Economic Recovery: A Financial, Political, and Feasible Solution to the US Economic Situation

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By Clayton M White
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Expert Author Clayton M White

This paper was prepared in order to outline key factors, and the writer’s perspective, of the current economic situation in the U.S., and provide a potential solution that might improve that condition. This potential solution offers a method to reinvigorate spending activities among individual citizens; increases the workforce; allows for a small reduction in the cost of government; and provides the argument necessary to shift the current tax burden, with no opposition.

One may claim the solution offered can be viewed as a “Keynesian economics” approach to addressing the ills of the economy. However, that approach has been proven, historically, to be a practical one. Government intervention is desirable, expected and – in view of a clear lack of alternative actions – necessary as the catalyst for recovery. However, this does not mean wholesale government spending. Our current economic situation requires austerity measures as well – and government must take that lead also. This solution therefore proposes that government, as the provider of leadership in the reinvigoration of the economy, is the only viable approach.

Situation

The U.S. economy is faced with a basic problem; simply put, there is not enough money flowing – which is causing a near shutdown of the economy. Shrinking markets, no real growth in the economy, uncertainty, restricted lending, high unemployment, economic problems in Europe, national debt, and a severe downturn in the traditional business sectors that have, in the past, driven our economic prosperity, have all caused a severe drought in the availability and free flow of funds throughout the economy. When combined with the need of government to receive revenue, and in turn use that revenue to stimulate activity, we face a difficult and challenging environment.

In the past, the ability and willingness of government to provide this economic “spark” was all that was needed to jump start an economy in this condition. Without that ability, government is left searching for that jump start without further exacerbating an already tenuous situation. History tells us that the business sector, alone or as the “lead” in this effort, is not a realistic possibility. With a current unemployment rate in the 8.0% – 8.6 % range, the private sector cannot support the hiring of additional workers to reduce that rate to an acceptable level. Not even a relaxation of regulations by government or the reduction of business taxes can provide this sector with the ability to turn the tide. What is the one simple reason? It takes consumers – the buying public – to create the demand that leads to business expansion. The current level of unemployment in the U.S., the disastrous conditions in Europe and the inevitable slowing of the economies of stronger countries like China and India – in total – do not support the type of consumer spending environment needed to generate and sustain U.S. business expansion.

In addition, we know that this unemployment rate does not accurately capture those unemployed individuals who would like to be employed but, did not file an unemployment claim in the last 30 days. That number is more likely in the 15% -17% range. The principles of free enterprise strongly encourage the drive for profits but, they also encourage survival – not an altruistic desire to help the overall economy. Business expansion, automation upgrades, even new product development is curtailed… if not completely placed on indefinite hold. In this environment, businesses instinctively wait, reduce to minimum effort to survive, and essentially conserve cash in order to hold out until the economy improves. Consequently, the wait is still for government to take the lead.

As it turns out, the business sector is finding that it actually has the ability to operate with a smaller labor force because automation upgrades do reduce the need for humans. Thus, businesses are not realizing a dire need to increase staff sizes – and the associated costs.

Exacerbating the problem are the spending habits of individuals and families in this environment, which is very similar to businesses. Given the economic climate, currently employed individuals and families retreat as well. The same uncertainty and fear that businesses and investors possess are held by these individuals – further reducing the amount of money flowing through the economy. They just do not spend, because they are fearful that they might need it tomorrow. They see the foreclosures in their neighborhoods, they see the market indicators dropping, they read the news about the conditions in Europe, and they stop spending freely.

Ignoring the approximately 22-24 million “real” unemployed worker population, or the true affect on our economy as result of the European economic condition is unproductive and unrealistic. The unemployment rate of 8.0% – 8.6% is both unrealistic in its true reflection of those out of work and it is misleading because, even with some adjustment, it does not reflect the seasonal employment surge from the holiday season – and this will bear out to be true as we see the future jobs figures in March, April, and beyond. At the very best, job growth is not at a volume or pace that will turn the economy around in the short term – which should be the only realistic goal. Likewise, decoupling is not feasible. Every M.B.A. student since the 1970’s understands that we have been a world economy for decades and that cannot change quickly. Even China will begin to show signs of weakness in the face of a globally weak economy. Even if it were possible, the U.S. economy, perhaps combined with China and India, cannot support the sustainment or growth of U.S. businesses. We comprise somewhere in the neighborhood of one fifth of the world’s consumer spending, therefore, our ability and willingness to spend must be present for the U.S. economy, and the world’s economy, to rebound. We are truly the world leader.

The question becomes, where does government find the resources to provide this leadership? This white paper provides a potential solution. The premise of this solution is partially built on the resources that the government currently has in abundance – the federal government workforce and the policy tools it has at its disposal. It is also built on the belief that a compromise can be reached politically, if each party can present a plan to their constituencies that reflect an equal sacrifice for all – and not a perceived contribution of one over the other. This political compromise will allow both parties to sell this solution without damaging their position – which is the basis of the current partisan disagreement. Shared pain is acceptable – selective pain will not sell. And finally, it is built on the unemployed, potential workforce – and what we know about that population.

Solution

Government Sector
The current federal government workforce is slightly over 2 million – excluding the military. There is obviously a strong desire to resist any further reductions to that workforce because of the damage it will do to the economy. More people out of work is not what the economy needs. Government historically understands that the basic hiring of more individuals into the workforce is, in itself, a stimulus. But without the funds to do so, that is currently not an option. A change in a fundamental premise of our work requirements can provide this ability to hire. One must fully consider this possibility – and the entire argument – before dismissing it as a potential solution.

A temporary reduction of the standard workweek to 36 hours will free up funds to use to reduce the debt, shrink the annual cost of government, and allow for hiring of new workers. The 36 hour change is proposed so that it will allow for those currently working both a 4/10 work week and a 5/8 work week – the two most common weekly work schedules. Now consider this situation: Out of the current federal workforce, approximately 2 million work one of the two weekly schedules mentioned. For every nine “5/8” and “4/10” workers the government gains the hours needed to hire one new employee (4 hours deducted from 9 workers = 36 hours, or enough to hire one additional worker). The savings from the 10th worker reduces the overall cost of government, and provides savings to retire the national debt. In addition, there are other possible uses of these savings that will be discussed later in this paper as well as the opportunity – in limited situations – to simply not hire the 11th worker, thus creating more savings.

As for the productivity affect on the workforce, it would be negligible considering that a supervisor of 10 workers currently producing 400 labor hours during a typical week will now have 11 workers producing 396. Flex time is already a standard practice in the workforce; therefore, the supervision of more people, with flexible schedules would result in virtually no productivity change given the overall work unit loss of 4 labor hours.

In effect, government will get larger in manpower, but smaller in cost. Of course this represents a sacrifice in income (10%) to those employees losing hours but, as I will discuss later, it will be a shared sacrifice and it is, and will appear to be, a viable alternative to those employees, given that total job loss is also a very real future possibility in the absence of such a strategy.

Although the possibility for mandating this change down to state and local governments does not exist, the feasibility and the options that it offers, should be enough to encourage those governments to follow suit. In addition, there are ways to strongly urge these changes through other political means available to the federal government and its leadership.

Please note, this practice of hour reduction is already being employed by some local and state governments. However, they are reactionary measures, stop-gap measures. They are utilized and viewed as a way of closing the deficit gap between current revenue and current costs – as opposed to a component part of a much broader economic recovery strategy. This is a lost opportunity.

Given the relatively small numbers that this effort will affect in government alone, this approach – on its own – is clearly not intended to address the employment needs of those unemployed in the entire U.S., but, it is intended to represent the lead in that effort. The private sector will have to support that greater re-employment effort.

Private Sector
Of course there are fewer options available to government to encourage the private sector to adopt this new option, but the most powerful incentive, legislation to provide temporary tax relief, should and would provide the necessary encouragement. I will not propose a type or amount because that is a political decision and an accounting decision based on the practical affect on tax revenue and is beyond my ability with the limited information I have access to. However, the point is clear – an incentive of this type can encourage a more widespread use of this strategy and it will encourage the employment of more workers.

For the business sector, it will provide a financial motivation. This is a feasible incentive in line with their profit goals and it provides a visible appearance that they are doing their part to reinvigorate the economy through hiring.

Incentives will also encourage the movement of workers back on the “official rolls” – which in turn would be an increase in income tax revenue to the government. Of course this suggests that an illegal activity is occurring now and, although I cannot support this suggestion factually, it seems fairly obvious that a good number of businesses are utilizing the labor of workers who are not officially carried “on the books”. This practice is reducing the impact on payrolls, and allows these workers to continue to receive unemployment compensation. It is a “win-win” for the employer and the employee, but it prevents the collection of income taxes and further drains the availability of unemployment benefits. Incentives that encourage hiring, will lessen, if not totally eliminate this practice.

But the main point here is that, in the absence of practical, viable incentives, the business sector will resort to practices that benefit them and allow them to survive and be profitable – to the exclusion of all other factors. This is not an anti-capitalism statement but rather an accepted behavior under the free enterprise system. A business must first survive before anything else is possible – therefore a business will do whatever it must to survive. Consequently, the adoption and utilization of such a practice will most likely be detrimental to efforts made by the government to raise revenues. Be they illegal, borderline, or loopholes, a void in directing the behavior of businesses in a way that benefits the economy as a whole will cause a proliferation of such individual business and business sector actions. This is the worst environment for uncoordinated action in the business community, but, survival will encourage and demand it – unless government leads and directs this effort.

The Top 1%
This group has, to date, been in the center of discussion as a source of needed tax revenue. The resistance has been largely based on an argument that they should not be asked to do more than any other taxpayer simply because they have been successful. This economic recovery strategy, however, leaves them as the only group not visibly and actively involved in making a sacrifice to help improve the economy. When faced with this possibility, even the most ardent opposition would reconsider their position. Politically, they would lose the current support that they have, and would have to accept an increase in their tax burden that would be seen as commensurate with the sacrifice in income made by all other working Americans.

Outcome

As previously explained, the goal of this strategy is to stimulate the economy. The principle methodology evolves around a temporary reduction in the work week, accompanied by new hires. The rationale for this methodology is based on the spending requirements that we know will exist for newly re-employed workers. The current crisis has caused millions of individuals and families to become delinquent in payments on taxes, mortgages, car payments, insurance, credit cards, utilities and a host of other household expenses.

If a realistic view is applied to the current unemployment condition in America, the real number of those unemployed long and short term is somewhere in the 24 million range if you assume the “real” percentage of unemployed is in the 15-17% range. This percentage represents the “U-6” unemployment rate as opposed to the more often used “U-3” rate. For the purpose of this paper, it is assumed that the employment of 18 million of these individuals is a target that will reintroduce sufficient spending in the economy. At a median net wage of $27,000 (Social Security Administration, 2010), this represents nearly $500 billion in additional payroll for the public and private sector. This additional income is the targeted amount that is needed, and will be spent by the newly employed.

Those who are newly employed and re-employed must spend vigorously to catch up on their mounting debt. These expenditures represent the burst of monetary flow that is needed to restart the economy. It essentially takes a little from those who are currently holding tightly to their reserves, and redistribute it into the hands of those who must spend. Every business sector would benefit from the “new” purchasing power introduced by this new group of customers, and governments at all levels will realize an increase in tax revenue.

There are several keys to realizing this outcome:
• accepting the “out-of-the-box” thinking in reducing the traditional work week,
• convincing individuals that a real, shared sacrifice by those currently in the workforce and those richest individuals is ultimately in their best interest,
• creating a suitable incentive to encourage all levels of government and the private sector to duplicate the strategy and,
• moving as quickly as possible to implement all components of the strategy on a large scale because partial implementation will not show the impact needed to cause the economic change desired.

Challenges

The challenges are numerous, varied, and for the most part, obvious. I will attempt to note several challenges that I recognize, with full understanding that this paper does not speak to all that might arise.

Politically, the ability to gain collective acceptance of the strategy is critical and necessary. That point will not be discussed in great detail in this paper but, it does require mention. This challenge includes the initial introduction to key stakeholders, and the more official announcement to the country. How the strategy is presented is of equal importance to what is implemented.

Operationally, the current work week for most organizations, be it government or private, are “hard wired” into an automated payroll/time and attendance system. Although a change to the standard hours for straight pay versus overtime hours requires a technical solution, it is not an insurmountable barrier. Most systems in place today allow for temporary changes to individual and group timekeeping. In addition, work schedules will have to be recreated to allow the necessary service coverage in order to maintain normal operating hours. Again a management challenge – but not a daunting one – especially given the series of staff reductions experienced over the past few years by almost all employers.

Another operational challenge is the consideration of retirement and other related benefit calculations. Although changes to the work week and all connected issues can be forced on the work force, it might be in the best interest of a successful implementation to continue the calculation of retirement based on the assumption that every 36 hour week is equivalent to a 40 hour week for retirement purposes. Another option is to consider it equal to 40 hours for retirement if the employee completes an additional four hours per week providing an acceptable public volunteer service, for example in a local public school. Regardless of the solution, retirement, vacation time accumulation, and sick time accumulation will need review and possible adjustment.

Contractually (and legally), some union and other employment agreements may require amendment if a guaranteed minimum is stated as an agreed upon item. I am not sufficiently knowledgeable in labor law to speak to this challenge but I believe it may arise. It is not unreasonable to assume that a court challenge or ruling may result or even be required for implementation. But this may not be a bad thing. It may, in fact, afford government the opportunity to renegotiate the benefits package that is currently a significant cost.

There are volumes of federal and state labor law, and there have been historical attempts, since the implementation of our current labor laws, to reduce the work week. The U.S. Supreme Court has even ruled on it. In addition, at least one bill, in the past, has made it through the U.S. Senate but failed in the House. However, a cursory review of labor law suggests that most of it protects employees from the establishment of more than a 40 hour week/8 hour day – not less. Finally, several states have already either implemented or are investigating a reduced work week. Given this environment, the overall economic situation, and the already lower comparable work weeks of most developed nations,, this is the ideal condition to reconsider this item – at least a change with a short-term sunset.

A more practical challenge involves the issue of setting a “floor” for this strategy. With nearly two-thirds of the workforce earning $27,000 or less in net wages it makes little sense to cut the hours of every potential worker. Some exceptions should be made. For example, the strategy would do more harm than good if applied to a person making minimum wage. A 10% reduction in hours for this person would put their annual wages dangerously close to the poverty level. Consequently, some occupations – and perhaps some industries – should be exempt from implementing this strategy. At the very least they should consider a lower reduction in work hours.

Conclusion

The current climate affords decision makers very few options. The nation’s sudden loss of wealth has caused a severe shortage of currency available to flow through the economy. In addition, the government’s ability to push reinvigorating funds into the economy has been severely hampered by the associated loss in revenue. This is largely due to the loss of taxpayers and other taxable entities that contribute to that source of government income.

The private sector cannot reverse this course alone, because it needs consumer spending to do so. We already know that this is not occurring and will not be occurring, on its own, in the near future. And, additional revenue gained abroad is not a realistic possibility because of the even more severely reduced purchasing power of the international consumer market as well as the associated strengthening of the dollar against foreign currencies. And ultimately, the private sector is not designed, focused or motivated to address the needs of the country.

Under these circumstances, one of the few options available is re-distribution of wages into the hands of those who are forced, by their circumstances, to spend quickly and substantially when the opportunity presents itself. That opportunity will come only when they are employed and re-employed. The need of the re-employed population to spend is clear and unquestionable – they must move to quickly reduce mounting debt. This influx of payments to debt holders, utilities, etc., combined with the newly hired employees’ ability to purchase goods and services – previously gone without – will provide the stimulus necessary to reinvigorate the economy. This strategy accomplishes that desired goal.

In addition, it presents a sufficient argument to reduce any opposition to the additional taxation of those who can most afford it – the ultra wealthy. Witnessing the sacrifice of the middle class will force any opposition to higher taxation for the ultra wealthy to wilt. They will be forced to join in and provide their part to the effort.

What should be clear to all is that the current conditions are, in fact, a moment in time of a continuous downward spiral. If a strategy such as this is not implemented, it will lead to a further reduction in wealth and more uncertainty and fear. This will result in a tighter hold on spending by those who still have that ability, and ultimately the need for further reductions in the size of the current public and private workforce – an evolution that we can no longer withstand.

The final argument is that none of the components of this strategy are new, nor are they unique. All have been implemented or considered, at different times in our country’s history, as an approach in reversing a sluggish or stagnant economy. The New Deal had a government led stimulation of the economy – principally through hiring – as its foundation. Increasing tax revenue by taxing a specific population deemed more capable than others to withstand such an increase has been done numerous times. In most of those instances, the increased revenues were, in turn, used to create a healthier economic climate for the nation as a whole. Cutting staff hours and reducing salaries is also a previously used strategy to reduce costs; thus, preventing a more drastic and destructive widespread layoff. State level governments and the private sector are currently utilizing this strategy. As an example, California has over 1.5 million workers who are still employed only because of their continued work at reduced hours. And finally, the consideration of a nationwide change to the standard work week of 40 hours has been undertaken in our past – by both the U.S. House and the U.S. Senate -albeit never implemented. Nonetheless, several states have implemented (in addition to the example), or are considering, this very strategy today.

Perhaps the most inviting aspect of the overall approach is that it can have a “sunset” if tied to achievable and measurable goals. Most, if not all, components are linked to the two major domestic issues that government faces – federal spending and the deficit. If the strategy is implemented under the condition that it is tied to a target reduction in those two areas, the strategy becomes even more acceptable, success more measurable, and a timeline more transparent.

The unique aspect of this combined strategy is that the conditions we are currently experiencing suggest and support the use of all three principle components in unison. There exists a population of taxpayers that can clearly absorb a tax increase – without significant impact to their lifestyles – that other taxable categories cannot. There also exists a need to reduce the annual cost and the accumulated debt of the federal government – but an achievement of this through workforce reductions would be further detrimental to the broader economy. And, there exists a need to re-employ a large segment of the eligible workforce.

Each of these conditions can be resolved through the implementation of the component parts but, the implementation of them in concert. No one component will address the overall picture but, a coordinated strategy possesses the synergy necessary to reverse the present conditions. Make no mistake about it, the present condition is a crisis. Regardless of attempts to frame this in a political way, it is an economic issue. It must be resolved in those terms or it will devastate all other structures – be they political, social, or financial.

A close examination of this strategy will reveal its use of opposing notions:
• national debt reduction can occur concurrently with business tax breaks;
• government can cut costs while increasing its workforce;
• cutting labor hours can lead to an expanded economy.
It is actually possible – under a particular scenario – to raise taxes, cut taxes, increase the size of the workforce, reduce government spending and expand the economy. Government led fiscal expansion can coexist with austerity, and long term debt reduction needs can be achieved along with short term stimulus. As uncoordinated actions it cannot work – but as part of a broad, articulated strategy, it can.

Basically, we have to radically rethink how we operate in this challenging environment. The thought should no longer be how we can do more with less people, but rather how we can employ more people with the amount of labor hours government and the business sector have at their disposal. The solution is tied to the number of people employed – not the number of people employed at 40 hours per week. Every effort should be made to achieve that end – even through the sacrifice of hours for the existing workforce and higher taxes for a small segment of taxpayers.



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