We’ve got a jobs problem. This will become clear with the next release from the Bureau of Labor Statistics. It will likely show negative job creation. This could be a public relations disaster for the Trump administration. It will feed public demands to roll back reforms and feed market perceptions that we are heading toward a recession or already in one.
Employment markets are sticky and breaking down. Young people know it. Newly laid-off workers know it. Businesses know it. There is a genuine fear of hiring out there. With the rise of robotics and artificial intelligence, every business is, right now, preferring machines to people. If you have entered the jobs marketplace lately, you know all this.
The question is this: What can be done about it?
We have a presidential administration in office that is looking for big wins with fundamental changes in policy and the relationship of government to the people. This is the time to fix the mistakes of the past that have become a grave source of vexation for American commerce.
The Trump administration has already taken on the high cost of prescription drugs and is now pushing for a dramatic reform in health insurance to push down the exploding costs. This is essential right now, as are further reforms that release the entire industry from the chains of the so-called Affordable Care Act (Obamacare).
What we need right now is dramatic reform in the payroll tax. It is the biggest single drag on hiring. It is paid by both business and employees, creates a vast headache in paperwork, and forces very high costs on what should be a simple transaction.
The payroll tax applies to everyone: a 15.3 percent tax at the minimum, plus more for higher incomes and additional high fees for unemployment insurance. The supposed benefits are Social Security, on which no one working today depends for what used to be called retirement, and Medicare, which is out of control in terms of costs.
The Trump administration needs to push legislation to allow individuals and businesses to opt out completely. Millions would take the deal and start their own savings and pursue other options for elderly medical care. Yes, this would be a shock, but it would instantly spur vast hiring and create new fluidity in labor markets.
Here is the fact that no one can deny: Artificial intelligence and robots do not pay the payroll tax. They are vastly cheaper than people for every business. As a result, they have the advantage in hiring. This is not good. Indeed, the problem needs immediate fixing.
Would this mean the most dramatic reform in Social Security since its inception in 1935? Indeed, it would. That program has been the bane of labor markets all along. It was never really a savings program. The “trust fund” was always an accounting fiction. In fact, the entire program always depended on young workers paying the way for retirees. It is not unfair to compare this to a Ponzi scheme in which new investors pay the returns for the older investors. It only sustains itself because of massive taxpayer subsidies.
It’s been politically untouchable because people have been paying into it all their lives on the assumption that it is some kind of forced savings program. They understandably want their money back at the appointed time.
This proposal to allow people to opt out entirely changes nothing about the promised benefits for those currently receiving them. That funding can come from general revenue. And anyone who wants to remain in the system can do so. Those who opt out can relinquish some portion of existing claims on the system. That would help relieve the financial pressure.
Hardly anyone is willing to admit that Social Security has, in fact, been a huge ripoff for a very long time. It worked at first, but the opportunity costs have gone up over time.
In 1937, the returns on the system were identical to the financial markets. This did not last long. By 1950, the markets already outpaced the system (250 versus 180). By 1975, the problem worsened such that markets were paying three times the system (1,300 versus 450). By the year 2000, the absurdity became unbearably obvious with a four times payout from markets (6,500 versus 1,800). Today, market returns are running nine times above the government system (102,000 versus 11,300).
This is a terrible deal. Young people would abandon the system entirely if they were allowed to do so. That would immediately make them attractive in the jobs market. To keep the fairness such that older workers would not be at a disadvantage, the option to forego paying in should be permitted to everyone.
As for Medicare, the system was only invented in the 1960s, when confidence in government solutions was high. It seemed like a no-brainer: a federal program to pay the medical bills of the aged, funded by a tax early in life. But then people started living longer.
The program itself created a moral hazard. It’s spending without discipline, with the main winner being the insurance industry. The program has an unfunded liability of $48 trillion and currently constitutes 7 percent of gross domestic product. In a few years, the program will have to ration care in order to sustain itself. It has never been reformed since 1967.
Something has to change. Exempting workers from paying into the system in exchange for foregoing benefits access later is an excellent start.
All politicians pretend as if these programs can continue as is forever. They preen and valorize their own resistance to change. This is gravely irresponsible. I’m not suggesting that any political figure commit political suicide by calling for big cuts. That simply will not fly as messaging.
What I am suggesting is that people be given a choice to participate or not. Let workers and businesses decide, consistent with the theme of freedom. Let people, in their capacity as employees and employers, assess the merit of continued participation. If it does not make sense for them, they can decline to participate.
That would immediately level the playing field between people and machine replacements. As it is, as long as this 15.3 percent surcharge exists, along with all the legal liabilities of hiring people, we are going to face labor markets that are sticky and not serving the people. There is never a better time than now to undertake the radical reforms we need.
This sloganeering around “never touching” these programs is not serving us well. I do favor dramatic cuts in payouts but also recognize that this is not realistic. What is realistic is to permit the basic right of human choice to be part of the system. The Trump administration can do this. Let the people go. After all, having a good job without supposed benefits—these programs never should have been tied to employment to begin with—is much better than having no job at all because a cheaper robot took the position.
