It’s time for a repeat – this one from 18 months ago, but it still needs to be said. Over and over.
It’s one thing to complain about the economy – anyone can do that. But what should be done to fix it? Longtime readers know that I believe that our economic situation is a Managed Depression and that only a fundamental restructuring will end it. This is my Six Point Plan to do exactly that. It describes action by the Federal Government, which is to say that it is a political platform – meaning it is incomplete and taken from a certain perspective. If you have questions, please follow the links.
Generational Shift [Short Term]: The best way to create jobs immediately is a one-time program allowing workers over a certain age to retire with full Social Security benefits and access to any retirement savings such as a 401k tax-free. This would turn the economy over to the next generation with their different skills and energy – and currently very high unemployment.
The cost of this program would be $48B per year or about $240B over 5 years, but most of that cost might be saved through reduced unemployment benefits.
Implement Simpson-Bowles Framework [Medium Term]: Congress must find ways to manage the budget, which is what the framework proposed by Simpson-Bowles is all about. This is important to the general economy in part because it would instill greater confidence but mostly because the centerpiece of Simpson-Bowles is dramatic tax simplification. It also calls for a reduction in military spending, which would free up money for other critical spending that has more potential to stimulate the economy (see: Infrastructure, below).
Reduce Overhead per Employee [Medium Term]: Wages paid are not the cost of workers – they also carry overhead costs that include health care, vacation, sick pay, pensions, training costs, recruitment, and 7.62% FICA tax. Every HR department is overhead needed to manage employees. The exact cost of this overhead per employee is not known, but small businesses seem to run 30-40% and larger companies, especially manufacturing, 60% and more – GM used 105%. It appears to average around 50%. That means that for every worker making $20 an hour or about $40k per year the cost to the company is actually $60k. A national initiative to quantify the overhead per employee, analyze sources, and then reduce it by changing practices should have a target of reducing overhead by a third. If this amount were split between corpoarate profits and hiring more workers there would be no unemployment.
Security Transparency [Medium Term]: Many obscure securities are not traded in public. Precise figures on holdings are hard to come by as well, particularly with Credit Default Swaps (CDS). This network of shady investments has made risk management difficult, threatening long term stability in finance and diverts money away from investment in more tangible companies. The simplest regulation of all is to require that they be traded openly and reported – and that all finance companies be a part of an insurance pool modeled after the FDIC. This won’t help the economy directly, but will improve investor confidence and possibly redirect investment.
Challenge Grants [Long Term]: Our economy will not transform until we have a handle on our balance of trade, and the single biggest part of that imbalance is our energy imports. A series of Challenge Grants to develop key technologies that will bring us first energy independence and then sustainable energy is critical to our long term economic health. The same mechanisms might also be useful in transforming health care, reducing overhead per emplyee. A tremendous amount can be done in five years with just a few billion dollars through challenge grants, at least in areas where technology is important.
Infrastructure Investment [Long Term]: The US has a 1-2 trillion dollar deficit in infrastructure, meaning that we need to invest a lot more to get our roads, rails, pipes, dams, and so on up to “good” condition. Exactly how this would be paid for is unclear, given that this is typically either a state cost or something shared 50-50 with the feds – and states are nearly tapped out. But an investment of a trillion dollars over 5 years would provide some jobs in the short term but, more importantly, give us an opportunity to transform key parts of our economy that include transportation. This is extremely expensive but essential. A solid method of tackling this deficit must be developed and implemented.
That is my Six Point Plan to transform the economy. It contains job creation in the short term, growth and reform in the medium term, and long term fundamental transformation. But it’s far from a complete list of all the good ideas.
I’d like to know your ideas for transforming our economy and getting out of the Managed Depression – please share them in the comments, and thank you for sending this out to your friends!
Barataria - The work of Erik Hare 
Overall, I like the suggestions you’ve presented. I don’t know enough about Simpson-Bowles to argue on that point, so I will hold off there until I do my research. As for generational shift, I fully agree, so long as your requirements are met: full Social Security benefits and tax-free access to 401K/403b investments. Security transparency would provide greater confidence in the market. Challenge grants tied to energy independence that would also allow us to become a net exporter of fossil fuels would be a boon to the economy, and infrastructure investment is critical now for the future… particularly if we look to the future in our building, such as constructing light rail between the metro and Rochester instead of simply reconstructing and beautifying what already exists, which was my observation of what occurred with the last round of so-called “stimulus” money.
Where I find it difficult to agree with you is on the end result of lowering employee overhead. One reason I find this difficult is because I believe it is absolutely imperative to substantially increase the capital gains tax in the near future. I think you’ll see that my argument regarding capital gains will come back directly to the topic of overhead, so bear with me. As for capital gains, these are essentially personal investments; although businesses have capital gains as well, but the key concept of capital gains coupled with a low capital gains tax rate is that it allows either the business or the individual investor to reap great economic rewards with little pain. This money is seldom reinvested in the business, even where it may have been tied to a business investment. It is usually used to deepen the pockets of the already extremely wealthy. I digress by bringing up Charles and David Koch; however, I’ll return to them with respect to lowered overhead, too.
The Koch brothers have been truly amazing in their ability to increase personal wealth rapidly, but I don’t believe it has anything to do with their business acumen or any brilliant business strategies they have employed. First of all, they inherited their original wealth. True, they did well with their inheritance, but not so well as to justify their nearly ten-fold increase in wealth during the past decade.
Without citing to the exact figures, I can’t recall whether they have actually reached the multiplier of 10 or not, but I do know that neither had a net worth exceeding $4B as of the turn of the new century. As of the date of this year’s publication of the Forbes 400, the Kochs had each added $6.31B or a combined $12.62B to their net worth. Again, this is not because they are more brilliant than the rest of us. I’d like to believe I could do the same if I started off in their circumstances, and here’s how I’d do it: I’d invest heavily in long-term investments with a strong rate of return. In fact, there is one company in which I hold investments that could provide me with $55M annually for a mere $1B investment. Additionally, as that company increased its stock value by 25% last year, I could cash out with another $250M in my pocket. All in all, a 30.5% return on my initial investment. Wth that $305M taxed at only 15%, I still come out with a hefty 25.9% total rate of return because I am not taxed on my intial $1B investment. I am taxed only upon my capital gains. Keep in mind the above is no hypothetical either. I actually own stock in the company I have not named and can assure you that with an investment of $1B, I could have earned that 25.9% net return.
Only very wealthy people can play this game though to such an extent. And the Koch brothers excel at this game. They don’t reinvest their capital gains in their business, or if they do, they certainly are not increasing either wages or hiring more employees. They are simply weighing down their own already heavy pockets. The rest of us are bound to lose because even the next 1% down the rung from the “filthy” rich, cannot afford to invest substantial enough sums to reap those kinds of gains. And, the Koch brothers did have a net addition to their wealth this past year of almost exactly the 25.9% figure I cited above.
Damn, I just told you what I could have done had I had an extra billion dollars hanging around, and you know I’m not that smart, so I think I have proved my point that the extremely wealthy are at a tremendous advantage right now, yet they feel “entitled” (how dare I use their word!) to pay the lowest capital gains rates in recent history, claiming as their argument that any increase in their taxes will cause them to have to lay people off. Really? I’m not buying that. They may not be any smarter than I am, but I’m not stupid either. If I start laying people off simply because my personal taxes have increased, then I am putting the future of my business at risk, and there is no way I want to do that if I am Charles or David Koch.
So, now we’ve come full circle to your premise that reducing overhead will lead to greater levels of employment. Not if I am Charles or David Koch, it won’t. I’m going to expect my people to do the same work, or maybe more, for the same wage they have always earned, and I am going to put as much of that cost savings as I can back into my own pocket. I will be especially motivated to do this once my capital gains taxes have increased to the 20 or 22.5% they were prior to the initial Bush tax cuts. And raising capital gains tax is a must unless we want to watch the Kochs increase their wealth by another 25 to 30% each year while the rest of us stagnate. It’s not about jealousy. Its about doing what is right. However, once we do what is right, we can hardly expect the owner class among us to do anything other than what they have always done: increase their own wealth.
Drew, you may have killed the comments section. 🙂
The premise is that small businesses that could use extra help because they are growing are slow to hire people for many reasons – and much of that can be attributed to overhead per employee. Some of that we can’t change much – training, etc – and some of it we might be able to. Stagnant companies will indeed just pocket the difference, but a bump in profits on Wall Street will have a bit of a ripple effect and lift everyone.
Including a rise in capital gains taxes – ie, making big investments less liquid – is very big and I am thinking that over. You may be on to something here. The key is to have stable pools of capital for investment, not capricious gamblers looking only at one quarter’s P&L.
I’ll think about this a lot more and get back to you. We have something to discuss here. History, however, shows that high capital gains rates correspond to higher growth, although I believe that good times support higher rates (ie, coincidence does not imply one causality over another!).
I don’t have anything to add on capital gains rates other than I have never understood why they should not be the same as any other income. If you want to change how they are taken out there are many ways to do it and you don’t have to use income tax code to do this. Taxes on trading for example would end the “microtrades” and could be used to encourage long term investing held for years which would be good all around.
As for your plan it is a good one but it is still missing education and retraining as a key component. There are many federal programs in place already and these may be adequate but it seems that this should at least be in the mix.
The infrastructure improvements is the one that I do not understand but I guess it has to do with the budget deficit. This is the most obvious and easy one to implement and you would think each congressperson would want their share of pork. The needs are there for anyone to see and it would put people to work. Maybe construction jobs are not all the same but when there is little home building you would think that repairing streets would keep the same people employed?
With you on the trading tax completely. That probably does make more sense in the long run. A simpler tax code that is more or less flat would generate a lot of money with a fairly low top rate, and combined with a trading tax that goes to zero after, say, five years might be just the ticket.
I’m not sold on any new education programs just yet. There are a lot of things out there and they are generally means tested so I think they work pretty well. But I have nothing to add at this time – this is a list of new things that I think should be done (which is to say, should have been done around 2008, but whatever).
There are unlimited number of ways that we can create jobs. I know you have a reason you picked these and I’d like to hear more about that.
This is not about creating jobs – this is about getting a handle on the restructuring that is necessary to create a new economy. It’s based on the theory that at the end of a Depression / Winter / whatever-you-call-it the economy you go into is a very different one than the one that failed at the start. We can’t entirely say what the next economy will look like, but we can do things that help it along and remove barriers to getting it started. That’s what this is about.
It’s not really about jobs, although infrastructure development would create a lot of jobs right away. This is about a transformation.
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