September 19, 2010
Solving the Unemployment CrisisBy Jim Prevor
Solutions to the unemployment crisis must begin with removing the perverse obstacles to employment that have been erected. For the last four months, the unemployment rate in the United States has hovered near 10 percent. Nearly 15 million Americans are officially classified as unemployed, and including those discouraged from seeking work and those working part time but desiring full time employment, the number jumps to over 26 million. Federal unemployment benefits have been extended to 99 weeks - a burden of over $100 billion dollars per year on the shoulders of taxpayers - and some policymakers want to extend them further.
The high unemployment rate is a major economic problem for the nation as a whole, reaching far beyond the suffering of the jobless. Having large numbers of unemployed people is a huge waste of human resources. America's workforce is one of her greatest assets, and leaving it unused is like keeping large sums of money sitting on a tarmac instead of earning interest in a bank.
In fact, it's even worse than that: Money sitting on a tarmac doesn't earn interest but at least it doesn't lose value. Human beings, on the other hand, left under-utilized, often find it difficult to go back to work. Long periods of unemployment are frustrating and boring. While some people out of work might take classes and try to learn new skills, many can't or won't. The unemployed generally don't spend their time reading Plato's Dialogues or giving War and Peace a try, and they generally don't spend their time experimenting with new physical fitness regimens. Instead, between dispiriting attempts to find work, the unemployed seem to watch a lot of television and otherwise lose some of the discipline for reliability and hard work that the workforce requires.
As an entrepreneur, I have seen firsthand the obstacles both to the ability of business owners to create jobs and to entice people to take the jobs when they are created. Although much ink and countless pixels have been spent in trying to explain the plight of "discouraged workers," it is not popularly understood that many of these people do not despair at the prospect of finding a job - they despair at the prospect of finding a job that makes sense to accept in light the costs of doing so.
There are limits to what policymakers can do to improve employment levels, at least if they limit themselves to what is conventionally considered politically feasible. President Obama deserves praise for - last week, finally - offering some pro-business proposals. But his proposals are temporary, which blunts their impact. And for the most part, since he came into office in early 2009 the president's efforts have been geared toward keeping public-sector employees at work and trying to jumpstart the overall economy through expensive Keynesian stimulus programs. But public-sector wages and stimulus bills are both paid for by the private sector; their ultimate effect is to dampen growth. Prosperity depends upon getting people back to work in private-sector jobs, which will not only take them off the dole and generate short-term income, but will also set them on the path toward increasing skills, developing better habits, and creating wealth.
The fact that the president and his congressional allies are associated with these failed policies creates an opportunity for conservatives to explain that they will try something truly novel to solve the unemployment problem. Republicans must not content themselves with blaming Democrats. They must suggest new policies of their own. And they must not buy into the political conventional wisdom (really a set of liberal shibboleths) as to what policies are politically untenable. Policies that the left considers settled, including the scope of the entitlement state, have not really been seriously debated in decades. The time has come to put them back on the table.
Here are ten specific policy proposals that can dramatically and quickly reduce unemployment. Their overarching aim is to restore to businesses the wherewithal to hire; to reduce the cost of new hires so that there is less risk in trying out new employees; to also lessen the non-financial risk of new hires; to encourage workforce flexibility; and to ensure that employment is worthwhile. These ten proposals would be beneficial at any time - but in this economic climate and at this political moment, they constitute a job-boosting agenda that conservative reformers would do well to consider.
(1) Eliminate the Corporate Income Tax
Just as banks have to retain a lot of capital to safely lend so they can absorb losses, companies have to store a lot of capital so they can absorb mistakes - such as hires that don't work out, or new projects that fail. Encouraging businesses to retain more earnings and, by eliminating the corporate income tax, allowing them to keep those earnings will give them the capacity and confidence to hire.
Liberals may characterize this proposal as a giveaway to business - but in fact, while this proposal may nominally make some people richer, the money must stay in the business to stay tax-free. So no wealthy individual will be able to spend even a penny more as a result of this tax change. Indeed, in all likelihood, businesses will reduce dividends, the owners of corporations will minimize their salaries, and businesses that are set up as pass-through entities, such as LLCs or "S" corporations, will convert to traditional "C" corporations. In the end, less money will be spent on personal consumption and more will be spent on productive business.
To ensure that corporations don't just sit on their cash reserves, we can require that any corporation with cash and marketable securities and assets unrelated to the conduct of the business exceeding, say, two years of expenditures for two consecutive years, must pay out a dividend equal to the excess amount.
It is a truism to note that corporations don't pay taxes - only people do - so corporate taxes are, inevitably, either a tax on the investors in a company, the customers of the company, or the employees of a company. It makes economic sense to tax explicitly so we can target taxes to achieve desired goals. When our goal is the creation of jobs, we need business to feel flush so they can take a chance on expanding and hiring. Eliminating the corporate income tax is a quick way to move in that direction.
2) Eliminate the employer contribution to Social Security and Medicare
Today, the employer and the employee each pay half the contribution to Social Security and Medicare. (As things now stand, each pays 6.2 percent on the first $106,800 of an employee's taxable earning for Social Security, and another 1.45% on all wages, without limit, for Medicare.) This was always a terrible idea, as it is valuable for employees to clearly see and feel their tax burden and to clearly understand how much they are costing their employers.
If we eliminate the employer contribution to Social Security and Medicare, over time wages will have to rise to compensate employees for the loss of this benefit. But in the short term, this change would have the effect of making companies more profitable and reducing the cost of new hires - outcomes that would contribute enormously to the willingness of businesses to hire.
Of course, the revenue loss to the Social Security and Medicare systems would move up the date of the insolvency of those programs - although that will to some extent be offset by the presence of more employees contributing to the system. Still, as the economy moves back toward prosperity, adjustments will have to be made and, quite possibly, one of those adjustments would be higher Social Security taxes on individuals. This approach will provide better transparency, so that employees clearly see what Social Security is costing them. After all, workers, who are also voters, might decide they would rather have a later retirement age or lower benefits than see so much of their earnings go to Social Security and Medicare.
In the meantime, lower labor costs and more profitable companies mean more jobs now.
3) Waive laws and regulations for the first thirty months of employment
In today's service economy, it often takes a full year for employees to really learn a job. They need to experience the "Christmas Rush" and the "Summer Slump," to go to the important convention in the fall and the company meeting in the spring. It can then take a business owner more than a year to evaluate how the employee is performing in these varied venues and to decide whether to keep the employee.
This is the riskiest part of hiring: taking a chance on someone unknown. Anything we can do to reduce the risk will increase businesses' willingness to hire. The best approach would be to waive the various legal and regulatory restrictions on employment, hiring, and firing - including minimum-wage laws and anti-discrimination statues - for the first thirty months of employment, by which time the employer should be able to judge whether a worker is a worth keeping. Employees would, of course, retain all their legal rights as individuals (their employers can't break contracts with them, can't steal from them, and so forth) but workers would not have any special government-created rights that interfere with the employer/employee relationship.
Although this proposal is certain to make many liberals recoil in horror, it is worth remembering that unemployed people get no benefit from any of these government-created rights. It is surely better for a person to take a job on terms that he and his employer agree upon without government interference than to languish entirely out of work.
4) Thirty months "free harbor" for independent-contractor status
A big chunk of the cost of employment is often the benefit package, and for small employers, the work involved in handling employees who quit or are fired. Take it from a guy who has had to handle these matters that the mere prospect of possibly having to fill out COBRA forms, work with the 401(k) provider, and so forth, can be sufficient justification to avoid hiring.
Many companies would prefer to hire workers as independent contractors, especially initially, thereby avoiding the direct costs of benefits as well as the headache of managing all the related paperwork. However, there are strict and difficult-to-interpret rules that typically preclude employers from classifying employees as independent contractors. We should allow companies for the first thirty months of employment to classify any new hire as an independent contractor, making hiring less of a burden.
5) Allow employees who can't sell their homes to treat a distant rental as a deductible cost of getting a job
The decline in real estate values has significantly reduced what was once a key American strength - the willingness of people to move around the country to get jobs. And it's not just declining values: if one's home in Pennsylvania went down 20 percent but a new home in Florida, where a new job is waiting, also went down by 20 percent, the drop wouldn't matter much. But if one has a mortgage of $250,000 in Pennsylvania when the house is only worth $150,000, then the homeowner can't sell it without writing a big check.
There is another option, though. The homeowner could move to Florida and rent - either just the worker or the whole family - in the expectation of selling the house when the market gets better.
Unfortunately, today's tax laws make that difficult. If the Florida job's salary is $4,000 per month and renting a house or apartment costs $1,000 per month, it would be a big sacrifice to devote a quarter of one's wages to securing a place to live when one already is paying a mortgage back in Pennsylvania. Worse still, if income taxes, Social Security, Medicare, and other taxes add up to 25 percent of the worker's pay, he is only getting $3,000 a month net to accept the job. So the $1,000-per-month apartment now costs a third of his pay. That's a hefty and discouraging chunk.
We can fix this problem by giving individuals the same sort of flexibility that corporations now enjoy. Tax laws now allow a business that has a headquarters building it can't sell because of a high mortgage to deduct fully the rent it pays in another location if it has to move offices. Individuals should be allowed to subtract the cost of their rent on a rental property directly from their taxable gross income. To make sure the deduction isn't abused by folks acquiring a pied-à-terre or vacation home, we can impose various restrictions, such as requiring the second home to be a certain distance away. We could also impose some reasonable time limit - say five years - on the deduction so that people are encouraged to take jobs where the jobs are right now and yet are given adequate time to sell their other home. But the bottom line is that we must restore to our economy the vital dynamic that lets people feel willing to move around in the pursuit of employment.
6) Allow for the deduction of time-saving services if one works
One of the reasons people stay unemployed for as long as they do is that they prefer not to take available work because unemployment can, surprisingly, be less expensive than it seems. Many unemployed people replace service jobs with their own labor - an option that is especially feasible if they have a working spouse and are receiving unemployment insurance.
If an unemployed person lays off the gardening service, fires the once-a-week pool guy, cans the once-a-week cleaning lady, pulls the kids out of daycare, starts washing the family car himself, drives the spouse to the airport instead of taking a taxi, and begins cooking at home instead of regularly dining out or buying takeout, then a lot of other people might lose their jobs - and for the unemployed person, the cost of re-entering the workforce goes up.
As a disincentive to work, this is tantamount to a very high marginal tax rate. Think of it this way: If a potential new job pays $30,000 a year, but one has a working spouse and gets unemployment insurance, the marginal tax rate is high to begin with, perhaps 50 percent of the salary - maybe more depending on what one's spouse earns, where one lives, and how large the unemployment check is. But if one has to put three kids in daycare and the job will result in a need for some additional help around the house, in all probability the person will be working but earning nothing. The problem is obvious: high marginal tax rates encourage people to do things themselves rather than outsource. This reduces total employment - so one could argue that the best solution is simply to lower marginal tax rates.
Short of that kind of tax cut, though, if we want to encourage jobs we should allow wage earners to deduct on their taxes the cost of the various services that formal employment forces them to purchase.
To be sure, this is a tricky policy to implement. Previous efforts to offer things like childcare tax credits have not been particularly successful, partly because of dollar limitations (for many people the credit is only about $600 for a child), partly because of preposterous government requirements (so if your sister comes to watch your kids and you give her some money, you are supposed to pay Social Security and other taxes), and partly because the government doesn't allow parent "add-ons" (so while daycare qualifies, sending your child to camp does not).
If our policy aim is to create jobs, this proposal is a twofer: On the one hand, allowing a deduction for services that make it possible for people to work directly increases the number of jobs available. On the other hand, by making work more lucrative, the deduction also makes people more willing to accept jobs. This policy would be such a win-win for job creation that it should be able to withstand the inevitable criticism that some people would deduct things they would have paid for anyway. And careful implementation should ensure that the deduction serves its intended purpose; for instance, the deduction can be restricted to apply only to so-called "unskilled" services that an ordinary person is capable of doing himself - so an electrician's services would not be deductible but a cleaning service would be.
7) Allow for the deduction of costs associated with having a job
There are loads of costs associated with having a job: commuting costs, clothes for work, lunch, Internet access at home, and more. As a general rule, none of these is currently deductible. Making them deductible will make employment more appealing to people while also reducing the cost to employers, as employees will require less money to take a job.
A deduction like this would also help to establish the principle that people should be taxed on their net earnings from a job, not on the job's gross pay. Broadly speaking, this will make employment more appealing to people and taxation more transparent and fair.
8) Allow people to deduct the cost of education and training
Over the years, policymakers have cooked up various deductions and credits for education: American Opportunity Credit, Hope Credit, Lifetime Learning Credit, and many more. Most such programs are means tested - that is, they have restrictions on income - and they generally prohibit deductions for education that might lead to another qualification. So a file clerk can't deduct the cost of night school to become a CPA.
The tax code allows businesses to deduct the cost of repairing or maintaining equipment and property - so if a machine needs to be fixed, a company can deduct the cost. Workers deserve a similar break: if they want to maintain or improve their minds through continuing education relevant to employment, they should be able to deduct the cost.
9) Reform Social Security's treatment of spousal benefits
Reducing unemployment is a complicated dance in which business must produce jobs but people must also elect to take them. As currently structured, the Social Security program serves as an enormous disincentive to work for any spouse.
As it stands, the law entitles someone who has never held a job, not even for a day, to a monthly payment equal to 50 percent of his or her spouses' Social Security benefit. But if a spouse works and thus has a record of his or her own on which to claim Social Security, the spouse is entitled to whichever is greater: either half of his or her spouse's Social Security benefits, or whatever has been earned on his or her own record.
The problem is obvious: The worker in this scenario pays full Social Security and quite possibly gets no benefit at all for that payment.
Setting aside any question of broader Social Security reform, the essential point is that Social Security is an enormous tax that discourages employment - especially if one also will get no benefit from paying it, as in the case of a wife whose earnings would qualify for a benefit of less than half that of her husband's. It is onerous and unfair. Rectifying this situation will go far to make employment more attractive.
10) Encourage entrepreneurship
Most government efforts to encourage entrepreneurship focus on things like Small Business Loans. Actual small businesses - say a person deciding to set up a business to prepare meals for neighbors - typically don't qualify for loans and probably shouldn't borrow.
The best way to encourage this kind of "small entrepreneurship" is to make it easy on the entrepreneur by getting government out of his way. The burdens of taking a risk to start a new enterprise are too heavy. We should allow small startups to get up and running for, say, two years before we mandate anything: no licenses required; freedom to work from home even if the zoning doesn't allow it; even no business tax filings for the first two years. This will mean no lawyers, no accountants, two years to get a business up and running before we ask it to bear the burdens of bureaucracy.
By making it easier for our spirited entrepreneurs to pursue their visions, we will not only keep them employed, we will be helping them to employ others, too.
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Many of the objections that this ten-point program will likely elicit are easy to foresee. Most obviously, those who are already nervous about the federal budget deficit will worry that all the tax deductions proposed here are imprudent revenue reductions. But, first, we cannot truly know the extent to which this program would increase the deficit; if these ten steps decrease unemployment and make work more attractive to more people, the revenue loss might be lower than expected. Second, even if the deficit does increase, the increase in private wealth that results from higher employment will make it easier to finance the debt. And third, if we need to raise more revenue to reduce the deficit, individual taxes can always be raised in a way that doesn't undermine the pro-job policies proposed here.
Other critics might worry about the risks of exempting workers from various regulations or of altering certain benefits. To those critics, the response is hard but clear: Anything we do to increase the cost of employment reduces the number of jobs. Sometimes this happens in the short term as people don't hire or proceed to lay off workers they can't afford. The long-term impacts include more outsourcing overseas and more automation. By keeping all existing regulations and benefits intact but allowing new employees a chance to prove themselves before these costs kick in, this ten-step plan should satisfy the supporters of regulation and benefits while significantly reducing the impediments to employment.
If we truly want to create jobs, it is not enough to simply berate business to create them. We must address the dynamics that keep businesses from offering jobs and that keep people from accepting jobs. We can use policy to create jobs - we just have to care enough about the jobless to make creating jobs a political priority.
Jim Prevor is an entrepreneur based in Boca Raton, Florida. He is the founder and CEO of Phoenix Media Network, Inc., which provides various facets of the food industry with print and digital publications, research and data services, as well as conferences and trade shows.