Aiding the Bottom 10%: A Recipe for Economic Decline

It’s a rule-of-thumb among many well run U.S. companies that they must routinely make redundant the 5 to 10 percent of their least productive employees. One obvious reason for doing so is to keep costs down, but there are many other reasons unrelated to cost for doing so.

For one, just as bad apples in sports tend to ruin chemistry such that total team performance declines, subpar performers in an office setting tend to worsen the performance of the most productive for wasting resources, all the while giving the productive an unworthy benchmark of success that allows them to become needlessly satisfied. To shed the least effective is to infuse a more competitive atmosphere among the survivors that aids the bottom line, plus the departed are a flashing signal to the survivors of their fate should they stop working hard.

But most important for an economy very much reliant on the efficient deployment of what is precious human capital, it’s frequently the case among those made redundant that they were misapplying their talents. Layoffs and the feeling of failure they engender are remarkable for focusing the minds of those let go on the kind of work that best suits them, not to mention that while painful, failure is a wonderful teacher that focuses its beneficiaries on mistakes to avoid in the future.

Alcoholism and a drug arrest forced Dominic Dunne out of a cushy Hollywood life into a rented room lacking television and telephone at the Twin View Resorts in rural Oregon. Finished as a Hollywood movie producer, Dunne was in his fifties when he gambled on a career as a writer. Though his first script was roundly criticized, and his first book (The Winners) was a flop, Dunne wrote in his journal, "I have never believed in myself more than when I was writing my script. I was never happier with myself." With a burning desire to succeed while in possession of very few options, Dunne persisted and today is one of the best-known writers of criminal fiction in the world.

While coach of the Philadelphia Eagles, Buddy Ryan cut talented, but drug-abusing wide receiver Cris Carter. Happily, from the devastation of the waiver wire emerged one of the most productive receivers of the modern NFL era; Carter at present a strong future bet for the Hall of Fame. Salomon Brothers let millionaire partner Michael Bloomberg go in 1981, and thank goodness it did because freed of the firm’s bureaucracy, the well-to-do Bloomberg later emerged the billionaire head of an eponymous market-data firm whose terminals are a must-have among traders.

But with company layoffs on the rise, the federal government seeks to make them less frequent by offering tax cuts for the employers that choose to keep their worst employee matches and least productive on the payroll. And as has realistically been the case since the introduction of the income tax, the most economically productive workers are "rewarded" with tax penalties for being that way, while the least productive either pay little or no taxes, or are actually given rebates for not making a lot of money.

Moving to housing, the Obama administration plans to spend $275 billion in order to aid homebuyers who borrowed irrationally in order to buy that which they couldn’t afford. Proponents of the plan suggest that this will be economy enhancing, but in truth, efforts meant to cushion the failures of the bottom 10 percent of homebuyers will be economically retarding for turning the above-mentioned business logic on its head.

For one, it’s well known at this point that subsidization of mistaken investment insures more of the same, and in shielding the profligate from failure, the government shields them from lessons that will help them not to fail in the future. Failure is an excellent teacher, but those most in need of instruction will not be taught if the allegedly soft view of the housing problem prevails.

Less spoken of is the obvious problems that will result from keeping people in houses that in a free system, they couldn’t remain in. For one, it’s fair to presume that a certain portion of strapped homeowners live in parts of the country underperforming economically. In this case, measures taken to keep them tied to a specific location mean that they will be less able to chase economic opportunity that exists elsewhere. In this case, both the individual and the broader economy suffer thanks to housing serving as the proverbial ball-and-chain.

Of course, much ink has been spilled and many words have been spoken about how neighborhoods will be ruined if many of their residents are forced to foreclose. An interesting thought, but if we ignore how federalization of home ownership is blatantly unconstitutional, have our nannies in Washington ever stopped to consider how the saving of the irresponsible could similarly destroy neighborhoods? Indeed, have they considered how once peaceful neighborhoods could be balkanized between those current with their mortgages, and those not but who are being subsidized by their neighbors? Is it unrealistic to suggest that violence could break out, or that the responsible, so offended by their parasitical neighbors, might move elsewhere thus similarly destroying these neighborhoods in crisis?

Advocates of the Obama housing plan say with straight faces it’s not fair that buyers purchased houses that are in certain instances worth much less today. But if we apply the illogic of such reasoning to its logical conclusion in the business world, companies such as Webvan, eToys and theglobe.com would still be in business; wasting human and financial capital in ways that our economy would be even worse off. The reality is that investors in anything frequently find that what they’ve purchased is worth less, but far from a call for more government handouts, this is often a signal telling them to cease throwing good capital after bad. And these failures teach us what not to do in the future.

In the aftermath of the Korean War, North Korea imposed the notion of “songbun” on its citizenry. The poor and shiftless for being poor and shiftless had “good” songbun, and today they are the privileged class for having failed most impressively. The successful in North Korea were demonized for being that way, and today they are the bottom caste in a society that has committed economic suicide right before our eyes.

So while it’s surely a reach to suggest the U.S. is going the way of North Korea, it’s also true that bad policy has a way of slowly wrecking societies over time. At present, with the federal government creating incentives whereby companies will be rewarded by the tax code for not laying off unproductive employees, and just the same where irresponsible homebuyers are being sanctified for being irresponsible, the U.S. political class is imposing its own, minor form of songbun; these actions signaling our nation’s long-term economic decline.