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An Economic Proposal

by William McGaughey

 

Why do this?

Many believe that the current economic system cannot be sustained. The earth’s natural resources are rapidly being depleted. The income gap between rich and poor is widening. The United States has large deficits both in its budgetary and trade accounts. The historic progress toward increased wages and shortened hours of labor for U.S. workers has ground to a halt. I do not want to enumerate the problems here but instead propose solutions. Whoever agrees that there is a problem with the economy may want to take a look.

Why do this? Shorter work hours are needed to correct the chronic imbalance in the supply and demand for human labor as machines produce more of society's useful goods and services. Through the application of technology, each hour of human labor is augmented by increased productive capacity so that additional workers are not required to handle the growing production that the free-market economy demands. Because this has gone on for so long, we need huge reductions in hours to restore the balance. And if organized labor no longer has the will to fight for shorter hours, some other institution must be the agent of change.

Let me say forthrightly that my “solution” requires decisions of the federal government. Certain laws need to be passed. I do claim that it is within government’s power to make the proposed changes. I do not claim that there is the political will to do so. In fact, at the current time federal politicians have willed not to do it. However, there is always a chance that public attitudes will force a change. There is a chance, too, that this paper might influence public attitudes that will translate into government action.

My proposal for change hinges on federal legislation to shorten work time. How would that help? First, I believe that work is the moral justification for receiving economic benefits. Welfare - benefits without work - is socially damaging. However, if people are encouraged to take paying jobs, those jobs should, first, be available and, second, pay enough that people can live adequately upon the income from such employment. Third, the jobs should not be so demanding in terms of time and effort that people cannot enjoy life outside work. More free time for working people would be the key to a generally more satisfying life.

In contrast with trends in the 19th century, working hours in the late 20th century have failed to decline. In fact, the Economic Policy Institute, using Census Bureau data, has determined that total annual hours worked in the United States increased from 1,652 hours in 1975 to 1,836 hours in 2013. Some of the longest hours are worked by highly paid managerial and professional employees. Why should this matter, one might ask?

The economic basis for shorter work hours

Over the decades, labor productivity has increased greatly. That means that a greater quantity of output is associated with a given input of labor, defined in terms of worker-hours. Alternatively, the same output can be produced with a smaller input of labor, again defined in worker hours. The basic equation is: Output equals productivity times employment times average hours. If productivity increases faster than output, either employment will be reduced (and unemployment will increase accordingly) or average work hours need to decline. In other words, if machines take people’s jobs, employers need to reduce working hours by a commensurate degree to maintain the level of employment.

What has happened in the United States over the past half century or so is that we have had rising output in dollar-denominated terms, rising employment, fast rising labor productivity, and moderately rising hours of work. However, much of the output is spurious; it does not consist of goods and services that actually benefit people but instead consists of such things as wars, incarceration, gambling, excessive medicine, and excessive education. It consists of what one might call “necessary evils”. Meanwhile, wages in real terms have failed to increase. Unemployment remains a constant threat. Young people are saddled with huge educational debts. People realize that their children’s lives may be less prosperous than their own.

Shorter working hours would help in several ways. First, increased leisure would give working people a chance to recover from the physical and mental strain of paid employment and also work on their own projects, enjoy family life, or otherwise spend the time off from work as they choose. Second, increased leisure for working people would help business in creating a demand for commercial products because those products mainly become useful to people if they have time to use them. (See Henry Ford’s argument.) Third, a reduction in working hours would reduce labor supply given constant employment so that labor’s position in the marketplace would be strengthened. By the law of supply and demand, wages would tend to increase.

The main thing, however, is that labor displacement by machines is accelerating. The robot revolution is at hand. The only sensible solution is, if we want to keep a stable employment market for human beings, is to cut working hours. Cut hours to the extent needed to keep employment at a desired level. Useful output will not suffer even if people worked fewer hours in a week because machines would handle most of the production.

Shorter hours through amendment of the Fair Labor Standards Act

Now it is time to see how this change could be put into effect. It could be done through federal legislation. We could start by amending the Fair Labor Standards Act of 1938. Its key provision is the following. U.S Code, Title 29, Chapter 8, section 209 states:

“(a) Employees engaged in interstate commerce; additional applicability to employees pursuant to subsequent amendatory provisions

(1) Except as otherwise provided in this section, no employer shall employ any of his employees who in any workweek is engaged in commerce or in the production of goods for commerce, or is employed in an enterprise engaged in commerce or in the production of goods for commerce, for a workweek longer than forty hours unless such employee receives compensation for his employment in excess of the hours above specified at a rate not less than one and one-half times the regular rate at which he is employed.”

There are several elements here. (1) The reference to (interstate) commerce is meant to meet the Constitutional requirement allowing Congress to pass such a law. It has no practical significance in terms of our discussion. (2) This law creates a standard workweek of forty hours which means that employers will have to pay overtime for work longer than that in a week. (3) The overtime rate of pay is declared to be one-and-one-half times the employee’s regular pay. Employers who work more hours in a week than the standard workweek (40 hours) are required to receive higher pay for those excess hours.

The first order of business, then, is to reduce the standard workweek so that employers will have a financial disincentive for continuing to schedule work at the existing number of hours per week. Second, if that disincentive is insufficient, the rate of overtime pay can be increased to make it more effective.

The Fair Labor Standards Act could be amended to accomplish those two things. For instance, the standard workweek could be reduced from forty hours to thirty-five hours, thirty-two hours, or another number of hours. The rate of overtime pay could be increased from time-and-a-half to double-time pay or to another rate. All Congress needs to do is strike “forty hours” and substitute “thirty-two hours” in the amended law or do the same with overtime pay. Such a change would bring about the shorter workweek.

We need to decide first how work time should be shortened. I favor creating a four-day, thirty-two hour workweek, as opposed to the shorter workday, for several reasons: (1) In the past seventy-five years since the Fair Labor Standards Act was passed, the physically less demanding “white collar” work has become more prevalent relative to blue-collar work so that it is less urgent to give workers relief from the demands of daily labor. (2) More workers today commute long distances from their home to work. If we cut a day of work from the workweek, that time and expense will be saved (which would not be the case if the work day were shortened.) Moreover, it becomes possible for employers to stagger the extra day off so that traffic congestion in urban areas is reduced. (3) An extra day off gives people a chance to work on their own projects fully refreshed instead of being tired from work earlier in the day.

Therefore, the heart of my proposal would be for Congress to amend the Fair Labor Standards Act, and for the President to sign into law, a bill that would reduce the standard workweek from 40 hours to 32 hours. A thirty-two hour workweek lends itself to four working days of eight hours each. Either the change could go into effect immediately or, as in the case of the Fair Labor Standards Act of 1938, it could take place in stages - for instance, a 36-hour workweek might become effective a year after passage of the law; a 34-hour week, a year after that; and a 32-hour week, another year after that. Either way, the workweek would be reduced according to a firm time table.

With respect to changing overtime pay, I do not favor a change from the time-and-a-half rate unless this proves to be an insufficient incentive for employers to reduce their weekly work schedule from 40 to 32 hours. If the fixed cost of labor or other considerations make the present rate of overtime pay ineffective, then the higher rate should be considered. But it is not clear at this point that such a change is needed.

I think that the Fair Labor Standards Act has a significant defect that needs to be corrected before it will effectively reduce hours. That is the provision that the extra half-time pay in raising the overtime rate from straight-time to time-and-a half be paid to the employee who works overtime. Overtime pay was supposed to be a disincentive to scheduling longer hours, not an incentive to seek them. As it is, many workers want overtime work because of the higher pay. If we really want to reduce hours, longer hours need to become disagreeable to all parties concerned.

The quest of higher overtime pay instead of shorter work hours has wrecked the labor movement which was forged in the fight for a shorter work day. It has fostered a spirit of selfishness instead of improving society. Yes, there are immediate advantages to working overtime, but there is also the possibility that chronic overtime will depress the regular pay rate. Workers may accept a pay cut if they have regular opportunities for overtime. All in all, it is a bad proposition. The alternative is to amend the Fair Labor Standards Act so that the extra half-time pay goes to the government. No one, employer or employee, wants to pay the government. However, the money collected from this source might go into a fund to stabilize wages as working hours are reduced.

Another important aspect of the overtime law is that certain types of employees are exempt from the Fair Labor Standards Act under Section 13(a)1. Many exemptions are written into the law itself. Most notably, employees who are “bona fide executive, administrative, and professional” and “outside sales” employees are exempt from the overtime-pay requirement. This has created a huge grey area, prone to litigation. The U.S. Department of Labor sets the eligibility rules. In practice, Americans who make less than $23,660 are automatically eligible for time-and-a-half pay under the federal law. They comprise 11 percent of the salaried workers.

Nick Hanauer, a Seattle billionaire, has proposed raising the salary threshold to $69,000 a year, which would mean that any employee making less than that amount annually would receive overtime pay. Employers would then have an incentive to reduce their hours. The $69,000 figure would merely restore the situation that existed in 1975 in terms of constant dollars. President Obama has the authority to make the change by executive action, but he has to date chosen not to act in this regard. But, again, the goal is to reduce hours, not inflate worker pay.

If it were up to me, I would eliminate as many of the exempt categories in the law as possible. Managerial and professional employees, too, need time off from work. In fact, in terms of changing social values, it would be good to abandon the idea that the more talented, higher ranking people despise leisure while the lazy ne’er-do-wells soak it up. For people who can effectively set their own salaries - CEOs and the self-employed - as well as seasonal workers, laws relating to work hours and overtime pay may not make sense. But for everyone else, to be covered by the Fair Labor Standards Act would be a major step forward in both income and quality of life.

What about outsourcing of labor?

Still another consideration needs to be discussed. The shorter-workweek proposal would have beneficial effects in a closed economic system where the law of supply and demand controls prices and costs. However, our economy is not closed. We are instead living in a global economy where the U.S. government cannot set standards for wages and hours. Businesses compete worldwide and so do production workers. As it is, our government’s free-trade policies have put U.S. workers in direct competition with poorly paid workers in Latin and Asia, causing manufacturing jobs to go overseas. Automated production has started to reverse that trend but there is still a threat from foreign competition in the labor market.

The solution is to scrap free trade and replace it with a system of tariffs that rewards individual producers for meeting higher labor and environmental standards. With international auditing and computer technology, we are now able to create customized tariffs that add back the cost advantage that businesses have gained in shipping jobs to low wage, long hours, sweatshop factories abroad. Yes, businesses could still produce goods under substandard conditions but they would have to pay the piper through tariffs when they bring products into the United States to tap our consumer market. Such a system would, of course, require international cooperation but I think it might be forthcoming. We Americans are fast becoming the laggards when it comes to improved labor standards.

What about the level of wages?

There is one other question - perhaps the most important one - that relates to the shorter-workweek proposal. How would income be affected? Americans have been conditioned to believe that shorter hours mean lower wages, at least on a weekly basis. Many people are so strapped financially that they would never think of supporting a scheme to work less time. How could they then make ends meet if they cannot working normal hours?

The reason for such a mentality is that the only time shorter work hours are considered is during recessions when “work sharing” becomes popular. During cyclical downturns, there is insufficient consumer demand to warrant steady production and full employment. Naturally wages will suffer during such times. Work sharing will be offered in the spirit of self-sacrifice. However, the reason to cut hours is not to share resources during hard times. Instead, it is to offset the labor-displacing effect of improved productivity in the long term as technology becomes substituted for human labor. Productivity steadily improves during hard and prosperous times alike. Working hours should be cut as well when times are good. Then people would not see this as something associated exclusively with recessions.

Another negative association has been created by Obamacare. The law requires businesses that work an employee more than 30 hours a week to provide health-insurance coverage for the employee. Many businesses evade that requirement by cutting the employee’s work to a level below thirty hours. I know a young woman who managed a pizza store for a big chain. They cut her hours to below thirty. She had to take a second job to make ends meet. In her mind, I suppose, cuts in work time mean cuts in income. Though a manager, however, she was an underpaid worker whose employment would not have much impact on the labor market. The shorter-workweek proposal only works if it is done on a broad scale over a long period of time. That way, labor supply can be affected so that the level of income will be protected.

Back in the day when Americans did have experience with shortened work hours, the beneficial effects were better understood. University of Chicago economist, Paul Douglas, who later served in the U.S. Senate, studied the impact of hours changes upon income. Confirming the “Simiand effect” (named after a French economist who studied the coal industry), he found a positive correlation between wages and reduced hours. Industries that had relatively short hours also had relatively high wages. This was the conclusion reached in Douglas’ book, Real Wages in the United States, 1890-1926. It was a time when work hours were steadily being reduced.

In 1933, as the Great Depression deepened, the U.S. Senate passed a bill introduced by Hugo Black that would have created a 5-day, 30-hour workweek. Opposition emerged among Congressional staffers and outside business interests. The incoming president, Franklin D. Roosevelt, eventually opposed the bill, too. Instead, we had various New Deal experiments, including reductions in work time, that did not substantially reduce unemployment until the time of World War II. Seeing the economic stimulus provided by war, economists later put the country on a permanent wartime footing to fight communism. The key decision was made in National Security Council report 68, issued in 1950.

Since we Americans have recently had little experience with permanently shortened work hours, academic economists have become phobic on the subject citing hoary myths such as the “lump-of-labor fallacy”. Demanding interest groups that want government money have a stranglehold on the body politic. Almost unnoticed, the rest of the world has caught up with our standards as an industrial society and, in the case of Europeans, gone beyond us in providing leisure for working people. Our economy has become highly imbalanced as education, medicine, corrections, and war expand at a cancerous rate. Even if Congress did decide to reduce working hours as the U.S. Senate did in 1933, the encrusted interests might frustrate the entire scheme. So what do we do?

I would say that we should enact the proposed amendments to the Fair Labor Standards Act that would reduce hours. Also, go out on a limb in guaranteeing that wages will not drop by more than a certain amount when the hours change is made. If payment is required to certain workers to make good on that promise, the fund financed by the forfeited half-time overtime premium will cover, at least, part of the cost. Another part might have to come from taxpayers. But eventually supply and demand will kick in and wage levels will rise in response to decreased labor supply. There was no government adjustment assistance when we went to the eight-hour day or the five-day week. Yet, the working class did relatively well during those times.

Interest groups that may not let go

Still, I worry about the demanding interest groups whose recent gain in employment and share of Gross Domestic Product have come at the expense of productive enterprise. Can we assume that, if work hours are cut and workers are again needed in agriculture, manufacturing, and other useful occupations, resources will cease to be required by the “necessary evils”? Will people be allowed to take jobs without massive educational credentials? Will banks cease being collectors of late fees and start lending again? If youth finds meaningful employment and stops engaging in criminal activity, will the law-enforcement, criminal-justice, and corrections industries subside accordingly? If the well-rested workers become healthy again, will the doctors stop overprescribing medications? Will the desperate gamblers turn to more wholesome activities? Can this nation ever refrain from war?

I suspect that the switch to a saner economy will not come without a struggle. The present economy has “grown” into many areas of enterprise that may not let go even after they are no longer needed for employment reasons. So, without precedent, I will speculate that government action may also be needed to prevent these less wholesome interests from strangling our imagined reborn economy in its cradle. Those now holding the money will not want their privilege taken away. And since they currently control the government, government officials may not permit a better and healthier society to emerge even if it were possible.

At the risk of nailing my political coffin shut, let me be specific.

College graduates who incurred a huge debt should be allowed to discharge the debt in bankruptcy if they cannot find suitable employment to repay the loans.

Employers should stop requiring college degrees if the fields of study have nothing to do with requirements of the particular job positions. (This will happen naturally if the oversupply of job applicants shrinks to a normal level.)

Our expensive court system should be replaced by a system of judges, magistrates and clerks hired by the court who decide cases after meeting informally with the disputing parties. Judges should decide cases by comparing written law with the facts of the case and should not consider judicial precedent in reaching a decision. The hourly fees of private attorneys working in the public courts should be capped.

The federal or state government should operate a public-health service that would provide basic medicine free of charge or at a low fee. Extraordinary health needs might be met by a system of private health providers whose cost would be borne mainly by individuals.

The U.S. government should turn over its international peace-keeping or regime-changing operations to the United Nations.

Prison inmates incarcerated on drug charges and other nonviolent crimes should be released. Marijuana should be legalized both as a medical and recreational drug.

Have I attacked enough sacred cows yet?

Admittedly, some of these are half-baked ideas that will require much more thought and discussion if they can be taken seriously. What I mean to say here is that other adjustments may need to be made to reduce costs if employment generated by shorter work hours is put back into the productive sector of industry. Also, if shorter work hours do create jobs in the productive economy, discharged workers in the bureaucratic sector will at least have a place to go.

To create a new society of leisure

The four-day, thirty-two hour workweek, instituted by simple amendment of the Fair Labor Standards Act, would be the first step in creating a society of leisure. Either it works or it does not. Assuming that the change is successful, the process can continue. After another five or ten years, it may then be time to cut another day from the workweek. We could have a three-day, twenty-four hour week. Alternatively, it may be time to cut an hour or two from the work day. A four-day week of working six hours in the day would also be a twenty-four hour workweek.

Or, perhaps, the additional leisure should be taken in the form of legal vacations. The International Labor Organization’s Holidays with Pay convention adopted in 1970 provides for a minimum vacation of three weeks in a year for employees who have worked at a firm for at least a year. The U.S. government might consider joining the rest of the world in requiring adequate vacations.

The point is that technology-driven increases in labor productivity have made it possible to afford nearly any kind of hours reduction, assuming that the grazing “sacred cows” can be kept in check. What a world this would be!

Keep in mind that the world of increased leisure is a world that people themselves will decide to make, either individually or in families and other groups. It would be good for them to be less competitive and contentious and more sociable; but again these are choices that leisurely people will have to make. They can spend the extra time watching television or they can spend the time in more active and creative pursuits. It is not up to me to say what people should do in their leisure. People have the right to waste their lives from my point of view. But at least it will be they making that decision rather than some business or government official who makes it for them.

Even so, I will speculate what might be in this kind of world. To start out, it may not be so important to succeed in the educational and career competition that we have now. If people spend less time at work, the workplace hierarchy will be less important. There may be greater turnover among the corporate and professional leaders because in a world of leisure such people may themselves have other interests. We would all be seeking self-fulfillment of some sort. There would be more entry points to positions of leadership.

I would imagine that the business world will become more like military service. One has an obligation to serve one’s community in the sometimes unpleasant work of providing material sustenance and support for other people just as one has an obligation to serve one’s country in the armed forces. Maybe the tour of duty would last a year in certain positions, or maybe five, ten, or twenty years. To reach a certain career position would not define one’s personal identity as it does now. That is because more people are passing through those positions and one also has a life outside of work.

I also believe that education needs to be scaled back to a more reasonable size. No longer can it be the funnel leading competitively to lucrative careers. There can be other, less expensive methods of preparing for careers. Some may involve the use of technology to convey an instructional message. The prerequisite for careers should be mainly the knowledge needed to perform functions competently, sometimes tailored to particular positions. It is also unfair for tuition-paying students to finance the research of college professors. Society as a whole should do that since society is the beneficiary.

Higher education can reposition itself to be an incubator of knowledge instead of being a preparer for desirable careers. The liberal arts can also play a role in its mission. Government should subsidize much of its operation as it does public libraries.

I imagine college campuses as a place where likeminded intellectuals and other creative souls can gather in formal or informal communities to pursue common interests. I can imagine great debates and discussions taking place. There can be contests with prizes to create certain things; and from such activities can come hierarchies of respected persons - hierarchies that do not depend on positions in business organizations or in government. People can be recognized for their self-chosen and sometimes unusual achievements.

I recall that the Renaissance is supposed to have begun in a contest to design and create the bronze doors of the front entrance to the Baptistry in Florence. The contest was held in 1401 A.D. Lorenzo Ghiberti won the contest and Filippo Brunelleschi was runner up. This event attracted broad interest, leading to a flowering of the creative arts and to an expanded culture generally.

Again, I recall that Charles Lindbergh’s solo flight from New York to Paris in 1927 took place because a businessman named Raymond Orteig offered a $25,000 prize to the first person to fly across the Atlantic ocean. A number of aviators competed for the prize but “Lucky Lindbergh” won. This was a period of great mechanical inventions, the gasoline-power airplane being one of them. Lindbergh’s courageous achievement brought him an unprecedented celebrity followed by his contributions to the nascent airlines industry.

Such things are still possible. The human desire to be recognized for achievement is virtually unlimited; and there can be institutions, including educational ones, catering to that desire. Not everything needs to be an achievement in the fine arts or in the mastery of technology. What is new and exciting will allow such events unexpectedly to take place from which the human spirit blossoms.

The new society of leisure can combine communication with distant places through the Internet with revitalized local communities. With more free time, people could interact more often and more vigorously with other people instead of receiving packaged communication from the media as a form of relaxation. Life could again become real.

In a society of leisure, I can imagine people laboring in backyard gardens to produce their own food or to produce better varieties of vegetables. People will have time to repair torn clothing or find new uses for electronic devices. We can cut down on the throw-away culture of discarded commercial products. We can bicycle to work or places of enjoyment. In such ways, we would be leaving a lighter footprint upon the earth while widening the scope of personal freedom.

I believe that the struggle for personal rank and position will always be with us. People have selfish as well as idealistic motives. The trick is to recognize people for activities other than going to war or force-feeding commercial products to large numbers of consumers. We can also work upon ourselves as persons, developing new models of attractive personality. But to do this we need adequate leisure; and that is what Americans presently do not have.

 

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