Hartz IV, the automatic stabilizer, or just a hammock for lazy moochers?

This post leans heavily on Ellis Winningham's blog posts 'All SNAP/Food Stamp Recipients Are Employed' and 'The Macroeconomics of SNAP'.

It is an interested misconception that German Hartz IV recipients are in the majority unemployed. All Hartz IV recipients enjoy the government provided benefit of having a stable and secure job. In addition, Hartz IV moochers secure jobs. Here is why.

Hartz IV Nutrition Consultant

When Germany ditched its much beloved Deutsche Mark for Euros it simultaneously lost control over the new currency as that control had now been shifted to the ECB. The Bundesbank could no longer play the currency market and Germany was in a recession. The only way to become again competitive was by devaluation of wages. The 'Hartz concept' was born. It brought together the former unemployment benefits for long-term unemployed ('Arbeitslosenhilfe') and the welfare benefits ('Sozialhilfe'), leaving them both at approximately the lower level of the former Sozialhilfe (social assistance).

But there is more to Hartz IV. It is some form of what economists call an “automatic stabilizer” to prevent a large drop in aggregate demand when the economy heads south. An automatic stabilizer creates a floor in aggregate demand, so consumer spending cannot fall through it and also, it creates a ceiling in aggregate demand when the economy is doing well. The actual macroeconomic purpose of Hartz IV is not to provide handouts to “lazy moochers” as the media wants you to believe, but to prevent a large drop in consumer spending on food, which in turn, prevents the economy from sinking further into a downturn. The job of the Hartz IV recipient is to buy and consume cheap food and to enjoy this dressed in cheap clothes, and it shows.

Although the German federal government is not the currency issuer and regulatory authority (it gave that up with the Euro), it nevertheless creates all unemployment. It also creates poverty and allows low wage environments and underemployment to exist. Because it has created this situation, the government employs (makes use of) poor and unemployed persons to function as an automatic stabilization mechanism for the economy. It is a misconception that Hartz IV recipients are unemployed.

There is also a common flawed perception among Hartz IV activists and, ehem, that female whistleblower that labor is of a fixed size and therefore it needs to be shared equally in order to eliminate unemployment. This is nonsense as unemployment is willfully created by government for a reason.

Hartz IV is not about the Euros, nor is it about helping the poor. “Helping” the poor buy food is not the intent. Like anything else concerning federal spending, Hartz IV is about the real resources: the food supply and people who, through the Hartz IV program, will be employed (labor) to do one simple job, which is to buy food, and that, in turn, maintains a floor in the German economy through which consumer spending cannot fall. In other words, rather than providing a full-time job to these persons by directly purchasing their labor power, the German government chooses to employ these persons as automatic stabilizers by providing them a small salary which they can only spend on food. Those who are too disabled to work obviously cannot be employed in a full-time job, but that fact does not invalidate the point concerning employment as an automatic stabilizer. Hartz IV recipients do not have to perform any labor other than finding a way to get to the grocery store and purchase food.

Apart from that, Hartz IV recipients indirectly feed a whole armada of lawyers who are only too eager to help maintain that situation by alleviating some forms of hardships. They do this cynically by diving into the parallel justice system of the SGB II with occasionally sprinkled interested criticism to satisfy their moral reservations and keeping face. The SGB II is the dragnet by which sustainable poverty is guaranteed and enforced. Even the German Constitutional Court manages its decisions gingerly along these lines.

There is more to Hartz IV. It is an insurance against rising criminality, unrest and associated forms of open or clandestine forms of opposition.

In addition, Hartz IV serves as a dichotomizer of society. It alienates certain strata of society from better-to-do, the (still) successful job owners, the middle and upper middle class group and thus forms a vivid reminder that things could go the other way if ...

Obviously, if Hartz IV funds were allocated by the government, but nobody participated in Hartz IV, then the program would not be able to perform its macroeconomic function. The government needs living human beings to go out and buy food with the Euros that it pays them. In doing so, these unemployed, poor and disabled persons are ensuring that middle class, skilled and highly educated jobs are not lost in an economic downturn. So, on the one hand, we can be thankful that some help exists for the poor and disabled. Otherwise, they’d starve. But on the other hand, from the macroeconomic perspective, for the crucial job they perform for the economy ensuring the jobs of people who earn comfortable livings are not lost, their extremely meager compensation is totally insufficient, unfair and altogether unacceptable.

For those willing and able to work, the German government should provide a job guarantee at a decent wage, plus any necessary further assistance to lift them out of the poverty that the German government created for them, restoring their dignity as human beings. For those who are disabled and cannot work, the German government must provide them with a basic income guarantee and any further assistance necessary that will lift these persons out of the poverty that the German government created for them, restoring their dignity as well. In short, these persons are forced into unemployment and poverty by the German government, then they are being used by the federal government to ensure that those who earn comfortable livings maintain their comfortable livings. Such a system is not a desirable way to operate an economy.


Hartz IV Protects Middle Class, Skilled and Educated Jobs

Now we come to the point in our discussion where you will understand the purpose of our long trek through consumer spending, job creation and federal spending. Since we now understand that somebody’s spending is somebody’s income as well as how jobs are created and why there is unemployment, we can now properly explore how Hartz IV protects the economy.

When unemployment rises, the unemployed seek assistance from the federal government by applying for unemployment insurance, welfare and Hartz IV. When they do, the federal deficit automatically rises, because increased federal spending is necessary to pay these claims. Since we understand that federal deficits are necessary to boost consumer spending (for heaven's sake, don't tell that Schäuble), we can also understand that when the unemployed spend these benefits, consumer spending will continue. That is the purpose of federal deficits – to boost consumer spending sufficiently to create and maintain a situation of full employment, and also, to ensure the public purpose (healthcare, education, infrastructure, etc.) So, what we’re talking about here is that the German government chooses each year to mismanage the economy, and because of that mismanagement, Hartz IV is necessary to ensure that consumer spending will not collapse. In macroeconomic terms, this is called “inefficiency”.

When millions of people spend their Hartz IV benefits on food, those Euros are income for grocery retailers, who, in turn, pay their workers with the Euros earned through Hartz IV purchases. Those workers then take their paychecks and buy food as well as non-food items from other businesses. They purchase clothes, toothpaste, DVDs, gasoline, books, furniture, TVs, and seek out services to purchase, such as oil changes, carpet cleaning, medical, dental, window replacements, on and on. Now, let us cut Hartz IV from the picture.

Without Hartz IV, when consumer spending contracts, business loses income and jobs are lost. The Euros from Hartz IV that would have purchased food and meant an income to grocers and paychecks to their employees are no longer there. So, as consumer spending contracts, spending on certain food items will fall along with the income of grocery retailers. Grocery retailers will then defend themselves from the fall in income by laying off workers. When those workers are unemployed, they will either slow or stop spending on clothes, toothpaste, DVDs, gasoline, books, furniture, TVs, and slow their purchase of services, such as oil changes, carpet cleaning, medical, dental, and window replacements.

Businesses who sell clothes, toothpaste, DVDs, gasoline, books, furniture, TVs, oil changes, carpet cleaning, medical, dental, and window replacements will experience a drop in income and will then defend themselves from the fall in income by cutting payroll and laying off workers. As the lack of aggregate demand, falling business income and rising unemployment winds its way through the economy, some small businesses go out of business entirely, mid-sized businesses take a major hit, large corporations downsize, and demand for the jobs of the middle class, skilled and educated weakens and then falters. These workers begin losing their jobs and end up in the unemployment line. Without automatic stabilizers such as Hartz IV in place, consumer spending would enter a free fall, collapsing to the point of an economic depression.


Concluding Remarks

Thus, we see that because of its own mismanagement of the economy, through Hartz IV, the  government employs the unemployed, the poor and the disabled to protect against a major collapse in spending. The government invites them to apply for Hartz IV, checks their application to ensure they’re qualified, then pays them a meager wage that can only be spent on food. While the Hartz IV recipients can only spend their pay on food, others who earn that spending can spend what once were Hartz IV Euros on any goods and services they wish. Those employed as automatic stabilizers get food, those receiving that spending get more than food. In summary, when we think of Hartz IV as handouts to help the poor, we are confirming the age old lie that the German government is powerless against business, and that the federal government bears absolutely no responsibility for the existence of unemployment and poverty. The entire reason why the unemployed, poor and the disabled need Hartz IV is because the German government intentionally placed them in that position of dire need.

So, while Hartz IV is a vital program and, outside of drastic changes to the German government’s fiscal policy stance, should never be cut, we must look for better ways to ensure automatic stabilization of the German economy. Rather than keeping people in a situation of involuntary unemployment and poverty, the federal government must buy up the labor of all who are willing and able to work, but cannot find a job and pay them a living minimum wage. Initiating a federal Job Guarantee will achieve this goal, ending all involuntary unemployment with price stability. It will drive out of the economy all low wage producers, and over time, it will enhance the private sector. For the disabled who cannot work, the federal government must raise their benefits to a level sufficient to ensure a life of dignity. A basic income guarantee is one means to achieve this end. If we combine the Job Guarantee with a basic income guarantee, we end involuntary unemployment, provide price stability, and we go a long way towards ending poverty. We end unemployment and poverty by changing course from neoliberalism to the public purpose.

Just days ago, the German Statistical Office released these data about the rate of poverty in Germany (in German here).

Population at risk of poverty or social exclusion population in Germany almost unchanged

WIESBADEN - 20.0% of the population of Germany - 16.1 million people - were threatened by poverty or social exclusion in 2015. Since 2008, this share has therefore remained almost unchanged. This is the result of the LEBEN IN EUROPA survey (EU-SILC). As reported by the Federal Statistical Office (Destatis), the share of poor or socially excluded people in the European Union as a whole has been significantly higher than in Germany (2015: 23.7%).


As Wynne Godley foresaw in 1992, in one of the most prophetic articles ever written:

If a country or region has no power to devalue, and if it is not the beneficiary of a system of fiscal equalisation, then there is nothing to stop it suffering a process of cumulative and terminal decline leading, in the end, to emigration as the only alternative to poverty or starvation. (Wynne Godley, “Maastricht and All That”, London Review of Books, October 1992)