Brilliant or Crazy? My Idea to Fix Unemployment and Government Spending

Every so often, I have a stunning flash of brilliance.  An idea that is so simple, seems so obvious, that I’m sure there’s something that I’m missing.   An idea that, if implemented, seems to solve not one, but several large social problems at once, making me a huge hero to the entire country, or possibly the world.

But then I take a step back, and really think about how that would work.  How could I, a normal mid-twenties guy, come up with a solution that’s alluded our policy makers and government leaders?  (On second thought, don’t tell; I’m pessimistic enough about the government already.)

In the spirit of sharing my money insights (one of the goals of this blog, after all), here’s the idea I recently had to fix unemployment and government spending, all in one swoop.  If I’m missing something, or being too optimistic about how some of these changes would actually affect things, be sure to let me know; I can’t present my new proposals to President Obama and the Congress if it’s filled with obvious bugs.  Here we go:

1) End the minimum wage: There are plenty of companies out there that would gladly employ more people if it didn’t cost them so much.  It’s Econ 101: the higher the cost, the lower the demand, and it works for employees as well as other goods and services.  If you’re forced to pay $7 an hour per employee, you as a business owner are going to want fewer employees than if you can only pay $4 an hour, which in turn is fewer than you would have if you could pay $1 an hour.  (Don’t worry, minimum wage workers, we’ll get you more money in just a bit.)

2) End current federal welfare programs: There’s currently a morass of federal programs that provide aid to the poor and those in the lower middle class.  (Although, there’s some argument about that point.)  Eliminate all those disparate programs (with the possible exception of Social Security, which is based on how much money you put into the system, at least in theory), to clear the way for something much simpler.  (For that matter, if you can eliminate most or all of the state and local welfare spending, we can really attempt to streamline the process.)

3) Change the poverty line: As mentioned yesterday, there’s much disagreement about the current poverty lines, which are just the inflation adjusted poverty lines first calculated back in the 1960’s.  Society and our spending habits have greatly changed in the mean time, and the previous poverty line levels don’t seem to be accurate (to say nothing of the fact that they don’t provide much in the way of adjusting for the different costs of living in different parts of the country).  The likely result will be to increase the poverty threshold, also increasing the number of people considered to be living in poverty.

4) Create a new benefits system: Now, if we want to make a simpler, easier system for public benefits, the easiest thing to do is to set up a single welfare program that will give out weekly (or biweekly, or monthly) checks to everyone who is unemployed or unable to work.  These checks will add up to the new poverty line for each person, which should (if we set a more realistic poverty line) be enough to allow them a decent chance to make a place for themselves.

5) Encourage work: Too many programs currently in existence suffer because they promote less work from recipients; if you work and bring home money, you end up getting less in government benefits.  To combat this, our new welfare program should encourage work, allowing people to increase their total income by working.

As the number of hours worked increases, the total amount the person earns (in wages plus benefits) should rise as well.  If someone is working twenty hours or less, the benefits they get should bring their total income to an amount higher than the poverty line, say 110% of the poverty line.  Working twenty-one to thirty-nine hours a week, and you’re guaranteed total compensation of 130% of the poverty line, while working forty or more hours a week (that is, full time) ensures that you’ll get 150% of the poverty line.  (Note: this would be total work time; if someone found two twenty hour a week part time jobs, they’d be able to collect the full-time benefits.)  No more worrying that working will decrease your government benefits; any job you take, no matter what the pay, will increase the money you take home.

6) Change who pays for welfare: You might have noticed one fly in the ointment up to this point: with the government covering the slack for businesses who pay their employments a wage less than the poverty line and no minimum wage, there’s not much incentive for companies to increase their wages.  They can pay $1 an hour, and their workers won’t complain (well, more than workers normally complain) because the government (that is, taxpayers) will pick up the tab.  Great news for businesses, not so great for tax payers.

To make this whole thing work without sticking it to the taxpayers, we need to change who is paying for this whole thing.  Our new welfare program will be paid for with taxes on corporate profits, for all corporations.  If discount stores and other currently minimum wage employers drive down wages for their employees, the tax that they, and all other corporations, pay will have to rise as a result.  Between the tax burden on their own bottom line, the tax advantages of paying out more money as wages (since they’d be company expenses and above the line deductions) and pressure from other companies who want to lower their taxes, there should (hopefully) be a fairly small drop in what companies actually pay their emplyees, even those on the bottom rungs of the corporate ladder.

Altogether, this plan should increase the number of people who are employed, simplify government spending, and encourage work, all while minimizing the tax implications for individuals.  Not bad for a sudden flash I had late last night, eh?

So there you have it; my plan in a nutshell.  Are there any flaw that I’ve missed?  Has anyone proposed a plan like this that I simply haven’t heard before?  Anyone have something they’d consider changing or adding?

8 Responses to Brilliant or Crazy? My Idea to Fix Unemployment and Government Spending

  1. Hmm, I think you’ve put too many ideas down into one simple plan there Roger – it’s hard to call it a single stroke solution! 😉

    Just to point out one thing, wages are by no means all the cost of employing someone. There’s all kinds of Government-related costs, health and safety costs, and also supervisory costs.

    There’s also the cost of acquisition. It might be better to pay someone more and not have them flee!

    Regarding your simplified benefits system, my own simple solution would be to mail everyone in the country a ‘citizens wage’ – regardless of whether they work or not! You simply don’t check. Everyone gets it.

    You then clawback money in the tax system. At a stroke you remove about 1 million bureacrats, tax wheezes, welfare frauds, etc etc. 😉

  2. Hello Roger,

    The ideas are bold, and that is a huge step in the right direction. The thing that would prevent bold measures is that whichever party tried to implement your plan would receive huge lashback. At first because these changes would take a while to phase in properly so there would be disparity throughout some groups.

    You hit the nail on the head with minimum wage. If they got rid of minimum wage (which would be hugely unpopular) then you would fix a lot of problems, but there would be a period of turmoil. People think that if you get rid of minimum wage, then they won’t be able to purchase things because of their new, lower income. This would be true for a short while, but because they can’t afford things, one of two things would happen:

    1.) Demand would evaporate, and prices would come down because no one can afford anything.

    2.) People, realizing they can’t afford anything, would choose not to work, and a shortage in labor supply would cause wages to rise.

    People don’t tend to look that far into it, they just think prices will remain high, and their income will remain low. That can’t happen because commerce would freeze up. The reason we won’t see this happen is because neither party in power wants to be the people blamed during the period while that disparity is working itself out.

    The market can fix itself, but intervention prevents this from happening.

    Thanks,
    Timothy
    Wealth Artisan Team Member
    http://WealthArtisan.com
    .-= The Wealth Artisan´s last blog ..Creating Space Series: Retirement =-.

  3. I like this kind of approach since you start out from scratch. You reinvent a system, question everything, and then see how this new system fits with the current one.

    I think each one of your proposals is a good starting point to have an interesting discussion on the topic. My only problem is the minimum wage which I don’t think should be abolished. The current minimum wage is not a living wage in many parts of the country as it is.
    .-= ctreit´s last blog ..Early retirement is a double whammy! =-.

  4. The below is just my opinion, so I digress 🙂

    “End the minimum wage”

    You’d have to roll back plenty of other programs as well. Even without a minimum wage, there are still liability issues, firing issues, discriminatory issues, immigration issues, payroll taxes, etc…. which place barriers to entry.

    “End current federal welfare programs”

    Welfare spending isn’t really the biggest problem. The biggest problem is the way that money is created and the way it goes to the favored interests first, at the expense of everyone else. Paying bums to sit at home isn’t so great, but paying corporate bums to divert real resources from everyone else is even worse.

    “Change the poverty line”

    Or perhaps get rid of it entirely? A poverty line is useless because all you are measuring is envy; people will be envious if they are at the bottom 10% whatever their absolute wealth. The only measure of poverty that should matter is real poverty: being unable to afford shelter, food, or clothing.

    “Create a new benefits system”

    I’ve read elsewhere that the federal government should just pay minimum wage and offer a job to *anyone* willing to work. As a form of welfare, it might be better than paying people to sit at home. At least something will be exchanged and some work will be done.

    “Encourage work”

    Agree with you, see above 🙂

    Good to see that someone is thinking deeply about these issues; however, I feel that so long as there are thousands of lines in the tax code (which is kind of pointless because the government doesn’t actually need to tax to spend; it has a printing press, remember?) and so long as currency is held in trust by a select few people who control the circus the rest of us live in, that the poor will continue to get poorer and the rich will continue to get richer.

    I honestly don’t know what would work better; a gold system would be one of continuing deflation which would mean lowering prices; great for people who already have wealth but not great for debtors. But maybe that is a good thing…

    What I would really like to see is a system of free currencies, that are not tied to central fiat but are tied to the physical world. Nobody has “god mode” access to the universe, so the amount of gold, oil, etc…. are what they are. I think in the future we will see a shift back to real stores of value and transactions might be done in units of energy, or other real units of work of value that cannot be manipulated or debased. We will see!
    .-= Kevin@InvestItWisely´s last blog ..Why Should I Buy a Used Car? =-.

  5. Good ideas but as you can see in the comments you are already getting some pushback, i.e. we need to keep a “…living wage.” This illustrates the need for a transition – you can’t just stand up and say the minimum wage is done. But if you transition to a minimum wage then essential services will be paid a wage that is livable – as trash piles up the amount people are willing to pay to have it removed increases.
    Second critical point- the only time you’ll get elected on this platform is when society is on the brink of diaster. Today there are too many people on guilt trips who feel they owe something to those who do not want to get the skills required to buy luxury goods. I can take you to my library and show a video collection that rivals Blockbusters – paid for by taxpayers who have never set foot in a library.
    .-= DIY Investor´s last blog ..Frequent Traveler Must Read =-.

  6. I love the ideas brewing.

    I think the biggest thing is to create more efficiency in government welfare programs. It should be easy to get on welfare (the most needy need it the quickest). And streamlined so that you can get everything at one stop.

    Some mixture of shifting taxes and changing minimum wage is a great way to think of it. Also, every american that works full time should pay something in taxes. A minimum tax would pay for a whole lot of government debt. I heard something like 40% of americans paid 0 in taxes.

    Thanks for sharing!
    .-= Ted´s last blog ..Life =-.

  7. Hey Ted,

    If you read about “modern monetary theory” which describes the operation of modern fiat currency, it seems that taxes serve to redistribute wealth, but they don’t have anything to do with repayment of debt; and your taxes do not actually fund the government in the way that you think.

    Do a search for “billy blog” or “modern monetary theory”. I am starting to read about it, and I’m not sure that I agree with it on moral grounds, but I am learning more about it and it at least helps describe how the current system works, regardless of whether it is good or bad.
    .-= Kevin@InvestItWisely´s last blog ..What to do… what to do? =-.

  8. The Amateur Financier: re your question “has anyone proposed a plan like this?”, the answer is “yes, I have”. See http://mpra.ub.uni-muenchen.de/19094/

    Your second last para attempts to solve the problem that employers have an incentive to keep people employed long term at a negligible cost to themselves, which robs the taxpayer. Your solution is for employers to fund the whole scheme. Problem with this is that the incentive for each INDIVIDUAL employer to take advantage of the system is still there (and to almost exactly the same extent).

    I solve that problem by limiting the time that any individual subsidised employee can stay with a given employer. That calls the employer’s bluff: if the employee really is productive, the employer will stop claiming the subsidy and keep the employee and foot the bill for the entire wage. Alternatively, the employer will let the employee go.

    That results in a bit of a jobs merry-go-round, but that doesn’t particularly matter because the unemployed are by definition a bunch of people who TEMPORARILY cannot find a job other than very unproductive jobs. If the employer cannot find a replacement to fill the above relatively unproductive vacancy, not much is lost.

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