Is there anything the government and others can do that will set the economy and hiring on fire—and quickly? The government has almost no control over the economy, contrary to all the pronouncements by politicians running for office. There are many assumptions that tanked the economy, but the true explanations are elusive. But the path to economic recovery is out there—targeted business tax credits for hiring the unemployed, lower prices to small business, and Americans demanding an end to outsourcing could add 5 million jobs in five years.
Tax Credits, Small Businesses, Large Corporations, and Individuals
To really get the economy cooking, it will take the whole country and all its parts. If the public, large corporations, and government all took the appropriate actions outlined here, we would be on our way to true economic recovery. This plan is simply a management consultant’s pragmatic look at what can really affect the decisions of those who can produce economic growth. The problem with government and political analysis is that, for the most part, they don’t understand what does and doesn’t affect business choices.
There are three steps that—if done together by the general public, larger corporations, and the government—could add 1 million jobs in 2011 and up to 5 million jobs within five years. Will everyone do what I’m suggesting? The past does not give us the warm and fuzzy feeling that enough people will step up to the plate to do what needs to be done. But none of us have been thorough an economic nightmare like this before so maybe people are ready to stand up and take pragmatic action.
Let’s start with some basic concepts that form the foundation for these recommendations. Fortunately, almost everyone from all political persuasions agrees that these are a key. So we do have something in common to build from. First, small business is the key to hiring and job growth. They can hire more people and start things happening much faster than big business. Second, large corporations are mostly hiring people who are already employed instead of the unemployed. Third, America has shipped way too many jobs overseas.
While most people agree with these three concepts, ideas on how to get small businesses to come out of their cocoons, how to get companies to hire those who are out of work, and how to end or minimize outsourcing do not reflect what it will really take to make this happen. Small businesses are trying to avoid risk at all cost because what they see is a gloomy picture and they are cash starved. Large corporations generally do what is in their best financial interest and need incentives and pressure to change.
Here are the actions that can change the decisions of small and large businesses.
Business Tax Credits
The key idea here is to offer large payroll tax credits for businesses that hire new employees and major first-year depreciation write offs strictly for small businesses that buy equipment.
The focus here is on small businesses. Large businesses don’t need these credits and will benefit greatly from the increased economic activity of the small businesses. Currently, large businesses are mostly hiring people who are already employed, so a smaller credit to hire the unemployed should be offered to them.
The HIRE Act passed by Congress in March 2010 is an example of Congress voting an act to brag that they did something, but the act itself doesn’t motivate anyone to do anything. It offers a 50% credit on Social Security taxes (not Medicare) for payroll in 2010, and if a new employee stays a year, the business gets a $1000 tax credit. Wake me when it’s over. The act produced no results because it didn’t offer enough incentive to cause a business to do what is needed—hire the unemployed right now. Compare that to my proposal with credits on actual payroll from 30% to 50% for smaller businesses and 10% to 25% for larger businesses. We are talking about thousands of dollars, and maybe even $10,000 or more in tax credits for each employee hired.
These credits will work because they attack the cause of small business inaction—risk. Small businesses don’t want to borrow money right now because they don’t want to add to their expenses in any way. Borrowing is risky, especially when the outlook doesn’t look promising. It’s too bad the government didn’t actually talk with small business owners and management consultants before they passed their recent legislation providing small business loans. But before we go further into why these credits would work, let’s dispense with the most common political proposal to help the economy, which involves income taxes.
A deep review of income tax cuts from the Bush and Reagan administrations does not provide a clear connection between these cuts and economic growth. Yes, hiring did increase and the gross national product did go up after these cuts, but a thorough economic analysis does not show a strong cause and effect relationship. In both cases, the cuts occurred right at the end of a prolonged recession. In all recessions since World War II, with the exception of the current one, economic activity and hiring rose substantially when a recession ended. It is more likely that caused the increases then the tax cuts themselves.
In my forty years in business and twenty-five years as a consultant working with business owners and executives, I have yet to hear that income taxes were a major factor in making a go or no-go decision on a business expansion plan. If a business can generate more profit, it will do so even if the tax rate is higher. Just because the tax percentage goes up, a business is still left with more money after tax from expanded sales than it had before the expansion.
I have discovered that when income tax rates are higher, businesses often spend more to get additional tax deductions and use those to help fund their expansions. The higher the tax rate, the more it pays to increase deductible expenses as long as those expenses can contribute to growth. While there may be an occasional business person that puts more emphasis on income tax rates, generally taxes do not drive business decisions.
What does affect business decisions, especially small business decisions? First, business people look to see if there is anyone else out there who might buy what they offer. They need to see prospective customers. Second, they tend to respond to anything that will help them reduce their expenditures while allowing them to pursue more business. Third, they want to grow but not take on additional burdens like loans or more employees in a weak economy. Fourth, they do want to grow and are thinking about how they can do so if only there was a way that made economic sense. It’s sort of like the old adage about which came first, the chicken or the egg.
So the answer lies in doing something that substantially reduces business risk and offers an economic deal like we’ve never seen before and likely will never see again. It has to be that good. There are tens of thousands of businesses out there that are thinking about expansion. Many see opportunities where they could sell more, but are afraid to take the risk right now.
Businesses need something huge to get them off the dime—and really big, targeted business tax credits will do that. If the risk of hiring a new employee and purchasing more equipment is reduced enough, it creates a deal that’s just too good to pass up. They will want to take advantage of this deal, especially since it only last for one year. It’s now or never to take advantage of one of the best small business deals of all time.
Targeted Tax Credit Details:
Businesses with 2010 gross sales under $2 million
50% tax credit on all payroll and payroll taxes paid on new hires who come from the unemployed during 2011 only. This is huge. It’s gigantic. My business is planning on hiring someone near the end of 2011, but if this credit were in place, I’d probably move that up to the second quarter to take advantage of the savings. This would pay for all my hiring and training cost and much more. It’s simply too good to pass up. Hire in 2011 or lose the tax credit.
50% first-year depreciation write-off on equipment purchases in 2011. Large corporations will love this one because this will get small businesses buying a lot of equipment from them. They will also have to hire more people to meet the demand. Once again, it’s only good for a year. Buy in 2011 or lose the write off.
Businesses with 2010 gross sales under $10 million
40% tax credit on all payroll and payroll taxes paid on new hires from the unemployed during the year 2011 only.
40% first-year depreciation write-off on equipment purchases in 2011.
Businesses with 2010 gross sales under $25 million
30% tax credit on all payroll and payroll taxes paid on new hires from the unemployed during the year 2011 only.
30% first-year depreciation write-off on equipment purchases in 2011.
1. Large Businesses
10% tax credit on all payroll and payroll taxes for new hires only from the unemployed during the year 2011. A 25% tax credit if they hire someone who has been out of work for at least two years.
While large business don’t need any tax credits and have the cash to hire, the problem right now is that they are mostly hiring people who are already employed. So the little hiring from larger corporations that is occurring is not promoting job growth or economic recovery. While this tax credit is much lower, it is enough to get big companies interested because of the number of people they hire. These dollars add up fast. They are generally extremely focused on saving money and if they can get a small tax credit for hiring unemployed people instead of the already employed, it will cause them to shift their hiring practices in 2011 dramatically. If they can only get this incentive in 2011, they will hire more than they normally would to take advantage of the credit.
Large corporations have been very short sighted in their hiring practices during this recession. They have become a part of the problem instead of a part of the solution. To maximize job growth and economic recovery, it’s the unemployed who need to be hired, not those who already have a job. It might be nice if every large corporation voluntarily reported what percentage of their total hires each month came from the unemployed and how long they had been unemployed.
The special 25% tax credit to motivate larger companies to hire people who have been out of work for at least two years could really make a difference. This is not a normal recession. It’s not just that the unemployment rate has stayed stubbornly high for a long time. It’s that there are too many people who have been out of work for years. They really need jobs and they need those jobs now. To hire someone who is already employed over these people is disgraceful. Large corporations need to be doing their part to improve the economy and this is one of the best things they could do.
The key to this is the size of the tax credits and write offs and they are only available for one year. There should be no extensions on this for any reason. It ends December 31, 2011. Use or lose it by then.
The high tax credits for small businesses benefit large businesses. When people are put back to work that gets more money circulating in the economy, which increases demand for goods and services. Large corporation sales will rise. A large percentage of equipment purchases by small businesses will be from large corporations further increasing their sales. All of that will cause large corporations to start hiring more too. If the large corporations hire more people from the unemployed, that further drops the unemployment rate.
If congress and the executive branch tweak this recommendation at all, I will not support it and recommend against its passage. It’s time to leave the party ideologies and lobbying effects aside and finally do something that will work. Pragmatism trumps ideology.
2. Small Businesses
In addition to the ideas above, large businesses need to dut prices on their products and services to small businesses by 25% to 50%. The tax credits and write-offs are only part of the entire solution. These do substantially reduce risk and create an attractive savings, but considering how scared small businesses are right now, they need even more of a break to really get them cranking and growing. I realize that no large corporation wants to cut into its profits. I personally believe the shareholders will understand and support this action. It’s the right thing to do.
This economy is not responding as previous economies have responded. This is the recession that just keeps on going and going (even though we’ve been told that technically the recession is over). There may be more here than just an economic contraction—it is entirely possible we are in the middle of an economic restructuring.
The more financial breaks small businesses can get right now, the more likely they are to hire and invest for growth. That gets more money flowing in the economy, which lifts all economic activity. At the same time, it gets people back to work and off of unemployment.
Why should large businesses help small businesses? Because large businesses know that small business is the economic engine that can lift the economy. Large businesses can, for the most part, only respond to what is already happening or take away sales from a competitor. In this economy, their activity will not break us out of the economic log jam we are in. This discount can prime the economic pump which will accelerate large business growth. It’s a win-win situation. It’s also time for small businesses get a break, and not just the businesses that can buy at the highest volume levels.
I recently approached a firm that specializes in generating sales leads about using their services for my consulting practice. We could easily increase their hiring by over 500% within two years. That’s the type of hiring growth the economy needs. But this firm, whose services tend to be used by businesses much larger than mine, refused to drop their prices or minimum purchase level for me even after I had explained my size level, cash dilemma, and ability to help the economy. Their decision was very short sighted. They admitted to me their sales are down, but seem to be unwilling to do something that could get the economy moving.
If I was the CEO of a large corporation selling in the business to business market today, I would create a special program just for small businesses with a pricing structure lower than any of my other customers paid. This is what all large corporations should do right now this month. If they did, they would be amazed at the economic activity it would create.
3. All Americans and Outsourcing
Everyone in the United States must demand that large corporations make a written commitment by a specific date to bring overseas jobs back to America and hold them to it.
The issue of outsourcing has been talked about for decades. While there has been a small group of Americans who have been very vocal about this, most Americans have never lifted a finger to do anything about it. This is not about buying American because many of the products that Americans want are made overseas. Asking Americans to buy something they don’t want will not go very far and most of the jobs that went overseas are for things that are not done in America much anymore.
So what would it take to get large corporations to bring their call centers and manufacturing jobs back to America? They are not going to do this on their own just because I suggested it. Americans do not understand the economic power they have, which is one of the reasons they hardly ever use it. If they really knew what they were capable of, a lot of things could change and change fast.
Corporations do everything based on what their customers actually demand and what keeps their cost low. The jobs went overseas to lower their cost so they could offer better prices. Americans like low prices, so they were willing to accept all these goods and services from overseas without putting up a fight. But with today’s advanced manufacturing and technology processes, facilities can be built in America that would be so productive there would be little change in prices especially when companies don’t have to pay shipping and import taxes on those goods anymore.
The truth is that if a corporation knew it was going to lose a significant number of customers unless it brought jobs back to the US, it would make the change. No corporation can afford to lose a large portion of their customers. That would be business suicide. But, up until now, they haven’t lost customers or faced a legitimate threat of losing many customers due to shipping jobs overseas.
Americans can change this anytime they want. Now would be a pretty good time. There is one and only one thing everyone needs to know about corporations. It’s all about the numbers. They count. Everything they do comes from adding up the numbers. If only 10,000 or 50,000 or 1,000,000 out of 350,000,000 Americans tell a corporation they will stop buying from them unless they change a business practice, the corporation will shrug it off. Those numbers are just way too low to matter. And the corporation will discount these numbers because they know a certain percentage of those individuals are probably bluffing.
It takes numbers much, much larger than that to move corporate America to change something as entrenched as outsourcing. We are talking about 50,000,000 or 100,000,000 or 150,000,000 Americans all demanding the same thing at the same time and not bluffing about it.
If 50,000,000 people wrote letters to the CEOs of every major bank, credit card, computer company, airline, and hotel company to bring all their customer service and technical support call centers back to America by a certain date or they will switch to another company, you would see something happen. This will work if nobody bluffs. If a commitment letter signed by the CEO and Board is not forthcoming by X date, they all have to stop buying or using that company. Period. When this happens to just one company, all their competitors will immediately make the commitment.
If 100,000,000 people write to the CEO of Wal-Mart, Target, Kmart, Macy’s, Gap, and a few more that they want all of their clothes and shoes to be made in America or they will shop elsewhere, it will happen if they are not bluffing. That means if Wal-Mart does not produce a commitment letter signed by the CEO and Board by a certain date, everyone has to stop buying their clothes and shoes from Wal-Mart until they do. It’s just that simple. Huge numbers and decisive action. When enough Americans walk the talk, they can change anything corporate America does.
The problem is that most Americans don’t think their voice or their single action makes a difference. It is an act of faith to write the letter without knowing that 100,000,000 other Americans may write that letter too. But these are the type of numbers it will take to get companies to bring the jobs back to America. The kinds of jobs that would come home include customer service and technical support call centers; computer and computer component manufacturing; cell phone, smart phone, iPods and other electronic device manufacturing; clothing and shoe manufacturing.
We can stop there. If we bring those back, that would represent several million jobs. It might be nice if these returning jobs are placed in the communities that need them the most instead of the states that offer the best incentives.
This is a three-step pragmatic plan that is guaranteed to drive economic recovery and sustain that recovery over the long term. Our government can’t solve problems of this size. They can’t even come close. Sorry, all you politicians running for office with job creation and economic boosting promises you can’t keep. But the government can do some things that will help as long as all businesses and Americans do their part too. It takes everyone working together to right an economy that’s gone wrong. Let’s all pitch in and show we can get the job done.
To Schedule Don Shapiro for an Interview or Appearance
About Don Shapiro
Don Shapiro is the co-author and editor of The Character-Based Leader and President of First Concepts Consultants, Inc. For 28 years, he has worked with for profit and non-profit organizations in over 30 industries to discover ways to grow and operate better based on his original research on how we make and influence choices. Don is an inspiring speaker on leadership, selling, strategy and choices. He is a graduate of the Executive Program in Management at the UCLA Anderson School of Management.