The Road To A Post-Corona Boom - Part 1

The man with the white tipped cane stood up. As everybody turned towards him, the woman next to me leaned towards me and whispered, “No matter the forum, he always says the same thing.”

The man had a simple complaint, one he had delivered time and again. He wanted to work, but as soon as he took in a paycheck, no matter how small, he’d lose the benefits he collected as a blind man. He wanted to preserve his benefits, even if he got a job.

He wanted to contribute to society, without threatening the safety net he needed to survive.

As I look at the economic catastrophe sweeping the world, I find myself reminded of that man.

Photo by Science in HD on Unsplash

The U.S. unemployment rate, including those “absent from work due to COVID-related reasons” is already close to 20%. Vast numbers of people are people are being kept on payrolls despite a lack of work. The actual ‘unemployment’ rate is far higher than is being reported.

Most focus on the economic hardship. Jobs are lost, rent and mortgages can’t be paid, investments have vanished, bankruptcies are spreading. In this environment, our first challenge is ensuring people’s basic needs are met. We can produce food and we can subsidize rent and mortgages.

Even if we succeed in these areas, we’ll be failing to address what I would call the spiritual hardship. As that blind man made clear, resources are not all that matters. Jobs are not just a way to create or acquire resources. Jobs can give those who have them a fundamental sense of meaning, purpose and, ultimately, fulfillment. With a productive job, you are contributing to society. You are contributing to something bigger than yourself.

In the aftermath of corona, even the best subsidy and resource distribution schemes will leave tens of millions lacking the opportunity to lead fulfilling lives. Just as with the blind man’s subsidy, those distribution schemes are already keeping low-skilled workers at home. Impressive unemployment benefits are making workers reluctant to return to work. In this environment, some are suggesting boosting the minimum wage to help those workers through these challenging times. Of course, in an environment where there is less opportunity to create value, higher minimum wages will just price more Americans out of the workforce.

On our present course, lower skilled workers may justifiably expect a decade or more of jobless despair.

Thankfully, even now, there is a way that we can emerge from this crisis stronger than we’ve ever been before. The answer lays in fundamentally restructuring our tax and welfare systems.

The US worker faces a major economic challenge. Americans, even with the collapse in employment rates, cost too much to employ in low-skilled jobs. The minimum wage in California is $12.00/hr plus benefits. A Chinese employee costs a fraction of that. If you can offshore your jobs, you do.

For the individual employer’s perspective that makes complete sense. But if an American is left unemployed because of that decision, the government (which ultimately collects its money from Americans) can end up paying the unemployed American as much as the company is saving in direct costs. A study in the Midwest showed that when a particular local industry was bankrupted by lower cost overseas competition, the local governments in the one affected state paid more in subsidies than all U.S. consumers combined saved from the cheaper foreign product.

With 4% unemployment, all of this was largely academic. Few people were being left unemployed despite the cost of employing them. Americans were used for higher value (and higher paying) roles while lower-cost labor increased overall productivity and even created higher-end opportunities for Americans.

However, with employment approaching 20%, the picture changes. There is suddenly a need for a system that gets people into the workforce, rather than having potential jobs offshored to low-cost countries because Americans can’t compete due to government mandates. The answer is not to force jobs onshore; this just makes American companies less competitive. Instead, we need to make the entire American system more competitive.

This can be done by combining two simple principles:

1. Get rid of the minimum wage, so Americans are not priced out of work. So long as they are interested and can do the work, local employees will be the first option for many American manufacturers.
2. Boost very-low incomes with public funds so low-paid Americans can still get by. As the bottom fifth of Americans received an average of $45,389 in annual government transfers – prior to the Corona virus – this might not require any additional outlays.

With this approach, many Americans would have fulfilling work and would be able to contribute to society even as they received subsidies.

The simplest short-term way to execute this would be a progressive payroll tax with a negative initial rate. By having a smoothly increasing rate there would be no point at which people would be discouraged from earning more. Of course, this approach keeps our overly complex and discouraging tax system. In the longer term, a far more radical approach – a progressive sales tax – could be implemented that would offer numerous additional benefits.

The concept is relatively simple:

1. Items would be priced at the full taxable rate
2. Every taxpayer would have their spending accounts (checking, credit card etc…) linked to the social security numbers of themselves and their dependents
3. A taxpayers initial spending in a period would result in the government depositing funds in their spending account. For example, the first $100 in spending might see a $90 deposit – refunding the tax paid and providing a subsidy to those with low spending. The second $100 would see a smaller deposit and so on until the deposit disappears.
4. Tax collection would occur on all incoming funds. By default, a percentage off all revenues, whether payroll or sales, would be siphoned off at the top-line tax rate.
5. Finally, spending could be classified as business spending. In these cases, taxes on spending would be refunded. Businesses, of course, would have no subsidy available, their lowest rate would be 0.

The benefit of this approach is its radical simplicity.

1. All other taxes – from income to payroll to sales tax – would go away. The calculation of income would go away, together with almost all the arbitrary complexity that that entails.
2. This system could also replace almost all other welfare systems, from food stamps to section 8 to rent control. One remaining form of welfare would be a basic payment to those with radical disabilities, such as the blind. Even if they had a job, that subsidy would remain.

There are a number of other attractive attributes of this approach.

Auditing would be by transaction, not period. Aside from non-electronic spending, no filings would be necessary. And because the bottom tier of spenders would be most eager to report their income, trickle-up accountable would be possible. An individual might pay another high-earning individual ‘off-the-books’ but at some point, those individuals will spend funds with cleaners, car detailers, gardeners etc… who have a strong desire to report. When that happens, the trail of undocumented revenue would be traceable back up the chain. If high-earners chose to compensate bottom-level earners for their lost subsidies then the high-earners would see little benefit to their tax evasion while the lower-tier earners would only be able to spend funds with other tax evaders (who would not report the revenue).

From a broader perspective, this sort of tax and welfare system would open the door to fulfilling work to low-skilled American workers. Government-mandated costs of employment – which drive US companies to overseas production – would vanish. Instead, so long as American labor is interested in the work, Americna workers would be in the mix to actually do it.

Perhaps most importantly, this is not a recipe for very low-income work. There will still be a market for labor and a limited supply of it. Wages rose in Mexico, Taiwan, Japan, Korea and China because prosperity, not government policy, drove up the value of those countries’ workers. The same forces would continue to apply in the US. As an example, Switzerland has no minimum wage but 98.7% of full-time employees make over $37,000/year – after tax.

As we look at the massive unemployment brought on by the coronavirus, the economic displacement gives us an opportunity to trigger an economic boom within our own borders. Inner cities with minimal employment (and all the social costs of unemployment) could see a rebirth. On-shoring could grow from a trickle to a tsunami. And, through it all, the bureaucratic costs of doing business in America could be slashed.

The blind man wanted to contribute to society, without threatening the safety net he needed to survive.

In these trouble times, where both our contributions and our safety net are threatened, his vision can inspire us all.

(Next: reimaging health care)

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<< Read More: The Road To A Post-Corona Boom (Healthcare) - Part 2