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.

Comments

[Barnabas Sackett]

Mort Kondracke from yesterday.

http://realclearpolitics.com/Commentary/com-3_15_04_MK.html

[Ken]

This anonymous source is becoming famous, as others have noted. Taking as established that he is a knowledgeable source, serious, and engaging in only mild hyperbole, this is still what is called an anecdote. Decembrist's supporting anecdotes are even vaguer. In my experience, when capable people look at real statistics, statements like this tend to vaporize a high percentage of the time. I agree that the current U.S. health care system is broken and in need of major change. I would hate to see that cause damaged by latching on to an alleged trend that might not exist.

[hesprynne]

Barnabas--perhaps I did misunderstand what you wrote. I still have to maintain that I have doubts that the market is going to provide what I need for a number of reasons. My options for finding another job, as you suggest, are quite limited--I am pregnant right now, about 5 1/2 months along and showing it, and therefore highly unlikely to be seen as a good job prospect elsewhere for some time to come. Since my husband is still trying to get full-time hours where he is, alternatives to my current plan are few on the ground. (Yes, he could change jobs but darn it, this is Michigan and he just got the one he has...) Sure, we could buy a bare-bones policy but how much would that cost? Can we afford just catastrophic with a baby on the way? Even if by some miracle someone else with better benefits wanted to hire me now, how long would it take for me to qualify for insurance?? Or should I just throw up my hands and quit my job so our child will qualify for state insurance, even if we don't?

So I ask again, where are my choices? The fact is that the US market has not provided me in my current situation with any tenable ones. My sister-in-law's situation in Canada looks enviable to me right now *because* of that.

I will give you all the credit in the world for not saying anything about my choice to have a child, though. You answered my question seriously and I appreciate that.

[BadTux]

Regarding hiring: Any businessman who would hire because of low taxes is an incompetent. The only time you should hire is when demand forces you to hire. Otherwise you're wasting money and not properly serving your shareholders' interests. Businesses are not charities. They do not have people on payroll just to have people on payroll.

If taxes rise, you can't fire anybody unless demand decreases. Remember, if this is a well run business, you already have the minimum headcount needed to meet demand. So what you do is raise prices to pass on the taxes. Now, THIS might cause demand to decrease, but it depends upon the elasticity of demand for the commodity you sell. For example, if the price of a hamburger rises from $2 to $2.05 at every hamburger shop in town because taxes went up, I'm not going to eat fewer hamburgers. I'm going to shrug and pay the $2.05. In this case, the elasticity coefficient is very low -- a 2.5% rise in prices has a caused a negligible drop in demand.

If there was a large rise in taxes there'd be a problem, but nobody's proposing that. The United States had the lowest taxes amongst OECD states under Clinton (except for South Korea and Mexico), and still does. Raising taxes back to where they were under Clinton would still give us the lowest taxes in the Western world. If we can't compete despite having the lowest taxes, we don't DESERVE to compete.

Now, let's get back to reality: John Kerry has not suggested hiking taxes on low-wage workers or hamburger restaurants. He has suggested hiking taxes on high-wage workers, those with incomes above $100,000/year. Now, most folks in that tax bracket spend around 2/3rds of their income, and invest or save the remainder. If taxes are raised on them, they are unlikely to reduce their spending -- they have a lifestyle to maintain, after all, and much of that spending is tied up in things like their mortgage and their pair of matched Jaguars. Instead, they will reduce their investment activity. Now, if we had a shortage of production capacity in the world, that'd be a disaster. But we don't. We have surpluses of virtually everything except health care and energy. The plain fact is that raising taxes on those with an income above $100K/year (let's say $150K/year for a family of four) will not decrease demand, and thus will not cause a loss of jobs at Burger Delish. All it will cause is a temporary reduction of investment income, offset by the fact that the government is no longer sucking up money for government bonds.

All in all, it's a wash. Government spending is government spending, whether it's sucking up money via selling bonds or sucking up money via taxes is irrelevant, the money is still gone. The only way to really change the equation is to reduce government spending, in which case less money gets sucked up by bonds or taxes. (And "sucked up" is a bad term to use here, since that money gets spent and pays the salary of government workers and contractors who return the money to the economy as demand for goods and services, but you get the gist, I hope).

Finally, regarding a well-run government bureaucracy: I suggest looking at Medicare. Suggest to any old person in America that they give up their government-sponsored single payer insurance program in favor of free market solutions. I dare you. Once they're finished beating you to a pulp with their cane or walker, they'll explain to you that the free market doesn't serve old people when it comes to health care (and arguably doesn't serve anybody over age 39, for that matter). They'll also explain to you that the Medicare bureaucracy takes out less than 1.5% of total payments for administrative overhead, vs. 20% for private insurance companies. In other words, government bureaucracy in this case is 1333.3% more efficient than private enterprise. (That's one THOUSAND percent more efficient!). And the arrogance of these insurance companies is astounding. You don't get to vote for them (unlike the politicians who make the rules about government insurance programs). You have no recourse if they refuse to pay for necessary medications or care, other than to die, for the most part -- you cannot appeal to your local Representative, he has no ability to influence a private company, and by the time a lawsuit wound its way through the courts you'd be dead. Compare/contrast with the Medicare situation. When the government makes a move that would hurt Medicare beneficiaries, the attack dogs come out, and after Congressmen's phones ring off the hook and mailrooms groan with letters from constituents, that move is history.

Yet despite that, Medicare is still more efficient than private insurance. Imagine that.

We have plentiful experience with a single-payer government sponsored insurance company here in America. . Medicare works. It works well, for the most part (the biggest "but" being prescription drug coverage, but that's coming). People who say that a single-payer government sponsored insurance company would be a disaster need to be caged with a dozen rabid AARP activists armed with walkers and canes, and beaten to a pulp -- which is what would happen if said person dared suggest to these old people that Medicare should be eliminated because "a single payer government sponsored insurance company would be a disaster".

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