decades. Secondly, the opinion is slowly spreading that constant growth - that is, each year the consumption of even more than the year before - will necessarily lead to the even faster depletion of resources and overloading of the biosphere with CO2 and other waste.

    The former President of Germany, Richard von Weizsäcker, may well be the first eminent politician to call it a "foolish idea" to attempt to solve the problem of unemployment through growth. (Speech at the 2005 Congress of the German Evangelical Church in Hanover).
     

    A Different "Quality" of Growth

    According to Okun's Law, in economics there is a supposedly constant relationship between economic growth and full employment. It states that with growth below two or three percent, unemployment will increase. An uncritical look at the statistics - to the annual growth rates and unemployment figures - can seem to confirm this view. Consequently, with an almost religious fervor, worldwide the call is heard for more growth.

    Economic growth is the result of the annual increase in gross domestic product (GDP). However, economists calculate GDP without taking into account what is actually produced and how desirable its production is. GDP is calculated simply by adding together the prices (or costs) of all products and services produced in a year, without any social evaluation. Thus, with no further thought, the costs of all hours of teaching are counted together with the costs for all cigarette production and the costs for rebuilding after a hurricane. It might never have been apparent that in this "value-neutral" addition of numbers, growth is concentrated to an ever greater extent on increasing and satisfying short-term needs in the consumer segment. (A creditable, but unfortunately by no means typical exception is the rapid growth in the use of renewable energies for power generation.) By contrast, society's longer-term needs such as school and professional education, science and research, social support and affordable cultural offerings are increasingly neglected even though sufficient intelligent people are available who could take on these tasks. Yet there is a lack of the education and training required for this, and of the corresponding jobs. This amounts to fundamental mismanagement of the economic system, resulting in the social climate becoming colder, a fall-off in general education levels, and also in the economy losing an important location advantage that it needs in international competition, namely a well-educated younger generation.

    Many economists seem to have failed to notice this arrival of a completely new type of lesser-quality growth. They do not differentiate between necessity or good sense in what is growing and, undeterred, call for even stronger growth. Quote: "Technological progress expands capacities. In order for these to continue to be exploited, more needs to be produced - the economy must grow." (Prof. Dr. Holger Bonus, Emeritus Professor in Economics at the University of Münster, summer 2005) Such is the unemotional, uncritical view that is prevalent in economic theory. But anyone who studies the impacts on society will notice a worrying development:
     

    Various Causes of Unemployment - Direct or Indirect Substitution

    1. In former times, unemployment was almost exclusively the result of humans being replaced by machines or robots that took over heavy physical or monotonous work. For example: construction firms acquired cranes and concrete mixers, which meant they needed fewer people. Then, with advancements in computer technology, unemployment was increasingly caused as a result of speeding up internal data exchange or automating passenger traffic, e.g. the replacement of secretarial pools by word processing systems or of ticketing staff by ticket machines. In all of these cases there is direct substitution of people by the production factor X. A characteristic of direct substitution is the fact that with its aid, a company's business purpose can be pursued even more effectively.

    2. Today, however, unemployment often arises in a completely different way. Personnel-intensive businesses migrate abroad, close down, or make staff redundant. This is not about better fulfilling the company's business purpose, in fact the opposite is true. The service which was previously offered is discontinued with no replacement. In a completely different area of economic activity, production and consumption of mass-produced consumer goods increases, the manufacture of which is largely automated. This is an indirect substitution of the production factor labor by production factor X. Repair firms and refitting shops disappear, the number of teachers in the school system and the number of university research workers is reduced, and research departments are reduced in size. Even quality control is neglected. The immense damage to its image that Daimler-Chrysler suffered internationally as a result of its latest recall - problems with the braking system (!) - could have been avoided with more intensive quality control. Symphony orchestras are disappearing. Jobs are cut in the police department's criminal investigation unit, and addiction advice centers are closed even though the number of people with substance abuse problems is increasing. The structure of the economy and of social life is changing to the detriment of the latter. It is a characteristic of indirect substitution that as labor-intensive branches of the economy shrink or die out, the tasks that they perform are also neglected or no longer performed at all.

    The facilitation of heavy physical or monotonous work mentioned under 1. above should be welcomed as a freeing from unnecessary drudgery - technological progress in a good sense. The replacement of personnel by computers also represents progress in many cases. However, the indirect substitution described under 2. above in almost all cases threatens the future sustainability of our society.

    The truly tantalizing question now is which of the two substitution mechanisms would be counteracted if the tax burden were shifted from the production factor labor to the still unknown production factor X. Will we experience technological regression to the "Stone Age", will people once again have to perform the work of cranes and pneumatic drills, or will this instead tend to stop the shrinkage or closure of entire factories and businesses?

    A simple plausibility analysis tells us that changes are less likely to be undone the greater the advantage that they present to the company. What road construction firm would stop using pneumatic drills, what newspaper would stop using word processors? The only changes that would be reversed or restricted would be those that brought only a small advantage to the company - perhaps because customers see the result as being too impersonal, such as dishing out meals at a counter instead of personal service at the table, or the introduction of ticketing machines as a replacement for ticketing staff. Yet if measures of this kind are restricted or reversed, one cannot genuinely talk about this being a regression.

    By contrast, the easiest way to counter the threat to the future from indirect substitution, the closure of entire businesses due to excessively high personnel costs, is to reduce precisely these personnel costs. Reducing these costs even by around 25 percent (the amount of the employer contribution) would bring about decisive improvements. Thus, a reduction in the employer contribution would not have negative consequences. Its consequences would be decidedly positive.

    Encouraged by this thought, we now continue our search for the mysterious production factor X, which we want to take over the financing.
     

    Energy as a Production Factor

    Conventional economy theory states that there are three production factors: capital, labor and land.

    • Capital includes factory buildings and machinery.

    • Labor comprises the employees.

    • Land mainly plays its role in agriculture and forestry.
    Value can only be created with a combination of production factors. It then comes down to having the optimum ratios in the mix.

    The fact that the existence of an additional production factor X has been discussed by economists only in recent years, and then very tentatively, shows the necessity of interdisciplinary collaboration. From the point of view of physics, for example, it is completely obvious that energy must be a "production factor". Energy should even be in first place! Without energy, nothing moves. Literally nothing happens. Physicists point to the first and second law of thermodynamics, which have proven to be fundamental laws of nature.

    In conventional economic theory, meanwhile, energy has hitherto barely been considered - for the crazy reason that it is so cheap (something along the lines of: "if something is cheap, it can't be worth much"). Most economists assume that the value-creation potential of a production factor corresponds to its price and therefore believe energy to have only a correspondingly low value-creating potential. It accounts for only a tiny 5 percent share of input costs. Compared to labor, which accounts for around 65 percent of input costs, energy appears almost negligible. But extensive econometric calculations have demonstrated the superior value-creation potential of energy as compared to the production factor labor (source: Kümmel/Eichhorn et al.; Ayres/Warr, Lindenberger).

    The explanation for this at first unexpected outcome becomes clear if one considers past oil crises. The shortage of oil in these periods led to an exceptionally severe fall in GDP in all industrialized countries. This can only be explained if the high productive power of energy is acknowledged.

    • The productive power is a number between zero and one hundred percent, which gives the weighting with which percentage changes in the use of capital, labor, land or energy have an effect on the total value creation of an economy (Jürgen Grahl, "Mathematische Erläuterungen zu Produktionsfunktionen und Produktionselastizitäten" ). For example, depending on the economy under consideration, energy has a productive power of between 31 and 65 percent, whereas that of labor is only between 9 and 14 percent.
    Economists use the term production elasticity instead of productive power. For the sake of clarity we will continue using the term "productive power".

    The great difference between the productive powers of energy and labor would not be a problem if the productive powers corresponded to their shares of input costs. Employers would then always be free to choose whether to focus on the more productive, but expensive production factor, or to opt for the cheap but less productive production factor. But unfortunately when it comes to energy and labor the productive powers behave almost inversely to their share of input costs: there is an extreme imbalance. This finding continues to be ignored in conventional economic theory, but the careful studies mentioned above leave no further doubt: it is not expensive labor, but cheap energy that has the greater productive power. The production factor energy costs less than a tenth as much as the production factor human labor, and is around five times as productive.

    Of course every business owner will prefer the production factor energy, which firstly has a far greater productive power and secondly is much cheaper. Parts of the business that require comparatively many staff generate less profit. For cost reasons, they will be reduced in size or closed without replacement. Capital currently prefers businesses with proportionately few personnel and a proportionately high usage of energy.
     

    Counter-Measures

    The imbalance between productive powers and shares of input costs for energy and labor is the main cause behind the continuous rise in unemployment. Additionally, this imbalance is actively reinforced by taxation policy and social legislation, or may even be caused by these in the first place. The state continually violates the principle that it should orientate its taxes and levies to the productivity of the taxpayer or the taxed production factor and instead obtains its main source of revenue by taxing - of all things - the weak production factor labor. In its social legislation the state additionally imposes the employer's social security contribution (insurance against sickness, unemployment and pension insurance) on precisely those employers who employ many staff.

    A comparison shows that the taxation of labor is more than ten times greater than the taxation of energy.

    Taxation of labor  Taxation of energy
    EUR 389 bn social security contributionsEUR 6.6 bn electricity tax
    EUR 124 bn income taxEUR 41.8 bn mineral oil tax
    EUR 513 billionEUR 48 billion


    The cure is immediately clear from the diagnosis: the state cannot continue to impose additional taxes that will make the disproportionately expensive production factor labor even more costly; instead the state must in future consider the productivity of the production factors when deciding the burden of taxes it will impose.
     

    A First Step: Energy Tax and Energy Allowance

    We propose that the current employer's social security contribution should no longer be imposed on employers and should instead be financed by the state via a higher "energy tax" (for the self-employed, the state should pay the corresponding amount into the social security system). This will reduce the tax burden to the greatest extent for labor-intensive businesses and correspondingly make energy-intensive businesses contribute more than others to the financing of the social security system.





    Accompanying this, an "energy allowance" should be paid out to private consumers of energy to reduce their tax burden. This is explained below.

    The terms "energy tax" and "energy allowance" are short and concise. They avoid misunderstandings and point to the inseparable link between the two ideas.

    It should be stressed at this point that the financing of employer contributions via an energy tax and the introduction of an energy allowance is just one of many options. We have chosen these ideas because in our opinion they are the easiest to explain. In principle there are of course other possibilities for reducing taxation on the production factor labor and transferring the tax burden to the production factor energy. But to keep this discussion focused, in the following we shall discuss only the option we have chosen.
     

    The Energy Tax

    The purpose of the energy tax is to finance what at present are employers' social security contributions. Employees' entitlements to social security benefits will be preserved in full, but the state itself will make payments of the same amount as the current employer contribution. The state will obtain the necessary revenues from the energy tax. In this way, companies will no longer be taxed according to the number of employees but according to their energy consumption. To explain the impact of this policy, we will divide all businesses in an economy into two imaginary groups. In the first group, the production factor labor is predominant. In the second group, the production factor energy is predominant.

    • Group 1: Labor-intensive businesses (comparatively greater use of personnel than energy)
    • Group 2: Energy-intensive companies (comparatively greater use of energy than personnel)
    The key feature of our proposal is that in return for increasing the energy tax, the costs of labor are made cheaper. As a result, all personnel-intensive businesses are winners. They will expand and new businesses will be formed. In contrast, the profit situation for energy-intensive companies will worsen. They will either have to switch to energy-saving processes, or reduce their size, close down, or migrate abroad. Consequently there will be winners and losers among businesses. Since opening or expanding labor-intensive businesses creates more new jobs than are lost in the closing or migrating energy-intensive businesses, on balance the number of jobs will increase.

    The winners will include many enterprises that carry out the tasks associated with making provision for the future: school education, research, science, social support, culture. Public and municipal institutions will also be among the employers to benefit in this respect. These employers have already been mentioned above. But here's a further point: in its role as employer the state could finally increase its staff levels, e.g. at schools and universities. The importance of increasing the number of teachers for the quality of school education is demonstrated by Finland, which is top of the PISA league table. Measured by the number of schoolchildren, Finland employs around three times as many teachers as Germany!

    All employers could then improve their profit situation not by closing but by opening or expanding personnel-intensive parts of their businesses. They can then fulfill the "social obligation of property" without being worried about harming their profits.

  • German Basic Law , article 14 (2)

  • "Property entails obligations. Its use shall at the same time serve the public good."

    Two further positive consequences also should not be underestimated:
    • Employees are freed of the pressing fear of sudden redundancy.
    • The political process is freed of the supposed obligation to approve as quickly as possible every innovation that could possibly contribute to economic growth before it is possible to conduct a thorough risk analysis. This concerns e.g. approval processes for genetic engineering, embryo research, the development of pesticides, nuclear fusion and other risky technologies.
    Energy Allowance Compensates for Rise in Energy Tax About one-third of energy consumption in Germany is currently attributable to private households. If energy taxes are increased, people's personal energy costs would therefore also increase. Hence there is a need for financial compensation. This is a question not just of acceptance but also of social justice. Our proposal therefore includes an "energy allowance" which is derived from the energy tax. Everybody whose principal residence is in Germany will receive this energy allowance, irrespective of age or financial resources. The energy allowance will be the same for everybody and correspond to the average increased costs. Anyone who is more frugal with energy than the average will therefore have a financial advantage. Those who use more energy than the average will be at a disadvantage. This creates a guiding effect on behavior, encouraging the saving of energy in the personal sphere.
     

    Concrete Figures

    To help explain our financial proposal for the current employer contribution, here are some concrete figures on taxes, social security contributions and energy consumption:

    • EUR 150 bn income taxes
    • EUR 140 bn VAT and VAT on imports (Einfuhrumsatzsteuer)
    • EUR 167 bn other taxes and duties

    • of which EUR 6.6 bn electricity tax
      EUR 41.8 bn mineral oil tax
    • EUR 389 bn social security contributions

    • of which EUR 195 bn employer contributions
    • 2500 bn kWh end energy use in Germany
    • approx. 1660 bn kWh industrial
      approx. 840 bn kWh private

    These figures from 2002 have changed only slightly since then. The breakdown of energy use into industrial and private use is a rough estimate.

    In the first step that we propose, employers' social security contributions - EUR 195 bn - will be financed by an additional tax on energy. To achieve this it will be necessary to impose an additional energy tax of about 12 euro cents on every kilowatt hour of end energy used for commercial or industrial purposes.

    EUR 195 bn social security contributions / 1660 bn kWh end energy used = 11.7 cents per kWh

    These 12 cents are based on present-day commercial energy usage. If energy consumption falls as a result of the increased taxation - e.g. due to increased energy efficiency or migration of energy-intensive businesses - it will be necessary to increase the tax rate. Energy consumption would then settle down at a lower level in line with the price elasticity of energy.

    Since private energy consumption is at only around half the level of commercial consumption, the tax revenues from energy tax paid by private persons would be around half the tax revenues from energy used commercially, i.e. around EUR 97 bn. Divided between a population of about 80 million this is more than EUR 1200 each year.

    • This results in an energy allowance of around EUR 100 per person per month.
    If the relationship between the energy taxes paid by private households and by businesses changes, this value would also need to be corrected.

     

    The Role of Raw Materials

    One objection to increased energy taxes needs to be dispelled immediately: the raw materials used in the manufacturing economy such as steel, copper, aluminum, cement, plastic granules and many raw materials in the large-scale chemical industry are manufactured using large amounts of energy. Two-thirds of energy used in manufacturing flows into obtaining raw materials. Iron ore is converted into steel in blast furnaces, limestone to cement at cement works. Aluminum is obtained from bauxite using massive amounts of energy. The raw materials industry only uses a relatively small number of personnel. This is why prices for raw materials are closely linked to energy prices. Any increase in the energy tax would have a full impact on raw materials. Since cheap raw materials are a precondition for mass production, there are widespread fears that if raw materials become more expensive this would lead to a general economic downturn.

    Our answer is that while cheap raw materials do indeed increase consumption, giving a boost to the economic situation and to "growth", they do NOT lead to the creation of jobs. On the contrary, cheap raw materials and cheap energy are a precondition for AUTOMATED production using FEW personnel. The cheap products of mass consumption are thrown away as soon as they develop even small faults and replaced with new products, since repairs "aren't worth it". As a result, cheap materials have led to the regrettable disappearance of repair firms and unemployment among the tradesmen and specialists who used to work there. Raw materials SHOULD therefore become significantly more expensive. That claim that making raw materials more expensive would lead to higher living costs does not take into account that according to our proposal, the burden on all labor-intensive businesses would be reduced in return. The prices for products and services will fall. Visits to the doctor, and medications, would become cheaper, as would all kinds of repairs, trips to the hairdresser, market garden products, organic products, wooden constructions, cultural offerings, education and training, advice and counselling, court costs, vehicle roadworthiness tests...

     

    Impact of Tax Increase on Various Energy Sources

    8 cents/kWh energy tax to replace employers' social security contributions plus 4 cents to finance the energy allowance result in a rise due to taxation in energy prices of 12 cents/kWh. Converted for the main energy sources, this means an increase of around:

    • 12 cents/kWh for electricity
    • 100 cents/liter for diesel, gasoline and heating oil
    • 120 cents/cubic meter for natural gas
    This is offset - as stated above - by financial compensation in the form of an additional energy allowance of EUR 100 per person per month. Every individual can to a large extent control through their own energy-aware behavior whether on balance they make a profit or a loss.

     

    Slow or Fast Change?

    When it comes to the question of whether the change we propose should be implemented gradually or as quickly as possible, two contrary points of view need to be taken into account.

  • In the case of a swift change, there is no escaping the fact that business decisions taken in recent years would then subsequently turn out to be bad decisions, e.g. the opening or expansion of energy-intensive businesses or the closure of personnel-intensive businesses. From the point of view of these companies, this speaks in favor of a "cautious" changeover, to give the businesses concerned time to adjust. In the private sphere as well, various purchases would subsequently prove to have been bad decisions, e.g. buying a gas-guzzling car.
  • On the other hand, from the point of view of personnel-intensive businesses that have successfully resisted the current trend of job-cutting, a fast changeover would be desirable. And private individuals who are already using energy-saving appliances, have opted to live in a passive house or who bought a three-liter car would have a financial advantage.
  • Ultimately the decisive factor in favor of the fastest possible implementation of the changeover we propose will probably be the dramatic financial, social and psychological consequences of the present-day situation: nearly 5 million unemployed are a burden on the social security system month after month. This economic "bleeding" must be stopped, and QUICKLY. In companies there is widespread fear of redundancy. The social climate is becoming colder. The population's trust in the leadership abilities of government and parliament is evaporating from month to month. It is therefore vital that concrete results become visible soon.

     

    Isn't Energy Tax Already High Enough?

    Many people subjectively feel that taxes on energy, e.g. diesel and gasoline, are already too high. But we can bring in an objective yardstick here: production factors must be taxed according to their economic productivity in order for the substitution of the production factor labor by energy to stop. This productivity has been calculated by means of the econometric studies mentioned above. These studies are therefore of inestimable value for making this discussion objective. But even without empirical derivation, it is apparent that taxes on energy are too low in comparison to the taxation of physical labor. Here is an example chosen because everyone can see from their own experience, without any specialist knowledge, that it is plausible, with valid proportions: a car dealer wants to deliver a mid-class car to a customer who lives 100 km away. He has two options to choose from:

    1. The car is driven under its own power.
      This takes one hour's driving, consumes 10 liters of diesel, and incurs a mineral oil tax of 5 euro.
    2. The car is pushed there by assistants.

    3. If three people push and one person steers, this will require 5 days and the payment for four people. Income tax and social security contributions (4 people x 5 days = 20 work days) will total approx. 500 euro. 5 euro or 500 euro! Conclusion: having the car pushed by assistants attracts a 100-times higher tax and social security contribution burden than driving the car using diesel fuel. Although this comparison may seem surreal, it clearly shows the disparity between the excessive tax and deductions imposed on staff and the completely insufficient taxes on energy. This example also shows that increasing the energy tax (as we propose) will not lead to employers having people push cars. According to our proposal, the 10 liters of diesel would be taxed at one additional euro each. The tax burden for 100 km of car driving would therefore increase by 10 euro to 15 euro. In contrast, the social security contributions payable for pushing the car would be reduced from 500 euro to around 330 euro due to the elimination of the employer's social security contribution. Even under the conditions we propose, car dealers would not have cars pushed to their customers. Consequently we have found a "dose without harmful side-effects". The use of machinery that facilitates labor, i.e. conventional rationalization, is not impeded.

     

    Difference between Energy Tax and Machine Tax

    There are similarities but also major differences between the energy tax and the old idea of a machine tax:
    • Different assessment

    • A machine tax is a tax on the purchase of machinery and therefore is a levy on the production factor capital. The energy tax makes it more expensive to operate machinery.

    • Saving or wasting energy

    • A machine tax would be oriented to the purchase price of machinery. Consequently the machinery that was purchased would tend to be particularly cheap and primitive. Generally speaking, the more primitive a machine, the higher its energy consumption.
      In contrast, the energy tax would create an advantage for energy-saving machines.

    • A machine tax either would not make the energy-intensive transformation of natural resources into raw materials more expensive, e.g. iron ore into steel or limestone into cement, or would do so inappropriately. Raw materials would remain cheap. The disastrous incentive for the automated production of short-lived mass consumer goods would remain in place.

    In contrast, an energy tax would make raw materials more expensive according to the energy used in their production. Indirectly this would also be a tax on the use of resources or on the "consumption" of nature.
     

    A National Pioneering Role?

    A frequent objection is that an increase in energy tax would only be possible with a worldwide or at least European consensus. There is no need to repeat these arguments here, as they are virtually self-evident. But the arguments in FAVOR of a national pioneering role are less well-known. Without claiming to be a definitive list, four reasons are given here:

    • Lower personnel costs allow qualified engineers to be employed, both for better quality control and so companies can carry out internal research. This increases the reliability of products and hence the export opportunities in the international marketplace.
    • Within a few years, an explosion in energy prices is expected owing to energy shortages. An economy that has switched to expensive energy in advance - for example with insulation in houses, fuel-efficient cars, solar collectors on roofs, etc. - is better equipped to deal with rising energy prices. An increase in energy tax then functions like a "vaccine" that mobilizes the body's own defense mechanisms in time.
    • Higher energy prices will lead to higher prices for raw materials. If one country goes it alone, there will be increased imports of raw materials that are produced energy-intensively. A country with high energy prices therefore conserves its own natural resources.
    • In the international marketplace, Germany cannot compete by having lower prices, since German wage levels are too high. It can only compete with higher quality and innovation. However, new developments must be tailored to demand. Earlier there was demand for machines that replaced human labor. But today the industrialized countries have more than enough workers. Instead a shortage of energy is becoming apparent. There will therefore be increasing demand for energy-saving technologies. A country that has higher energy prices than its neighbors will develop energy-saving technologies to production stage, creating an export advantage for the country when there is a further increase in energy prices.

     

    Responsibility of Economists

    For decades, economists have in broad unanimity proposed that the way to combat unemployment is to increase economic growth still further. However, this proposal is of little use since it amounts to a call for exponential growth that exceeds the laws of mathematical logic and is not possible in a real, limited world. Unlike the natural sciences and philosophy, where it has long been good form constantly to subject new theories and even natural laws that have been known for a long time to new critical evaluations in order to falsify them where necessary, established economists have shown little willingness to look for the flaws in their thinking that have led to such an unusable conclusion.

    It is surprising that even when assessing the causes of unemployment, an entire nexus of causes is left out of the consideration. In any case, the described obvious imbalance between the share of input costs and productive powers (production elasticity) and how this functions as a motor driving the continuous substitution of labor with energy has so far not been a topic with which economics occupies itself. Instead, economists tend to assume that there is a balance. Behind this lies the idealizing belief that a production factor with a high productive power - corresponding to its productivity - would necessarily be traded at a high price on the market, whereas a production factor with low productive power would account only for a correspondingly low share of input costs. Here economic theory overlooks the fact that in respect of the costs for labor, luckily there is no genuinely free market in operation. For socioethical and historical reasons - here the role of the trade unions is due particular mention - employers cannot reduce the wages they pay to such an extent that labor's share of input costs corresponds to labor's low productive power. On the other side of the coin, economic theory also overlooks the fact that political pressure is exerted to keep the price of energy artificially low, as seen in the international political pressure on OPEC.

    In a lecture at the fall convention of the German Mathematical Society in Hamburg, Germany, on November 7, 2003, Professor Claus Peter Ortlieb showed how problematic the schematic application of mathematically idealized principles of balance is to a developing economy that is subject to dynamic and political forces, in a devastating critique. The fiction of a balance between productive powers and share of input costs - this unrealistic basic assumption - of course cannot explain how the ongoing substitution of labor by energy and the resultant rise in unemployment come about. For as long as economists do not acknowledge that the productivity of energy far exceeds that of the production factor labor, even though energy costs are so comparatively low, socially engaged policy-makers will lack all material arguments for the increased taxation of energy. There will be nothing to counter the populist assertion that taxes on energy are already much too high. This has been shown in a tragic way in the fizzling out of the ecological taxation and finance reform in Germany, whose proponents at the political level apparently ran out of arguments as well as courage, even though the project is right in principle.

     

    Summary

    Energy is a production factor.
    The production factor energy is more productive and cheaper than human labor. "Labor" is therefore being substituted by "energy". This happens
      1. As a result of classical rationalization (facilitation of labor)

      2. Through the creation of energy-intensive businesses (with relatively few jobs) in the production sector. In consequence, personnel-intensive businesses in the maintenance and service sector are closed or are subject to shrinkage (including in education, research, science, etc.) The tasks that these businesses perform, often making provision for the future, are then no longer performed.

    Our proposal:

    An increase in taxes on energy to finance employers' social security contributions would stop the destruction of jobs mentioned under point 2 above.
    To compensate for the increased taxation in the private sphere, an energy allowance should be provided for every citizen. One third of the energy tax should be used to refinance this measure.

     


    Appendix

    Notes on Productive Power

    The productive power (production elasticity) of a production factor is a percentage that specifies how sensitively the value creation of an economy - the gross domestic product - will react to a small increase or reduction in this production factor if the other production factors neither increase nor fall. Here are two simplified examples in which the volume used of only a single production factor is varied:

  • Example 1


  • A country's GDP increases by 0.41 percent compared to the previous year, following an increase in the amount of energy used by 1 percent. The amounts of capital and labor used remain unchanged. This results in a productive power of energy of 41 percent.

  • Example 2


  • A country's GDP falls only by 0.24 percent compared to the previous year, though the deployment of personnel has fallen by 2 percent. This results in a productive power of labor of 12 percent (0.24 is 12 % of 2).
    In real situations it almost never happens that the use of only a single production factor changes in comparison to the previous year, with the other remaining constant. Instead, all factors (or rather,factor input volumes) change together. It is not then clear, a priori, what contribution the changes in the individual factors have made to the change in GDP. However, with the aid of complex mathematical models it is possible to "distill out" the influences of the individual factors from the various series of economic statistics.

    Notes on Share of Input Costs

    (Energy 5 % - Labor 65 %)
    A production factor's share of input costs is a dimensionless figure that states the share in the total production costs that is attributable to the costs of the factor concerned.
    Here again are two simplified examples in which the utilized volume of only a single production factor is varied:

  • Example 3


  • A share of input costs for energy of 5 percent, as is usual in industrialized countries, means that if the amount of energy used increases by 1 percent compared to the previous year, the production costs in that country will increase by 0.05 percent.

  • Example 4


  • A share of input costs for labor of 65 percent, as is usual in industrialized countries, means that if personnel utilization decreases by 2 percent compared to the previous year, the production costs in that country will decrease by 1.3 percent.

    It can be seen from examples 3 and 4 that the utilization of energy has only a minor influence on production costs, whereas the use of human labor is a considerable burden on the production costs in the economy.

    In reality, the utilized volumes of the individual production factors change simultaneously. Keeping the example data we chose, which tend to match the average figures for the Federal Republic of Germany over recent decades, let's assume that the number of people in work will fall by 2 % and at the same the use of energy will increase by 1 %. A combination of outcomes from examples 1 to 4 then shows that:

    • GDP has risen by 0.41 % - 0.24 % = 0.17 %

    • The economy grows!
    • Production costs have fallen by 1.30 % - 0.05 % = 1.25 %

    • Employers' profits increase!
    • The number of jobs has fallen by 2 %

    • Unemployment increases anyway!
    Thus the current misery of our economic system can also be represented mathematically.

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