Recession and Efficiency

Question. In what ways can a recession be useful for forcing inefficient public-sector agencies to lay off redundant workers and reduce bloat?

Answer. None.

Every recession, going at least back to the Great Depression, you get economists and others who are certain that high unemployment can discipline firms into greater productivity. Back in the 1930s, this was Joseph Schumpeter saying that there was no need to fear a depression because it was good, like “a cold douche.” Liquidating unproductive firms and forcing the rest to get leaner was supposed to improve economy-wide efficiency. Today, you can find people arguing the same for inefficient public-sector agencies strapped by budget cuts.

It doesn’t happen. Productivity decreases in bad economic times; labor-saving productivity improvements happen when wages are high, not when sales are low. Cash-strapped firms do not have the ability to invest for the long run – they just sell portions of themselves and shrink to be easier to manage, to limit the loss.

In public-sector public transportation, this really is the same. The best time for converting a metro line to driverless operation is when unemployment is 3%, not when it’s 15%. When unemployment is 3%, it’s possible to place workers in the private sector, which means they’ll work well through the transition. This goes doubly so when the productivity improvement lets one person do a job that previously took three rather than eliminating the job entirely: workers can go on strike if they’re unhappy, and transit as an industry is very amenable to unionization, to the point that unions have succeeded in organizing the tech shuttles in Silicon Valley in an otherwise union-hostile setting. (Of note, American public-sector anti-union successes have mostly been about screwing young workers, who are already the least empowered within the union, rather than doing anything to 20-year veterans who are about to retire with a full pension.)

The issue here is that very, very few workers are redundant on a next-day basis, even in severely overstaffed agencies. New York can eliminate subway conductors but requires some planning in advance to do so, for example to move mirrors around and place CCTV cameras to enable drivers to see the platform and close the doors. American commuter rail agencies can eliminate rail conductors, in what is as close to next-day redundancy as I can think of, but even that requires hiring fare inspectors for proof of payment checks and often also buying ticketing machines at outlying stations where previously passengers bought tickets directly on the train.

More often, eliminating a large amount of waste requires spending a bit more money in the short run. It can be on capital, like more ticketing machines. It can be on labor, like more dispatchers to make the buses run more regularly to reduce delays and bus driver overtime. But it’s usually not something that can be done by the Chainsaw Al school of management. It takes time, and in a lot of cases, the cooperation of the workforce is necessary.

Time and time again, we see transit managers who think in terms of just cutting avoid making long-term investments to improve efficiency. We see hiring freezes, wage freezes, reticence to engage in any long-term hiring and planning even in temporary recessions, and hostility to electrification even among American governors who propose to spend billions of dollars on parking more trains in city center between the morning and afternoon peaks. Even below the top political level, managers who develop a siege mentality never think in terms of long-term improvement. That’s not what will get them ahead; avoiding short-term controversy will, and they adapt to bad practices readily.

The workers adapt, too. If they expect sudden layoffs, their morale will tank and so will their productivity doing anything but the most routinized work. Maintenance workers will skip things – nobody will notice until it’s too late. Cleaners will slack, and if the message sent from the top is that it’s time to retrench, it will be hard to argue for aggressive standards for cleanliness. Even absent unionization, productivity will flounder, and there will not be much room to replace truly lazy workers if there is a hiring slowdown.

So what works for increasing efficiency? The answer is growth. Kopicki-Thompson’s report on best practices for rail privatization has a chapter about the history of the breakup of Japan National Railways in the 1980s, which makes the connection between growth and efficiency clear. Between 1980 and the breakup of JNR into seven constituent JRs in 1987, the company laid off two-thirds of its workforce, after complex negotiations with the unions, some of which were militant socialists. Japanese work culture is that a man is expected to work for the same firm for his entire working life, from age 22 for a university graduate to retirement at 65; JNR had to place these workers in the private sector for a mid-career layoff. This could happen because Japan’s economic growth in that era was famously high, to the point that Americans soon bought business books about how to think like a Japanese manager.

It is best to instead use weak periods to plan for the long term. If there’s stimulus spending, take it and go build things. Even if there isn’t, remember that the recession won’t last forever and plan in advance. Part of the plan should be knowing which workers are supernumerary and making a plan to place them at private-sector jobs as soon as they become available. But don’t expect to be able to send masses of pink slips in a recession; that must be saved for when jobs elsewhere in the economy are plentiful.

23 comments

  1. Coridon Henshaw

    All of what you wrote applies to most employers in all sectors, or at the very least to all of the public sector and large private enterprise employers. ‘Cut your way to growth’ has been the senior-management mantra, across virtually all sectors, since the 1980s. A middle-management siege mentality driven by continual retrenchment, forced from the top down, is just as present in almost every sector.

    In general the anglosphere is burning its seed corn by living off physical, educational, and social investments made in the 1950s, 60s, and 70s while refusing to put the level of funding needed into paying those investments forward. The perpetual push towards retrenchment in cutting transit funding (either in nominal terms or by letting inflation make cuts behind the scenes) is just a very small piece of a larger pie.

    The downside to this, as it relates to the transit sector, is that making things work better in transit means bucking a much broader social trend. That’s a very hard problem; either transit swims upstream against the current or transit advocates need to push back against sociocultural problems that go far beyond just transit.

    • Nathanael

      Well, thankfully there’s severe pushback against that destructive trend society-wide in the US. Since the trend is so destructive, the pushback is going to win, I’m just not entirely sure how messy it’s going to be…

  2. Sb

    If companies/organization didn’t fire employees during recession, there is no recession and vice versa during growth.
    I get that you advocating that transit organizations should zag when others zig but that is really hard to pull off in real life.

    • Eric2

      Yes – I think that politicians should zag when others zig (Keynesianism), but if a transit agency’s income falls at the same time a private company’s income falls, they’re going to have to react the same way.

    • keaswaran

      I think the point is only partly that transit agencies should zig when other employers zag – the bigger point is that if transit zags at the same time as everyone else, that isn’t going to be a way to help efficiency. The only way to grow efficiency is to try to do these things during good times – cuts during bad times may be unavoidable, but they aren’t going to have a silver lining.

    • Alon Levy

      I don’t think they do? They tend to hoard the labor they do have. As I understand it, mostly companies just go under and don’t hire, I don’t think the cause of rising unemployment in a recession is mostly an increase in layoffs.

      • AJ

        My understanding it is mostly a drop in hiring. This crisis is different, as some firms are rapidly running out of cash and there are mass layoffs. But during a more typical (i.e. slower) recession, hiring drops off first, driving up unemployment as those who become unemployed struggle to find new work quickly, or can only find lower quality work.

    • Mike

      Recessions are a drop in spending, which lowers profits and causes layoffs. The 2020 recession is caused by a pandemic that make people afraid to go to public spaces, and the 2008 recession was caused by unsustainable borrowing and misleading asset prices that when they were revealed, nobody could tee what the true value was so they refused to trade them. Layoffs didn’t cause these situations. Preventing layoffs can make a recession milder but it doesn’t eliminate it.

  3. Henry Miller

    The keyenes school says spend in a recession, then in the good times spend less and pay the debt off. That doesn’t happen, for reasons that are out of scope.

    A recession is a good time to buy the ticketing machines (at the recession sale prices if possible, but even at full price you are stimulating the economy) so that when the good times come you don’t need the conductors and can get rid of them when there is a place for them.

    Private companies might get rid of dead weight whenever but transit companies are government (for reasons Alon has explained before) run and so must care about the political out fall when eliminating even the worst dead weight. Thus good times are required to get rid of dead weight. Bad times is when you invest in the infrastructure to make them dead weight.

    Transit organizations should always have a long term plan of where the next infrastructure investments should be. They should be able to run to federal and state when a stimulus is announced with a plan that can be done in two years or less. (so whoever sponsers it can get a photo op at the opening). There should be several of these ready to go at anytime. Small stimulus run a small project. Recession is because metal is expensive, don’t electrify lay concrete. Next recession do something else. The important part is knowing what can usefully be done in 2 years so that your political supporters get the photo op.

    • yuuka

      That’s kinda what I thought with getting rid of conductors on commuter rail services – no one loses their job on the day the policy is changed, some become fare inspectors, some can man temporary ticket offices that aren’t any more than a desk, a laptop to keep track of issued tickets, a stack of paper tickets and a cash box, all of which probably can come from surplus (MTR did this after last year’s protests screwing up their AFC systems massively) while you wait for the permanent ticket machines. And of course, offer early retirement for those who want it.

      The problem with adopting the Andy Byford “quick wins” strategy for when money comes in is that agencies are having a hard time even staying afloat and that’s a distraction to management. They need to understand that thinking about infrastructural investments for when the money comes in does help with improving efficiency – but then they’ll ask, why shouldn’t the money be used for day to day operations?

      • Henry Miller

        Most government budgets have operating expenses and capital expenses. Operating expenses are paid from this year’s budget and thus go down with the economy, and cause problems with recessions as you need to cut costs somehow. Capital expenses are for building things, and so something you are allowed to barrow money as needed and pay off in the future. It is illegal to use money for capital expenses to cover operating costs. Thus there often is money to build something new even when there isn’t money to run the existing network.

        • yuuka

          Except that in the case of America, hasn’t the FTA allowed agencies to redirect capital project grants to support operations in this particular situation?

      • Nathanael

        The main problem in NYC is simply that politicos forced out Andy Byford. I feel like reasonable improvements are happening at MBTA due to a cultural attitude change at the top. I’m not sure when that’ll hit NYC but I think it’s going to — my sense of the vibe (yes, I know, vague) is that we’re only a few years away — the people already supported Byford, and the slightly elderly politicians will have to catch up.

        • Alon Levy

          The reasonable improvements at the MBTA are 100% because we yell at the people at the top, who left to their own devices would rather keep sandbagging study after study.

  4. Onux

    As I noted in the “Eliminate Local Government” post, if you want efficient public agencies you have to vote for it. Expecting a recession to force agencies to be efficient is as misguided as expecting eliminating local government to force local NIMBY concerns to be ignored. Strong civic-minded politicians can get agencies to make good choices or be efficient in good, bad, or medium economies. Bad politicians mean that even if cuts are forced due to lower revenue they will be implemented poorly (by retaining poor performing service to a favored constituency, or retaining sycophants and firing the more competent.)

  5. Kamoro

    This may be tangential, but an analogy comes to mind regarding the notion of “cutting funds forces efficiency”:

    When an animal is starving, its body burns muscle as a fuel source. This is not an improvement of the animal, this is an attempt to buy time and hope the famine ends before the animal does. Once the famine is over, the animal will be a worse hunter than it was before.

    Cutting funds forces INefficiency.

  6. Pingback: Recession and Efficiency – Hogg1890 – Blog
  7. AJ

    This isn’t the topic you are addressing, but the headline made me think about cost inflation & deflation. What role does the business cycle play in allowing the public sector to get work done more efficiently when there is less private competition for scare resources. I recall reading how through sheer luck the University of Washington put out to bid a new football stadium during the extreme trough of the 2008 recession and therefore got the facility built for something like half of cost of what would have bid for a few years later.

    Most large project are long cycle so it’s basically impossible to time construction around a business cycle, but is there an efficiency argument to accelerate public construction when private construction is slack, separate from a more typical Keynesian counter-cyclical argument?

    • Alon Levy

      This also happened for SAS Phase 1 – some individual contracts came in below budget because in 2010 there was no private-sector work for competent contractors who didn’t want to deal with MTA red tape. I don’t think this is really an important issue overall, though – subways take 4-5 years to physically construct and even the 2009 recession, the longest in recent memory, was not long enough to reduce New York costs.

    • Richard Mlynarik

      The problem we (Anglosphere) with this is that to a very large extent public works contracting firstly isn’t an open market to begin with, and second that any individual sub-contracts there are that a new contractor might bid on are so small in comparison to overall bloated project size.

      If, say, a “public” agency decides, based upon “alternatives analysis” by a private contractor, that a crazy route with 80% too much tunnelling, and 150% oversized stations, and a new and untested signal system, and 700m of bonus tail tracks, and extensive roadway and sewer and power line relocation and reconstruction, and “community benefits” in the form of public park refurbishment is the Preferred Alternative.

      The “public” agency rubber-stamps the consultant’s choice, perhaps after a year of meaningless “public outreach” (more consultant profits) and tacking on extra “community benefits” in the form of additional road intersection widenings and a childrens playground area and extra tree plantings (of a specific species) added to the park refurbishment.

      The project goes out to “bid”.

      There are only one or at most three specialized insider public works contractors (aka “rent-seekers”) who are capable of even responding to the massive bundled project, with scores of sub-contracting specialities, several technical massive-cost sub-contracts whose requirements were tailored to exclude any competition at all, and incredible amounts of legal boilerplate and red tape.

      (Oh, there’s an “in-house” layer of not-unrelated contractors and legal who skim a percentage off the total marquee cost to perform “project oversight” and act as “owner’s representatives” off to the side, and they’re also effectively never out to bid, always finding themselves in a favourable “business” cycle.)

      Let’s say that there’s a cyclical recession and smaller contractors are short of their usual private sector work and are hungry to bid on sub-sub-contracts of the “public sector” (really huge rent-seeking competition-shielded private contractors in a niche they created and control) project.

      Landscaping bids for the playground are 40% of estimates! Over ONE MILLION DOLLARS is saved.
      Concrete, including delivery and pumping, is 70%! A press release is issued, because THIRTY PERCENT SAVINGS is HUGE, meanwhile Good Jobs at Good Wages are being Created.

      Of course, there are “unexpected” issues with utility replacement, and “inclement” weather, and “unforseeable” geotechnical issues, and the usual quality control problems one “has to expect on a project of this size and complexity”. bBecause of an elevent month delay in site preparation, the concrete contracts expire, with penalties, have to go out to bid again . And so on.

      But in the end, a terrible project — coming in half a billion dollars over superior and simpler routes and technologies that were eliminated nine years prior at the very earliest level of “alternatives analysis” stage — is delivered three years behind the schedule advertised when the master project contract was signed.

      Counter-cyclical spending and a favourable bidding for landscaping sub-sub-sub-sub-contracting saved a million dollars on the children’s playground component.

  8. adirondacker12800

    20-year veterans who are about to retire with a full pension.

    20 years gets you half pension and you still have to wait until you are old to collect it. But actually finding out how pensions work would ruin the meme.

    • Alon Levy

      In Boston you can retire with a full pension after 26 years of service and you collect it immediately. I think New York is similar? It’s never 20, but it’s not much more than 20.

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