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Thursday, December 19, 2013

Getting There - How to have Full Employment with Good Wages

In my previous article I talked about the need to reduce the length of the work week.  But this cannot be done in isolation; if we simply all began to work less, then we would produce less, and we all would be poorer.  No, it must be done in synchrony with other measures.  This is the plan that I present below.

First, let me list some facts:

1. A large fraction of the U.S. population are either unemployed or under-employed. Also, many are earning poverty wages even when working full time or more than full time.

2. The gap between the incomes of ordinary people and the incomes of the wealthy is very large.  The last time it was this large was about 1928. Since then it has mostly been much lower, until recently. You can see a nice graph of this here:

3. America's large corporations are doing very well. Their profits declined briefly during the recent recession, but quickly recovered to reach record levels. Wealthy individuals are also doing very well. (The rich have gotten richer.)

4.There is no shortage of investment capital to invest in plants and equipment, or to hire new employees, should corporations decide to do so. They are currently able to supply the demand for their goods and services with what they already have, so they are investing very little.  (The so-called "job creators" are not doing it.)

5. About 70% of the goods and services produced by American businesses are consumed by Americans.

6. Wealthy people spend a fraction of their income on goods and services; the rest they invest. The size of the fraction depends on the income. (of course there is individual variation) The very wealthy invest most of their income.

7. Poor people save nothing, they spend all of their income quickly. Middle class people save a little; they spend most of their income fairly quickly.

8. Due to pervasive and continually increasing automation, the number of workers needed, is less than the population of working age adults.  This unbalance will grow, probably for decades to come.

Now let's address how to improve our situation:

If the populace were to smarten up just a little, and elect representatives that understood these issues, and had the courage to do what's best for the whole country, then they would begin to fix the roads, bridges and railroads, and invest in alternative energy, and raise subsidies for the installation of solar systems on homes and small businesses, and a host of other things.  Not just any other things; they must be projects that result in significant employment gains, and with little delay.  This would employ many people directly, and many more people through the increased spending by those who are directly employed. (the well-known multiplier effect)  Projects that mostly transfer tax dollars to wealthy people and corporations should be avoided.

There are 3 ways to pay for this: Money can be borrowed, revenue can be increased, or the government can "print" the money. (as you know, this last means that they simply create money by accounting entries in computers.)

Although there can be a mix, IMO it's best to pay for most of it by increasing revenue. There will be substantial revenue increase just due to the increased employment and increased profits of businesses, but some tax increases, or loophole plugging, are desirable.  Taxes should be progressive, because if the goal is to boost the economy, then it's important for the average person to have money to spend.  (This follows from items 5, 6, and 7 above.)  This is not a new idea:

For those who think that increasing revenue will prevent the economic gains, I refer you again to items 5, 6, and 7 above.

The main and important goal, as I see it, should be to maintain, over the long term, a balance between a labor shortage and a labor surplus. Currently we have a labor surplus. That leads to low wages, and to oppressive working conditions. A labor shortage would also not be a good thing; it would lead to inflation and high labor turnover. Too much government spending on job-creating projects will create a labor shortage. Hence government spending needs to be adjustable. It needs to be part of a feedback control system. It should reflect the unemployment rate.

When the unemployment rate is high, government spending should be increased. When it is low, spending should be decreased. I suggest a "dead band" of 3% to 5%. When the unemployment rate is below 3%, then spending should be decreased. When it is above 5%, then spending should be increased. As a side issue, it would be very desirable if the labor department would calculate and publish a true unemployment rate, It is this rate that should be input into this proposed feedback control system.

Legislation can be enacted which describes the broad outlines of such a scheme, but it is impossible to get everything right in advance. Congress will have to revisit this topic annually, or better yet, semi-annually, and make necessary adjustments, with the goal of maintaining unemployment within the desired range. And of course that range may also need to be changed.

Now to the question of the length of the work week: As a consequence of the great strides that have been made in automation, it is no longer necessary for people to work a 40-hour week. In fact, that custom makes it more difficult to keep everyone employed. The only way that we could maintain full employment and the 40-hour week is to undertake major projects, something like building the pyramids. An expanded space program is one example, but it would probably not be sufficient. We could also build lots of hospitals, clinics and schools of all kinds. Or we could expand the defense establishment even beyond it's present bloated condition.

It is difficult to regulate the work week. There are many categories of people who want to work long hours, and should be allowed to do so. Into this category fall artists and other creative workers, as well as the self-employed. However, it is only necessary for work-week regulation to apply to a majority of the population, in order to have the intended effect of enabling full employment. It should apply to all of the most common occupations, blue and white collar. It does not need to apply to any category that includes relatively few people.

Current labor law (Fair Labor Standards Act) makes a 40-hour week standard, and requires the payment of time-and-a-half for overtime. This law applies to the employees of most large organizations, public and private, and hence covers a large fraction of the workforce. What I propose is that the FLSA be modified to reduce the 40 hour figure according to a flexible schedule. The initial schedule would be simply one hour less for every year that passes. However, whenever the unemployment rate is low, say below 5% for example, the work week would not be changed.  Whenever the unemployment rate climbs above 5%, then the once-a-year lowering of the work week would resume.  The work week would never be lowered by more than one hour per year.

I'm sure it is obvious that the present congress is neither willing nor capable of implementing my proposal. It cannot happen until we have a congress that is dominated by people who are both intelligent and open-minded, and furthermore are not beholden to conservative political donors.

Why do I want the government monkeying with the economy to such a degree, some will ask? My answer is that I am convinced that without such "monkeying" we will continue to regress toward a very hierarchical society, with the vast majority of the populace in poverty. This has been the normal state of human civilization ever since the rise of large cities several thousand years ago. It is still the norm in most of the world.  I prefer a society where there is a well paid job for everyone who wants one.