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The Economy Summed Up: Pay Any Price, Bear Any Burden, to Avoid Creating Jobs

[Note: updated slightly in response to good comments below.]

The political analyst Charlie Cook's weekly column, available by free e-mail subscription here is a real treasure, and even though he's a horserace analyst, it usually offers much more than just the horserace. There's a single paragraph in today's column that I think sums up what we need to know about the economy and jobs better than anything I've read:

In December, the CEO of a California-based high tech firm told me that "there is no amount of overtime that we will not pay, there is no level of temporary services that we will not use, there is no level of outsourcing or offshoring that we will not do, in order to prevent us from having to hire one new, permanent worker in the U.S." As I travel around the country, meeting with business leaders, I hear similar, though less succinct thoughts in almost every sector and every part of the country. U.S. wages, health care, and other benefit costs have gotten so high -- and the press by investors for high stock prices is so great -- that the premium is on wringing every last bit of work out of as few employees as possible, to do anything but incur the costs of adding permanent employees. [emphasis added]

There is a lot to this anecdotal paragraph. First, it puts outsourcing/offshoring in context. It is not a phenomenon to be studied and accepted or discouraged or encouraged in isolation, but part of a larger trend that include various techniques to avoid actually hiring people.

I know of plenty of companies, large and small, as well as foundations and nonprofits where the stock price is not an issue, that are currently obsessed with limiting the "headcount" in just this way. They might spend more on consultants, on training short-term staff, on overtime, or on technology, but as long as they keep the actual number of employees from increasing, everyone's happy, or, I should say, management and shareholders are happy. This is a new phenomenon, different from the management-tier downsizing of the early 1990s, and also different from a recession in which companies are trying to cut short-term costs. Our entire nation is in the grip of Headcount mania.

Second, it strengthens a point that was true in the prosperous period of the late dot-com boom as well as today: We have been consistently invited to give up security in exchange for short-term prosperity. More overtime, more consulting, and more domestic outsourcing mean that some people and their families are doing well -- often better than they would be doing on a salary, and often with the chance to start their own businesses, even if it is doing just the same thing they used to do as an employee. Other examples of the tradeoff: We are rapidly giving up defined-benefit pensions, which ensure a fixed income for life, in favor of defined-contribution plans, which involve individual stock market investments, with the potential for greater returns but more risk. In calling once again for private accounts in Social Security, Bush is asking to do the same with that portion of national savings. We are giving up savings that used to be held in passbook accounts and certificates of deposit, in favor of mutual funds and stocks. These tradeoffs are not all bad. For many people, especially when we have a certain amount of security in the form of skills, or financial support or a home, there is vastly more opportunity in this economy than in the economy of the 1970s. But the loss of security comes at a huge price.

This must be part of the case for government going forward. Government, under the liberal consensus of the New Deal through the 1970s, did not redistribute income. Rather, government's greatest achievement was to create SECURITY -- the kind of security that created the opportunity to join the middle class. Deposit insurance, pension insurance, COBRA (the provision that allows people to maintain health insurance after losing a job), unemployment insurance, etc. -- these were the great achievements of American liberalism. And they are either becoming irrelevant, or completely neglected in the current climate. In the recession of the early 1990s, for example, there was a huge bipartisan effort to ensure that Unemployment benefits were extended again and again, even though, under the budget rules at the time, every extension had to be paid for with cuts elsewhere in the budget. Even though there is no such budgetary constraint today, we have now allowed the average period of unemployment to reach a record, and yet allowed the extended federal program that provides benefits beyond 26 weeks to lapse months ago.

As a candidate, Kerry should begin to talk about the role that government can play in providing the security that people need to navigate the rough waters of the economy. It is a role that Bush completely overlooks, or opposes, but that even liberals rarely talk about.

Third, the Cook paragraph shows that we must do something about the costs that prevent American businesses from hiring. Wages, at the low end, are not too high -- they're too low. (This resistance to hiring must not be used as an excuse to put off raising the minimum wage from its scandalous level of $5.15/hour, since the problem is not with low-wage workers but with workers whose skills allow them to demand higher wages.) The part of the problem that we can solve, must solve, is health care. In addition to the many injustices, inequalities and hassles in our health care system (to the extent that it can be called a system), there is the fact that it is a huge disincentive to job creation. Health care costs can represent up to a quarter of a low-wage worker's compensation, but most of all, they are totally unpredictable and going up rapidly. It means that every time a good (i.e., health-insurance-providing) company hires a permanent employee in the U.S., they take on a totally unpredictable burden, the cost of health insurance.

There is no reason that risk should be the burden of some employers, while other employers evade health care costs entirely. This is why I find the idea of a system in which health insurance is attached to the individual rather than the job so appealing. It not only ensures near-universal coverage, it gives business predictability in their health care costs and requires all businesses to contribute, rather than letting some employers take advantage of others. The New America Foundation has the most detailed approach here, in a readable and persausive paper.

Finally, we should think about how we can change the culture of the corporation so that they feel less pressure from investors on the stock price. I don't expect politicians to make the argument that corporations should feel some responsibility to someone other than their owners, even though the limited-liability corporation is a creation of the government, and in fact another way of providing security so that people can take risks, and therefore the public has a right to ask for certain behavior in return. But even short of that horribly radical idea, companies should feel some flexibility to take a long-term approach, one that might depress the stock price in the short term but lead to a more profitable and vibrant company in the long term. I won't say more about this, because I know very little about it, but it does seem to be part of the story of the economy.

Posted by Mark Schmitt on March 9, 2004 | Permalink


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Dammit, soon you'll want everyone covered for health insurance, Qu'elle horreur!
PS. Please don't come to Canada, we don't need your left wing ideas.

Posted by: old ari | Mar 9, 2004 5:40:51 PM

These are excellent points as it is becoming increasingly clear that the national economy has changed in fundamental ways.

The interaction between this and political concerns is worrisome. The changes necessary require significant heavy lifting. Switching the entire basis of health care, while defensible seems impossible and the type of change you recommend is not the type of thing that can be done piecemeal.

Similarly the rhetoric on social security and Medicare increasingly will focus how the government can provide security when there will be so many more claims on these programs.

Corporate reforms may not be as hard but if we can't get them done in the wake of Enron and Worldcom, when will we (maybe if similar scandals occur during a more sympathetic administration).

I agree with the direction of all of your suggestions. I wish I was more optimistic about how we get there.

Posted by: Stuart | Mar 9, 2004 5:43:56 PM

Decembrist: For some "horribly radical" analysis about the drive for "flexibility" in the name of "productivity," see Capital, v.1. Whatever the politics that has been perpetrated in the author's name, still the best analysis. Even with the recent hyper-financialization of the capitalist economy, the stress there on competition within the business class, the stretching of the working day, the technological re-working of the labor process, the plain old squeeze of working people with few other choices, the creation of "floating" and "surplus" populations, and the political struggles that accompanied the whole global ensemble, remain trenchant and horribly relevant given the telling quote of Mr. Cook's businessman. David Harvey's discussions in the "Condition of Postmodernity," have brought the original up to late 20th century realities. Also, Robert Pollin, a left Keynesian Economist who takes the author of Capital seriously, has made valiant, practical suggestions as to how to make this economy more egalitarian, while still largely working within policy traditions that have tempered capitalism's Social Darwinian soul and preserved its historical viablity: Contours of Descent, 2003; and "Financial Structures and Egalitarian Economic Policy," New Left Review, 214, Nov/Dec 1995.

Posted by: R Wells | Mar 9, 2004 9:48:34 PM

Why do you say that there's a "strong case to be made that the limited-liability corporation is a creation of the government"? The LLC is a creation of the government. No case needs to be made.

Posted by: | Mar 10, 2004 1:37:21 AM

Heresy! The government has no role in defining a limited liability corporation. It is one of God greatest gifts to mankind. 3000 years of tradition can't be ignored. If we take this suggestion seriously and attact the sanctity of the corporation what would happen to the children? Please help fight to maintain our strong traditional corporate values!

Posted by: andrew morton | Mar 10, 2004 2:43:41 AM

Which brings us back to the main issue: the change has come from the culture, from the voter, from the consumer, from the patient, from the worker, from the stockholder, from (ohmygosh)Me.

Posted by: s'Valentine | Mar 10, 2004 11:03:32 AM

If corporations actually felt real responsibility to their owners, that would be an improvement. In fact, CEOs feel reponsibility only to themselves, damn the customers, damn the employees, damn the stockholders.

Posted by: The Brick | Mar 10, 2004 11:05:26 AM

Hillary Clinton made the reasonable point that while her healthcare initiative was a big fiasco,
it did seem to chasten the healthcare providers, because insurance rates were flat for the rest of the decade.

But under Bush, we have runaway increases, and I have not heard anyone provide a convincing answer. Perhaps the HMOs and Big Pharma have an understanding to go for it with Bush?

If rising healthcare costs are a big disincentive to hire, then why aren't we hearing anything from
the administration about controlling costs? They would rather pay the price of rising joblessness instead of violating their dogmas.

Posted by: bob h | Mar 10, 2004 11:44:29 AM

The big reason why headcount is such a big issue: Health insurance costs. Insured people in the United States provide the vast majority of funding for our health care system. The number of insured people is plummeting, as employers cut benefits (e.g. the grocery strike in Southern California, which is about the grocers cutting out health care benefits for their workers) and kick employees off their payrolls in order to re-hire them as no-benefits "consultants". The costs of the health care system are remaining constant, when adjusted for inflation and population growth. What this means is that the remaining employers and employees end up paying much more for health care, since there are fewer of them to pay the costs of the system.

I was interviewed by a start-up company that located in Canada rather than in the Silicon Valley. The reason? They could make their money go much further. Health care costs for their white-collar employees were HALF of what they would have been in the United States, because all Canadian employers (including contracting/consulting companies) are required to purchase health insurance (provided by the provincial health insurance authority) for their employees. That spreads out the costs of health insurance so that the average cost of health insurance is half that of the United States. And the government provided excellent tax incentives to create positions. Each new job had 2/3rds of its salary reimbursed as a tax credit for the first year (up to $100K per job limit if I recall right, though, so multi-millionaire CEO's can't get millions in tax subsidies for their extravagant salaries). They said the combination of all this would allow them to make $5M go as far as $15M would go in the 'States for that critical first year that is always the hardest part for a new business.

Has Bush proposed anything like this Canadian policy? NO WAY! The result is that Canada is adding tens of thousands of jobs every month (the equivalent of adding hundreds of thousands of jobs every month in the much more populous United States), while the only jobs added lately in the United States are government jobs.

Has Kerry proposed anything like this? Hmm... somebody else is going to have to go wade through the turgid policy proposals on his site, it's time for me to go to work :-}.

Posted by: BadTux | Mar 10, 2004 12:01:29 PM

The biggest problem employers have with the healthcare system is that they have to pay the same price for a worker that goes to the doctor once a year, eats healthy food and excercises regularly as they have to for someone that goes to the doctor for their every sniffle, eats junk food for every meal and sits on the couch all night after work. If health insurance was structured the way auto insurance was and people's premiums were a reflection of their lifestyle choices costs would be much more acceptable to nearly everyone. The fact that there is a "system" that has one fee regardless of how people use it not only encourages people to abuse it but it creates a huge opportunity for healthcare providers, pharmaceutical companies and Pharmacies to charge whatever they want since all their customer will see is the $10.00 co pay.

It's absurd (ABSURD!) to blame these problems on Bush and really knee-jerk to then conclude the only answer is to Nationalize healthcare, i.e. Canada or Hillary.

It occurs to me that this is all rather convenient for the left because it gives them the opportunity to appear to be on the side of business and the worker at the same time. The reality is, just as big a part of the equation for companies when hiring employees is TAXES. For every penny an employee has to pay in taxes the employer has to match. The more the employee gets paid, the more they are taxed and then it is the more that the employer has to pay the government for the priviledge of employing them. Will the left then now concede (if they are willing to blame this "jobless" recovery on the cost to hire domestically) that the lower the tax rate the better it is for employment? Some how I doubt it. Kerry certainly wont as he favors repealing Bush's tax cuts. How likely do you think Kerry will be to address the issue of spiraling healthcare costs and abuse when part of the equation deals with individuals making bad decisions and or engaging in risky behavior? Not very likely at all.

Bush has already addressed half of the problems preventing new hires with his tax cuts and I firmly believe the second half of the equation, helathcare, WILL become a focus of the next term. I can guarantee you his solution will not be to socialize healthcare or to "Stick it to Big Health" so I fear many of you will still not be happy but at least the country will be that much better off.

Posted by: Barnabas Sackett | Mar 10, 2004 1:36:45 PM

Barnabas, taxes do not figure into the decision to keep headcount low. Paying time-and-a-half (overtime) for current workers costs more than additional workers at straight time, but is cheaper than paying health insurance costs for additional workers. Paying regular salary is cheaper than paying regular salary + 20% (the slice the consulting company takes off the top to "outsource" the employee back to you that you just laid off), but paying regular salary + 20% is cheaper than paying regular salary + health care costs. I've had the privilige of working all these numbers while writing up the business plan for a start-up company. They very much discourage someone from hiring additional people.

In addition, the United States is a very low-tax country compared to most countries. Of the OECD nations, only Mexico and South Korea have lower taxes as a percentage of GNP than we do. If taxes were the problem, then Canada would not be adding jobs at the same time we were losing them. This is also why the Bush tax breaks have not had the salutory effect that was hoped for. People motivated to hire by low taxes have already done their hiring. Once I buy four gallons of milk for my refrigerator because you were selling them to me 4 for $1, you can lower the price to 1 penny and I'm still not going to buy more milk.

Finally, regarding spiralling health care costs, Switzerland and France have the best health care systems on the planet. Both spend about 20% less on health care than the United States, and they have been spending about the same percentage of their GNP on health care (10-12%) for the past 10 years (the United States spends approximately 15% of GNP on health care). That 20% is, incidentally, the average profit margin for a private health insurance company in the United States last year. It is only in the United States that health care costs are spiralling, and it's because we're the sole nation amongst 1st World nations that does not have a government-sponsored single payer health insurance company capable of properly spreading the costs of health care amongst all taxpayers, not just white collar taxpayers.

Posted by: BadTux | Mar 10, 2004 4:35:50 PM

And don't forget -- Congress is making it easier to save costs using overtime by "outsourcing" millions of workers from entitlement to extra pay for overtime.

Posted by: Upper West | Mar 10, 2004 7:20:38 PM

BadTux, Thanks for the analysis as it does make things clearer for me. But as I said, Taxes are half of the equation and Bush has already addressed it. If, as you say, companies that are motivated by taxes have already done their hiring (which it appears that they have done) what will Kerry's proposal for a sharp increase in taxes do for the companies still looking to hire? The answer is it will have a negative affect.

Without question the healthcare issue still needs to be addressed and I think you will find that there are a lot of people on the right that will agree with many things that you and the Decembrist have pointed out. I would have no problem with a single governing body for healthcare insurance that would allow for portability and lower fees. I have heard many on the right say as much as well. I'm very leary however, to give the government complete control over the system. Any such plan needs to allow for healthcare providers and pharmaceutical companies to continue to innovate (and yes make a profit) and the government has a very poor track record with this. I don't want the american healthcare system to become the same low quality that it's education system has become and I don't want my doctor to be micromanaged by bureaucratic
red tape. If their was a single governing body that audited healthcare providers' and pharmaceutical companies' and pharmacies' markups and punished those that abused the fact that insurance will pay whatever is charged I'd be all for it but you don't have to look any further than the VA hospital system to knoe that making a hospital another government institution like a public school is a recipe for disaster. Poor service, long lines and a constant revocation of benefits are all products of a system with no incentive for innovation or profit just as inflated prices and zero accountability is a product of a system that hides costs from its consumers.

I think a balance can be struck but we will need to be very cautious so that we do not destroy what it is we want to preserve.

Posted by: Barnabas Sackett | Mar 11, 2004 8:19:18 AM

Does anybody remember the book 1984 by George Orwell? Where the protagonist foolishly hoped for the rise of the proletariat to take down Big Brother?

I have become so cynical over discussions about making major changes to the health care system. Which would involve unseating the glacially entrenched health care organizations and their powerful lobby broups. Every time I see discussions such on these that talk about changing the system, I remember that book by Orwell (For those who don't know, the proletariat never rose and Big Brother won.)

The talk of health care reform comes up *every* election. It is a political football that is tossed around every election year and nothing is ever really done about it.


Posted by: Jerry Wilson | Mar 11, 2004 8:33:07 PM

Barnabas, the health system is already strangled by red tape. If you don't experience this, then you are fortunate to be able to afford a better plan than many. Poor service? Constant revocation of benefits? These are happening *today*. Already.

And just because one government institution is bureaucratic (e.g. Veterans hospitals) doesn't mean that all future government institutions will be similar. This is a logical error, it is an ingrained anti-government reaction.

Posted by: Buford P. Stinkleberry | Mar 11, 2004 10:16:31 PM

>Barnabas, the health system is already strangled by red tape

It is amazing how much faster the European single payer plans pay back isn't it. Makes one wonder what merely the economic cost of slow paying in the health system is here in the US.

Posted by: Stirling Newberry | Mar 11, 2004 10:26:55 PM

Buford, of course it is already strangled with red tape. If it wasn't we wouldn't be having these discussions. But please show me a government organization that runs efficiently. A logical error is to do the same thing repeatedly and expect different results.

Jerry, if you remember correctly, Big Brother was not a series of corporations it was an entrenched, intrusive government that brutally micromanaged every aspect of Oceana's life. It was written as a warning against the collectivist state and would be government planners. As F.A. Hayek said, there is little difference between the monopolist and the socialist:

"Our freedom of choice in a competitive society rests on the fact that, if one person refuses to satisfy our wishes, we can turn to another. But if we face a monopolist we are at his mercy. And an authority directing the whole economic system would be the most powerful monopolist conceivable."

So while I take your point that we are forced to either pay the price of healthcare or die, I hope you would at least agree that the last thing we would want to do is put the entire healthcare system under the control of the government where we would have no choice whatsoever.

But dont lose hope, 1984 was just a book. Eastern Europe (the true target of the Author's criticism) has thrown off the chains of Soviet Big Brother. Unfortunately it appears that America is considering fitting those chains for themselves.

Posted by: Barnabas Sackett | Mar 12, 2004 6:35:34 AM

" Unfortunately it appears that America is considering fitting those chains for themselves."

Why is it that people who preach about the free market and the joy of capitalism do so much free preaching on a medium created by government?

Posted by: Stirling Newberry | Mar 12, 2004 12:04:00 PM

Barnabas: the vast majority of Americans *cannot afford* "turn to another" health care plan unless their employers decide to provide a choice for them. This choice in turn is largely dependent on what choice the employer can afford.

I'm a case in point--I work for a small business that changed insurance providers about four times in as many years. The third time we changed, it was to have a multinational corporation take over our human resource department. This would give us "more choices," proclaimed the company reps. We would have the clout of being included in group plans with thousands of other workers, which would also cut our health costs. We all eagerly signed up.

One year later, the "choices" vanished and we were all transferred to a bare-bones PPO with huge deductibles, just like the two initial plans we'd had. I am now looking forward to a trip to the maternity ward with a $1000 deductible and lord knows what else not covered. Bills for ultrasounds and prenatal care keep coming in--and my husband's job is too new, after 9 months of unemployment, for him to be taken off my plan.

So where are my "choices" in this "free" market?

Posted by: hesprynne | Mar 12, 2004 1:35:02 PM

Hesprynne, Didn't you read what I wrote? I completely agree with you. The current system is completely monopolistic. You have to pay the price they ask or you die. My point is we shouldn't rush to move from a system with little choice (now you could look for another job with better benefits) to a system with no choice (but to leave the country).

Stirling, "a medium created by the government"? Do you mean you actually believe Al Gore is the father of the internet? Or are you refering to the defense department's ARPANET. (Though I doubt you'd credit the defense department with anything good.) The internet as we know it was created by programmers and networkers all over the world and is run from largely privately owned hardware- why do you think they haven't taxed it yet?

Posted by: Barnabas Sackett | Mar 12, 2004 2:56:44 PM

I dunno if I'd go anywhere near defining COBRA as one of the great liberal achievements. I asked about it when I left my last job before moving here, and my HR person told me she'd give me the paperwork but she could almost guarantee that I'd never use it. Why? COBRA is too expensive--more per month than my rent in either NC OR California. The continuation of health care could be a benefit IF somebody had an existing or near-terminus condition (like pregnancy) or if somebody could guarantee that they were getting another job right away, and they'd have that income, but for me, with barely three thou to move me coast to coast and tide me over for the four months to my next job (which I didn't have lined up, so it could have been longer), COBRA was an impracticality.

BTW, I lived in Canada for three years and was covered for part of that time under my work visa. The health care I got was excellent and personal. I'd adore being able to not worry about my friends and loved ones if we had a health care system like theirs. (At least the Alberta branch.)

Posted by: PiscusFiche | Mar 12, 2004 5:53:34 PM

There's another reason not to hire more people. It's called "productivity." Which is related to "inflation," through some kind of economic witchery, which I will not try to explain, since I don't really fathom it. Being, you know, a layman, and stuff.

Posted by: John Lyon | Mar 12, 2004 6:41:19 PM

Ignore the obvious.

In California I asked a store owner whether he was hiring. Not with a total 18% (including California's workers comp) total tax on minimum wage.

Liberals should be ashamed of supporting such nonsense, no, they should be jailed for genocide.

Posted by: Matt Young | Mar 12, 2004 10:58:21 PM

This quote (about not hiring US workers) showed up in Barron's today.

Posted by: mike | Mar 13, 2004 1:23:30 PM

In Florida, thanks to Jeb, I couldn't even change insurance plans. When Aetna decided to raise my group HMO premiumns from $804/month to $1472/month, I looked elsewhere.

Blue Cross for $554/month. Then they asked me about pre-existing conditions. My daughter(age 8) was born with spina-bifida. We have had insurance for her entire life.

Thanks to Jeb he changed the laws. It used to be as long as you had insurance and did not let it lapse for over 30 days you could change insurance companies. Basically, if you took care of yourself you could search for a better insurance plan.

Not anymore. Jeb changed that law. They can now deny you regardless of your previous insurance converage. Blue Cross denied us because of my daughter's birth defect.

Meanwhile, as a IT consultant, 6 years at Siemens ICN Lake Mary, FL I was one of 20 Americans ordered by corporate management to train our foreign replacement workers. Our replacements are Tata Consulting India employees, holders of congressional H-1b and L-1 work visas.

We were told our replacement workers get the equivalent of $1,000/month paid in Indian rupees and $2,000/month paid as expenses to work in the USA.

Their salary is 2/3 the cost of my medical insurance.

It's no wonder corporate America isn't hiring Americans. Just cost too damn much to be an American.


Posted by: Mike Emmons | Mar 15, 2004 3:56:04 PM