Monetary Policy Is Obsolete: Here’s What’s Next
The federal reserve has a dual mandate: Maintain full employment (what economists call the “normal” rate of unemployment) and maintain price stability. Price stability has not been much of a problem. While the dollar perpetually goes down, it’s a steady, downward trajectory is all according to plan. While savers probably hate this, it’s how the banking-financial system works. Were it not for moderate inflation, too many debts would be un-payable and the banking system would collapse like a house of cards.
The insidious problem is employment. The problem is less job quantity but more so job quality. After all, there’s an almost unlimited demand for free labor (unpaid internships) and a virtually unlimited demand for underpaid labor (low wage jobs for PhD’s for example). Yet there simply aren’t enough “quality” jobs around to satisfy the population. This results in populism, and people being “at each-other’s throats” even in these good economic times. The recent trend is polarization of the labor market, which means some high paying jobs and low paying jobs but very little in between jobs. Middle skill jobs are most vulnerable to automation, while harder to economically automate lower and higher skill jobs persist.
The Current System Rewards Profit, Not Hiring
Politicians always talk about job creation. Jobs are considered a “social good”. Yet there is zero incentive for businesses to create jobs in the current system. There is solely an incentive to create profit. If a company has 10 employees and makes a profit of 1 million dollars, it pays the same tax rate as a company with 1000 employees that makes a profit of 1 million dollars on that net income.
Furthermore, the company with 10 employees will pay less taxes, because it will be paying less payroll taxes. A payroll tax is a tax on “human” employment, so it’s a human tax. There is no such tax on using technology, so entrepreneurs have every incentive to employ un-taxed technology in whatever form rather than people. Technology never takes a day off, never complains, never sues, never sleeps and never asks for a raise, and continually improves. Hiring humans is less and less attractive each passing day to do work versus finding a way to automate it.
Hiring is no longer as profitable for companies as it used to be. Sure, all companies are going to want some staff. But the real value creation in today’s tech-driven economy comes through leveraging technology in clever new ways. For example, when Instagram sold to Facebook in 2012 it had 13 employees but sold for 1 billion dollars. Nowadays that’s considered a steal. Compare that to a company like ABM (ABM), which has a staff of 130,000 people yet is worth a comparatively measly 2.3 Bn to it’s investors on the NYSE.
If you’re an entrepreneur, which company would you rather work to create? A personnel intensive one which needs to manage 130,000 people or a tech-enabled company that needs a baker’s dozen to make a billion via acquisition?
Instagram is an extreme example, but it’s far from the only company with enormous value but a handful of employees. Increasingly, tech-enabled companies with a very small staff are making enormous profits by leveraging technology. It’s powering a wealth divide. If a company has a small staff yet an enormous stock value, such as Facebook or Netflix, it can lavish perks on it’s workforce without breaking a sweat financially. If you work for ABM good luck asking for a raise or stock incentives, but if you work for Facebook or Netflix you might be in luck.
Current Monetary Policy Will Be Ineffective Next Crisis
Using monetary policy to influence employment even in good times twenty years ago is like pushing on a string. It’s very indirect at best, and has side effects. These side effects include influencing asset prices, such as increasing the value of stocks and bonds as interest rates decline. Policymakers will desperately be in need of new tools to stimulate growth in the next crisis. Cutting interest rates to zero in the next crisis will do nothing to help the labor market. They’re already close to zero, and have been low for a long time now. The problem isn’t borrowing costs. It’s technology and automation eating away at the labor market.
As usual, politicians are not cognizant of the real problem with the labor market. Washington operates on the assumption this is 1999 still, before everyone had a smartphone, the internet was so fast and software automation was so powerful. The economy simply doesn’t like work today like it did in 1999 anymore when Greenspan was in office. We can do more, with less. We’re hurdling towards a “push button” economy Warren Buffett talks about, where all goods and services are created by flipping a switch. Everything is being totally automated, and very few people are required to run various industries. All that is required is someone to flip the switch on/off.
Capitalism In Crisis?
It’s good to be skeptical of anyone who says capitalism is in crisis. This is a system which has worked tremendously well to create massively important innovations for the last several centuries. The system works. The inventions over the next 100 years, if the system continues will be absolutely mind boggling. It is in the interest of humanity to continue what has worked so well for creating massive technological leaps and unlocking the potential of the human race.
Capitalism works better than ever. It will continue to create massively important technological breakthroughs, and efficiently allocate capital to new, exciting and promising industries. The crisis of capitalism is not a crisis of the system functioning. The crisis of capitalism is a crisis of public support.
People tend to support what supports them. If you’ve made millions from the current system, it’s likely you support it. If you’re struggling to pay your light bill, rent, and afford food and healthcare despite working 40 hours a week, you might have some skepticism. 63% of Americans don’t have enough savings to cover an unexpected $500 expense, which should make it apparent how unstable the political-economic-fabric of this nation really is.
A New Policy Tool of Last Resort
I’m proposing a new policy tool of last resort to be used in the next financial crisis. It should be used sparingly, but it is something which should be on the horizon for policy makers.
Imagine the next financial crisis. If Ray Dalio is to be believed, it could be worse than the last one. Given that Bridgewater, the hedge fund he founded collects more relevant economic information than the Fed, I’d say he’s a credible source. It may not be very long before it all begins again. That should concern all of us deeply. So what can be done?
The long and the short of it is to subsidize hiring. Companies which add new employees during hard economic times receive a subsidy. During good economic times, that subsidy would be reduced or eliminated. It would require smart policy makers to implement to ensure that the system is not abused. For instance, firing staff and then re-hiring that same staff to get the subsidy.
A subsidy will lower the cost of hiring new employees. The subsidy need not be large. It could be potentially be very small and yet still have an effect on the unemployment rate on the aggregate. For instance, a 25 cents per hour per employee subsidy being raised to 26 cents in theory should reduce the unemployment rate. It’s important it be a subsidy however, rather than a tax break. A tax break for hiring additional employees would impact industries unevenly, and not reduce the cost of new hiring for startup companies which are not yet profitable.
What I’m proposing is to eliminate the payroll tax, and in essence reverse it. The payroll tax is particularly unfair in today’s tech-enabled world because it’s a tax on human employment, while “hiring” technology is un-taxed. Is it any wonder technology is the one which is getting hired more and more by businesses, not humans?
How would this payroll subsidy be paid for? I’d like to leave that to others to explore, as that gets contentious. Ultimately, subsidizing hiring during the next financial crisis will be something worth considering. Especially if Ray is right and it’s worse that 2008. While expensive, the alternatives will be far more gruesome: Social unrest, riots, even an outright revolution.
