In an earlier essay I suggested we just forget the 1%. This was an idea not entirely supported by the commentary that followed. On reflection, I’ve decided it isn’t the right approach after all. What we really need to do is rescue the 1%.
They may seem like the last people who need rescuing, but when you consider the facts it becomes clear they really do need to be tossed a life-preserver. The problem is their basic business model is self-annihilating. This is not a new observation in history, but it is worth thinking through again. CEOs and board members are required by fiduciary law to maximize profits for their shareholders. If they fail to aggressively pursue this goal with every business decision, they might actually get sued by an angry shareholder deprived of his maximum return on investment. So maximizing profits is the order-of-the-day—every day. This imperative has been dramatically reinforced (and distorted) over the past three decades—as explained and illustrated by William K. Black—by evolving corporate compensation rules awarding huge bonuses to upper level managers based on the short-term profits their business and “accounting” strategies are able to generate.
There are clearly many different strategies for maximizing profits (including, as Professor Black teaches us, convoluted accounting tricks) but the most straight-forward strategy which CEOs and board members really have no choice but to employ is minimizing the labor costs of their business. It’s just plain, simple, mathematics: the cost of goods, materials and machinery, electricity and fuel, are beyond their control. But they do have control over the level of wages they pay their labor. They are also—in the increasingly digital/robotic world we live in—able to reduce the amount of labor they must employ, further cutting their labor costs and maximizing their profits.
Taken to its logical conclusion, the quest of this business model will grow ever closer and closer to eliminating labor costs (and human labor) altogether. Obviously this becomes a serious dilemma for the 1%’s business model because “labor”—in addition to building the widgets or providing the services companies sell—also comprises the consumer market that purchases those widgets and services. And the money that “labor” needs to make those consumer purchases comes from the wages they are paid. So you can clearly see the snake eating its own tail here, which is why the 1% business model is self-annihilating—and why, whether they realize it or not, the 1% desperately needs our help. If we don’t help, somewhere down the road their markets will inevitably collapse—if they aren’t ravaged first by rioting throngs of the unemployed and destitute who used to be what we are here referring to as “labor”.
So how can we help? Modern, sovereign fiat currencies, in fact, make possible a very effective answer to that question: We can solve the 1%’s self-annihilating dilemma by providing them with the one thing that, long term, would make their business model really work: a perpetual supply of consumers who have Dollars in their pockets. If this were provided, American business could continue to minimize its labor costs without worrying about the consumer market collapsing—or riots in the street. But if labor continues to be increasingly underpaid and under-employed (to maximize profits) how will labor obtain the Dollars it needs to perpetually purchase the widgets and services of American enterprise?
This “Catch 22” can be resolved by the “Job Guarantee” (JG) program advocated by many Modern Money proponents. Here is a brief summary (in my own layman’s terms) of how the JG program—which has been proposed in detail by economist L. Randall Wray and others—could rescue the 1%:
Every citizen who desires to work, and who is otherwise unable to find suitable paid employment, will be hired by the sovereign government to do something useful for the collective good in their local community. What these jobs entail would be determined by the local communities themselves. To avoid the potential of the JG program competing for labor with local businesses, the JG pay scale would be just under the federally mandated minimum wage—and that minimum wage mandate would then be eliminated! It is no longer necessary because Private Sector businesses can now hire workers out of the JG labor pool—should they see an opportunity to generate profits by employing new workers—by simply offering a wage somewhat higher than the JG wage. This creates a de facto minimum wage without need of any federal enforcement. When the Private Sector economy is clicking on all cylinders, most of the JG workforce is hired by private business. And when the Private Sector cools off, for whatever reason, the JG program absorbs displaced workers back from the Private Sector.
JG workers would have bank accounts into which their weekly pay would be deposited by the Federal government. They would receive standard work benefits, job training if necessary (which they would be paid to attend) and would be “managed” by what used to be called the local Unemployment Office, but which is now the local Employment Office. The local Employment Office would track and document the work and training of each JG participant, and the resulting data base would be made available to local businesses searching for employee candidates.
The proposed Job Guarantee program is made possible by the actual workings of today’s modern, sovereign fiat currency. Dollars for the program do NOT come from Federal tax collection, nor are they “borrowed” through the issuing of Treasury bonds. The Dollars are simply created electronically by the Central Bank and deposited in the accounts of the JG workers. Any inflationary pressures which might arise would be alleviated by Federal tax collections and Treasury bond sales. This is not a theory of how our national monetary system could work, but a description of how it actually is working today if we’d take off our wrong-way glasses, see it for what it is, and begin to intelligently utilize it for our collective good.
The big question is why would the 1% not embrace this policy? Look at the benefits: The current amorphous pool of “unemployed” people—many of whom have gotten out of the “habit” of work and forgotten basic responsibility skills—is replaced with a pool of labor regularly and gainfully employed doing useful things in their local communities. A simple example of a possible JG work project: growing fresh vegetables in urban and rural “food deserts.” In each case, the JG work is something which otherwise is NOT undertaken or provided because Private Sector business does not find it profitable to do so.
Many JG workers will have received specialized training—for example, how to operate and manage a hydroponic vegetable-growing service—and this labor pool is documented in a searchable data base made freely available to Private Sector businesses. How much easier can you make it for a local business to find a talented, available employee when they need one?
Welfare programs—which the 1% seems to object to on purely ideological grounds—could be dramatically reduced since more and more people currently on welfare would become fully self-supporting providing useful services in their local community. Many of the services that local taxes pay for (street crossing guards and public garden maintenance, for example) could be provided by JG workers—meaning local taxes could either be reduced or put to other uses.
Most important of all, however, the Job Guarantee program would rescue the 1% from the inherent, self-annihilating contradiction of its basic business model. No matter the extent of its success in minimizing labor costs, a strong and stable consumer market would perpetually exist for its profit-making products and services.
In exchange for this life preserver, the 1% should be willing to accept Federal rules that eliminate, once and forever, the moral hazards associated with its current business model—specifically, the linkage between the calculated measurement of short-term profits and corporate management compensation packages. If these new rules were adopted, American business—without changing its implicit need to maximize profits—could begin making decisions based on rational, long-term profitability goals rather than short-run scams and deals. Banks, for example, could once again become businesses that make loans rather than bets.
I do not mean to suggest here that rescuing the 1% means everyone else should inevitably work for minimum wage. In a recent, thought-provoking essay Dan Kervick writes, “Improvements in productivity are continually creating more leisure, but that leisure is continually creating new kinds of formal employment”—suggesting that even as business minimizes labor costs, new opportunities for the employment of labor are continually created. The JG program could easily feed into that process, spinning new for-profit start-ups out of work projects originating as non-profit services in a local community. In other words, “Rescuing the 1%” is a formula for reimagining how, and for what purposes, we are collectively utilizing our sovereign fiat monetary system. A better way of putting it might well be: “Rescuing the 100%”.