The Bail-Out and Stimulus Package
Every economist will tell you any time you ask that the Federal Government is a closed system. Whenever it gives out money to someone it has to take that money from somewhere else. This includes higher taxes, fewer programs or mortgaging the future through higher deficits. There is no free money.
Politically, the Bush administration and the Obama administration and both Congresses are hell-bent on a bail-out and stimulus package. So as long as this is going to happen anyway, we should look at how it should be structured and what should go along with it.
The basic theory is that if you give people money, they will spend it. They will buy things they would not otherwise buy, which in turn helps the businesses that make those things and they are able to keep more of their employees (even if those employees are in China). When people are hurting for cash, do they buy the higher price items made in the US or the lower price items sold at Walmart and made overseas? In theory it does not matter because the Chinese guy buys something and eventually the money raises everyone. Do Chinese assembly line workers buy American made goods?
But this begs the question, why should the US government and US taxpayers provide money to help employ the Chinese? There is certainly no way to stop it. Once I got my $600 last Spring, I bought stuff. I have no idea where it was made. Did last Spring’s stimulus package help the economy? Are you better off for it? China grew at 13% last year. Where did the $600 go? Where did the $350 billion go?
The goal of spending US cash should be to build the US economy. At its core, what is wrong with the US economy?
We don’t make things anymore. The only way to build an economy is to make things that people want to buy. So, if we are going to spend this money anyway, what should we do to make sure it helps the US economy?
1. Dramatically increase SBA guaranteed lending to entrepreneurs and small business. Virtually all of the current unemployment is being experienced by Baby Boomers over the age of 45 years old. They represent a highly paid glut of humans in our population. In our current situation, they can never be re-employed at high rates. These people have experiences, talents, training and ideas. Help them start new businesses using those capabilities and they will hire others.
Plus a loan is not a net drain. The vast majority of SBA backed loans are re-paid. Even a 5% default rate, which is extraordinarily high, is cheaper than giving away all this money. Plus these are guarantees. Banks lend the money. So there is no actual cash out the door and banks start lending and making money again. The best of all worlds.
That is the politically doable part, but don’t disregard it because you do not like or understand this next part. It is really important though.
2. Eliminate the minimum wage. It is not paid by businesses. It is paid by hard working middle class Americans who get less so the company can allocate some of their hard-earned wages to the dredges at the bottom who, by definition, are not worth even minimum wage. These dredges recently got a raise for being the worst workers in the company. Eliminating that will make US manufacturers more competitive, which simply has to happen.
3. Allow all immigrants into this country. We need low-paid workers to do the stuff at the bottom of the manufacturing pyramid. We will GAIN jobs, because we will hire Americans to supervise, manage and oversee these low level workers. Those are all the HIGH-PAYING jobs that are lost when we move manufacturing overseas and they are perfect for the unemployed Baby-Boomers.
4. Pass my health insurance plan – see prior post. Get corporations out of the insurance business. Get the States out of the regulation business and make healthcare a national issue which will reduce costs. Allow anyone to band together to negotiate great group rates or create huge self-insurance plans where wellness drives cost reduction. The government should provide catastrophic coverage which will reduce rates to most because the coverage costs are capped.
5. Create a flat corporate tax on revenues over $1,000,000. Eliminate the payroll tax, which is a disincentive to hiring and paying workers. Roll all income and payroll corporate taxes into one simple flat tax. This will dramatically reduce compliance costs for American companies and avoid complex schemes to create a tax loss and avoid paying any taxes. If a company has revenues over $1,000,000, they pay a set percentage of those revenues in taxes, even if they are losing money.
Congress uses taxes for social engineering. I think that is wrong, but it is a fact of life. A flat tax actually makes this easier and more powerful. Every company pays it so they will ALL have the intended incentive if a credit is provided. Not just those showing a taxable net profit.
Small businesses (under $1,000,000 in gross revenues) pay no taxes, so all the complicated corporate, LLC, partnership and Sub S schemes to avoid “double-taxation” that they pay attorneys and accountants for is eliminated. These are families trying to make a living and hire people.
So if we do this, what happens?
Businesses are relieved of a significant amount of unnecessary overhead in trying to do things outside their core competencies – taxes and benefits. The government gets the same amount in taxes and more control over corporations.
There are low-paid workers able to fill the bottom of the manufacturing pyramid and this employs supervisors and management for the Baby-Boom generation that is currently suffering most. These positions are now lost to China. This helps grow the US manufacturing base which grows the economy.
There are plenty of important regulations regarding working conditions, the environment and the like which must remain. When we make things, we do it in a much better, safer and cleaner manner than anyone else in the world. Our unions will make sure that fair wages are paid if that gets out of line. We have a great system. Let it work.
If we help fund small creative entrepreneurial businesses, the true greatness of our economy, we will put the brilliant minds to work on reaching the dreams they never pursued because they had jobs. Small companies built on great ideas build nations. But they too need easier tax burdens, fewer non-core responsibilities and workers who make what they are worth all the way through their organizations.
Finally, workers who are paid only what they are worth, the definition of the minimum wage, will work harder, get to work on time, reduce drug and alcohol use so that it lessens the impact on their performance and will try harder to be better so they can make more. Immigrants will come and go as job availability dictates. Without a minimum wage they may be able to find better employment in their own countries and go back. Problem solved.
Simple but difficult solutions that would work and no giving away money. We shall see.
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5 Responses to “The Bail-Out and Stimulus Package”
You should be proud, being able to write something that on some points I couldn't agree more and some I couldn't agree less. For example your concern about trade imbalances and how the stimulus will fail if that isn't corrected is dead on, and something that I have been frustrated hasn't been discussed more.
I also agree that healthcare should not be based on where you work, because that decreases job mobility and causes stresses on the system when businesses go under. And more SBA loans in particular industries would be great.
But a flat tax on revenue? Seriously? That is an awful idea because different businesses have different margins. A company like Google can make a huge amount of profit compared to revenue while a place like Walmart can't. There are lots of other ways to close loopholes than that.
Also getting rid of the minimum wage — regardless of whether you think it is a good idea in the long run — is guaranteed to produce wage deflation in the short term. This is absolutely the very worst thing that we could have right now without massive restructuring of expectations (meaning we accept the inevitability of a Depression and change society accordingly).
I also don't think we can have tens of millions of managers for immigrants. A lot of Americans need manufacturing jobs.
The root cause though is that we have lived beyond our means for too long. I applaud your attempt to reimagine what America looks like economically, but it won't be able to bring us back to “normal” and I don't think anything really will. However, that is the largest roadblock to change, and until more people accept that they'll have to make due with less, it will be very hard to get any large programs implemented correctly.
First of all, you apparently hate the minimum wage and yet you have shown absolutely no evidence (or even a basis in economic theory) as to why this it is a bad idea.
Secondly, pretty much all of your ideas are aimed at promoting business a.k.a. a trickle down effect. It doesn't matter if business don't have to pay any taxes and have access to below market rate loans if people can't afford to buy the goods and services being sold (one reason why getting rid of a minimum wage is a very bad idea).
What we need to do in the economy is focus on the building a strong foundation – and that means focusing on the greatest number of people. Create jobs with salaries that can support a family and that provide health insurance. Make sure people can't be turned down for health insurance based on pre-existing conditions (and help them afford the insurance they can get). Find new energy sources so that people aren't being screwed when oil and natural gas prices rise again. Do this and not only are you gaining revenue from income and payroll taxes but you are also getting people off government programs. And you are ensuring the businesses can succeed because they actually have consumers who can afford to buy their goods.
I recall that Mr. Lips has written at least one other post advancing his opinion about the minimum wage. The tone and content of this post set me up for a better undersanding of his position. Apparently the economic model from which he is operating is that the manner in which wages are distributed is determined exclusively by a single parameter: the quality of the work performed by recipients.
For instance, he states: “…the company can allocate some of their hard-earned wages to the dredges at the bottom who, by definition, are not worth even minimum wage. These dredges recently got a raise for being the worst workers in the company.”
Not to belabor the point, but there is no other way I can see to interpret this but that Mr. Lips posits that minimum wage earners are singularly “dredges”, each of whom is a “worst worker(s) in the company” and even further, that wages scale simply with the quality of the work performed. If Mr. Lips model is correct then it might be reasonable to debate his proposal to abolish the minimum wage, though it is still not a foregone conclusion.
However, (and avoiding his unsourced “every economist” formulation) I strongly suspect that many economists would suggest that there are a range of other parameters that influence wages and that when these are taken into consideration, Mr. Lips argument against the minimum wage is fatally flawed. As even Alan Greenspan has learned the “hard” way, overly simple economic models, when used to determine policy, can have genuine negative consequences. (There may be other valid arguments against minimum wage, but Mr. Lips argument appears to be one simply of ignorance of economic reality and belligerence.)
I very much agree. This economist (B.A. Economics, M.S. Applied Economics) does not agree with Mr. Lips about the minimum wage. There are a number of factors that decide wage on both the supply and demand side of the equation. And in basic economic theory one of the key factors in regards to a minimum wage is whether the labor market is perfectly competitive or monopsonistic. In a perfectly competitive market a minimum wage may not be a good idea but in a monopsonisitic labor market it typically can raise wages and total employment without making the employer worse off.
And it is true that just using the basic economic models is not always the best way to analyze a situation. Most models are based on a series of assumptions – many of which do not conform to reality. You can use that as a starting point but then you need to analyze real world evidence. And while wage floors (minimum wages, living wages, etc) can have negative effects most of the literature I've seen has said wage floors have either no effect or a positive effect.
Proliferating SBA loans is such a good idea it probably won't happen, that seems to be the model. But disparaging labor is so puzzling a position it's hard to know where to begin to respond to that. For a small business, labor is its gold, every successful small business owner knows that. People crave dignity and respect even more than money. Depressed wages are neither respectful nor dignified. As far as hiring immigrant labor on the cheap…wake up, we did that. It doesn't work. Why? Immigrants are such good labor it doesn't take long before they upstage their “American” supervisor and rise above that minimum wage you propose to eliminate. Plus all the “American” workers become resentful of the immigrant's success. That is precisely where we are today. Irreplaceable illegals in small businesses are earning $25. an hour and more. Too many Americans are fat and lazy, and that is just a fact.