Rethinking the Social Safety Net

The COVID-19 epidemic wreaked havoc on the majority of American households. The USC Dornsife poll reported on April 17th that 15% of previously employed people in the country have lost their jobs because of the virus. That translates into close to 26 million newly unemployed. While many of those jobs will come back once we get through this, I do not think all of them will. Future social distancing rules will, for instance, limit the number of patrons a restaurant or a bar can serve. Fewer customers means fewer employees to serve them.

But rather than hypothesize, let us look at the context of the meltdown in jobs and consumer earnings. Last year, Joel Kotkin and I researched how middle-class California can afford to live in the Golden State. We published our findings in “California Feudalism: The Squeeze On The Middle Class”. We estimated that between two-thirds and three-quarters of California households are not bringing home enough money to meet their real costs of living. They were borrowing more, saving less and had little or no reserves to meet emergencies. Our findings seemed somewhat academic a year ago. Somehow, people were getting through life.

But today, it was clear how close to the mark we were. Our prediction is that we have not seen the real household repercussions of this shock to the system. We will see increased economic desperation hitting many more people. And the “V” shaped recovery the economists are predicting may not be as steep as they think, as the fundamental economics of the most affected California employers . . . retailers, restaurants and tourist attractions . . . is rethought.

Which brings me to the notion of the social safety net. This idea, conceived in the depths of the Great Depression of the 1930’s, has been most recently applied largely to poor people, and to people who are temporarily unemployed. However, at the time most social safety net programs were created, income in the country was a very different place. What used to be a large middle class, with the skills and the opportunities to be self-sufficient, has become very polarized. An extremely small elite owns the vast majority of income and wealth. Entrepreneurship is down. Many opportunities to open middle-skill businesses has evaporated as we became with off-shoring everything from welding to software coding. And the only major growth we have had in jobs has come from the low-paying service industry.

The safety net we need now has to change from simply a stimulus check to cover people for a month, to a complete re-think of the cycle of future success. The new safety net needs to consider the following:

• How we retrain people for a clearly changing future
• How we provide incentives for companies to hire and mentor people
• How to create a pay structure that does not also create or reinforce poverty
• How we provide adequate housing for people
• How to share in the success of the organizations they contribute to beyond simply retaining their jobs
• How we create a national “rainy day fund” (besides higher taxes) that lets us cushion the blow from the next crisis or epidemic.

This may entail changes to the more narcissistic ethics of the free-market, capitalistic system. However, I do not think a full-blown social welfare state is warranted. Just as businesspeople who create wealth by leveraging the talent of their employees have an obligation to their capital-providing investors, they ALSO have an obligation to the talent itself. Today, investors typically wins while employees often lose. Businesspeople like to think they discharge their responsibility to employees by keeping them employed. However, continued employment in low-wage industries is more akin to feudalism than it is thriving.

Here are four specific suggestions on things to re-design in the American economy to better serve the middle class without becoming a welfare state:

1. Make education more useful for future middle-class workers. Change how curricula is developed in every state to include active participation from the business community. Currently, this is largely the province of educators and administrators of schools. The curricula for K-12 needs to be as dynamic as the economic environment it exists within. Without the ultimate employer of talent in the planning process, curricula cannot adapt to change
2. Make nurturing talent a national priority. States and the federal government need to create a tax incentive for companies to hire and formally mentor new talent. The quid pro quo for receiving incentives is this: companies must create a certification program that attests to the competence of those trainees. The certification should be broad in nature, focusing on the basic business skills every business needs. The skills also need to be updated every 2 to 3 years to include new technologies and everyday business analytical competence. The certification should be transportable across industries and accepted as a standard. Those that excel in the training process should earn more than those who do not.
3. At the core of the middle-class safety net is having an affordable place to live. We need to redesign the suburban redevelopment process to make it easy to redevelop retail areas that we no longer need into residential or mixed-use spaces. While there are programs to rehabilitate the blighted urban core, there are no programs to revitalize the places most Californians want to live. We could greatly increase the availability of housing, and thus reduce its costs, if we tapped into the vast number of old malls and strip centers that are poorly utilized today. To do that, we need to provide a coordinated set of incentives to developers and change the way municipalities generate revenue so that it is no longer retail sales tax-driven.
4. On the issue of giving workers a stake in the success of the companies they help succeed, I propose a decidedly capitalistic solution. Every company, publicly and privately-held must reserve a minimum of 15% of its shares for workers. Today’s templates of ESOPs (Employee Stock Ownership Plans) and ISO’s (Incentive Stock Options plans) can be adapted to provide all workers at least some participation in the upside (and in the risk of the downside) of their work.

The COVID-19 epidemic provides us with a perfect opportunity to re-think the system. Our leaders have an obligation to our society to start that discussion and to help nurture it. If not, we risk even greater shocks in the future.

Marshall Toplansky is Clinical Assistant Professor of Management Science at Chapman University. He is co-principal investigator, with Joel Kotkin on “The Orange County Model”, a demographic and econometric research project to identify growth strategies for that region. He is formerly Managing Director of KPMG’s national center of excellence in data and analytics, and is co-founder of Wise Window, a pioneer in sentiment analysis and the use of big data for predictive models. He lives in Orange, California.