Thought experiment of the day, job-creation edition

By Felix Salmon
September 15, 2011

Note to “job creators” out there: With $2 billion, you could employ 40,000 people for a full year at $50,000 each. #roguetradeless than a minute ago via web Favorite Retweet Reply

My colleague Pedro da Costa has this intriguing tweet this morning, and I thought I’d throw it out there for bloggers and commenters: let’s say I gave you 40,000 people earning $50,000 apiece, and asked you to put them to work for one full year. Could you create a business worth more than $2 billion? How would you do that? And how many people would that business employ going forwards?

(Small print: yes, you can spend $X over and above the cost of labor, but then the business has to be worth $X+$2 billion. And you can pay some people more than $50,000, so long as you still employ 40,000 people in all. And for the purpose of this thought experiment, let’s ignore things like payroll taxes and the like.)

I’m sure that Andrew Mason would have some ideas here: he’s one of the few entrepreneurs who isn’t shy about hiring a lot of people.

My idea: outsourced mortgage servicing. Create a mortgage servicer from scratch, where everybody who calls in is given a single point of contact — a unique individual who owns their problems and is charged with finding solutions to any problem, including refinancing and loan modification. There’s got to be a way of building up enough trust with both banks and homeowners, over the course of a year, to build a $2 billion business somehow.


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MERS II: The Felix Strikes Back?

Posted by klhoughton | Report as abusive

I don’t know if it would work on that scale or not, but I think there is a market for higher quality household furnishings than what we get at ikea or Wal-Mart — things made by craftsmen rather than slapped together for the lowest possible cost. One thing leading me here is my antique dresser which isn’t fancy at all, but has lasted forever because it was well built to begin with. Another is Starbucks and the way that firm changed what Americans were willing to pay for a cup of coffee by putting out a product that was enormously better than the crap we had been settling for.

Posted by dr_eats_babies | Report as abusive

The market for that kind of stuff is thin. Hitchcock Furniture was in essentially that business, and they went bankrupt a decade ago. Their furniture was literally twice the price of the mass-produced knock-offs. The fact that it was designed to last forever (instead of for 5-10 years) wasn’t enough to convince people.

Plenty of individual craftsmen around, though, if you still want something handmade and are willing to pay for the necessary labor.

Will also note that any business model that relies on skilled craftsmen will be difficult to scale rapidly. And they may prefer to work independently, exercising greater creative control over their product.

Posted by TFF | Report as abusive

Fair enough – I was conforming to the thought experiment. My actual idea is that this would be a good small business in my area, where there are lots of crunchy locavore types who would prefer locally produced goods to cheap imports.

Posted by dr_eats_babies | Report as abusive

In one year?

No, I couldn’t do that.

Could I take $2 billion and give you, in a few years time, one that employs 40,000 people and is worth more than $2 billion?

Yes. Or at least a damn good shot at it. Slightly technical, but there’s huge amounts of something called “red mud” out there. Couple of billion tonnes with a further 80 million being added each year. At the moment this is horrible, deadly, polluting stuff. However, it can also be viewed as low grade iron ore with a few more interesting metals that can be extracted from it.

Recent advances in furnace technology have meant that it is in fact now possible to use it as low grade iron ore, and also thus extract those other useful metals. It would solve the problem of relying on China for rare earths too.

Building a company to clean up the pollution and profitably produce metals could be done for a lot less than $2 billion in fact but I’ll take that if it’s on offer.

Posted by TimWorstall | Report as abusive

I’d hire 40,000 people to lobby Congress to change the tax law to provide for a $55,000 per year tax credit for any firm employing more than 30,000 US-based employees.

Step 2 – Profit!

Posted by NotAnEconomist | Report as abusive

Launch a building company in Germany that does refurbishing of houses and blocks of flats for energy efficiency. It’s in demand, it’s necessary and you need to wait 3 month to even get an appointment with a craftsman or builder here. The market is cleared in building.

Use modern materials, develope a system of ‘adaptive kit’ that can be used on most row houses, blocks of flats etc and a window replacement division and scale it.

Then export the expertise to skandinavia/norway, where waste of energy and bad insulation are endemic and go over that backwater that is GB.

Posted by Finster | Report as abusive

Re Felix’s mortgage servicing notion: it should include the possibility of personal bankruptcy or a short sale in some states and walking away in others. I see by the notices on the door that a neighbor has taken the latter course.

Posted by walt9316 | Report as abusive

Felix any Government run “money pit” is a way for businesses to swindle it. Make what is available work and accountable. Handslaps and Senate commissions are not deterrents.

One stop shops are the way to say “wasn’t me” blame that Government subsidized business [I swindled]. If the banks wished to be ethical and do their job and follow the law there would have been no servicer problem because they would have been closed down for not doing business ethically. the banks cheered their “efficiency” even though they knew there was no note… or proper and legal documentation to be had.

There is also a likelihood of another recession, so the refis you make today might not fly tomorrow. Who wants the headache of being that one stop phone call and who is going to get through?

This program in Georgia is a terrific one if done properly. As it is it was poorly run and drastically understaffed. The thing about Unemployment Insurance is not everyone wants to be on it.

How could that office be understaffed when arrangement should be made that each person does the “other 2 days” they are not working in the office doing followup and calling businesses to see how the person is doing, whether they are working and learning and suited for the on the job training.

The program had no dedicated staff for goodness sake. How can that be allowed to be funded being no one is doing anything but “everseeing.” Crazy if you aren’t making it work and calling businesses to help you tweak it to work.

The program has incredible potential but it was badly implemented and run. If the program was given a subsidy for stipends (as no staff had to be paid) why was the stipend increased so drastically other than to ensure the program failed?

“In September 2010, the program was opened to any job seeker, the stipend was increased to $600 from $240 and its length was reduced to six weeks from eight. Monthly participation jumped to a peak of 4,081 in January this year.” 9/us-obama-jobs-georgia-idUSTRE7880LV201 10909

Posted by hsvkitty | Report as abusive

Good concept. Change the law in such a way that big companies aren’t just accountable to shareholders, and they somehow have an incentive to hire as many people as possible, as long as they can still remain in business.

Posted by Doly | Report as abusive

Direct employment I couldn’t do, but here’s an indirect one:

Create an ETF that will invest in S&P500 companies, weighted by the number of jobs they created last quarter.

Much of the money goes straight into the fund, to get the ball rolling.

Some goes to hiring a fantastic sales and PR team. You need to cajole institutional investors, pension funds and the like into buying in, multiplying your initial $2bn. And you need to rub CEOs’ faces in the idea, get them thinking of payroll expansion as a way to inflate their share price.

Posted by danohuiginn | Report as abusive

One could build a large Coal-to-Liquids Plant as a National Strategic Infrastructure project to reduce our dependence on foreign sources of petroleum using a cheap, plentiful, and domestic energy source. Yes, there would be carbon emissions, but there must be some point at which those extra emissions are justified by additional employment to restore an ailing economy to its potential growth trend.

Posted by Indy-1 | Report as abusive

Screw the 40,000 jobs at $50,000. I’d fund REGIONAL CENTERS that would provide anyone without a job or otherwise can only find part-time jobs or are self-employed, ACCESS to the following:

-FREE jobs training for targeted, high value, skilled jobs (think computer science and similar);
-FREE advisement and mentoring for startups;
-FREE access to expensive tools, computers and software to help people create their own jobs;
-FREE workspaces for people to create their own goods.

In other words, I’d teach people to fish, give them access to the tools to fish, and give them the space to learn to fish.

Posted by GRRR | Report as abusive

@Indy-1 you could not build a coal to liquids plant for 2 billion dollars anywhere in the western world. A gas to liquids plant was just built in Quatar with cheap labor and steamlined permiting with the full support of the local population and goverment… and that cost the better part of $20 billion.

Even at that price the plant makes money. Your coal to liquids idea is spot on though. They tried to build one in my state on the site of a closed nuke plant. It was a parcel of land upon which nothing else will ever be built on any human time scale. It had pre-existing transmission infastructure in place. It had access to ocean shipping which they were going to use to bring in the coal and bio-mass that they were going to turn into ultra clean diesel fuel and produce enough electricity to power a quarter of my state as a byproduct.

They also would have paid 100% of local property taxes leaving every resident in town with no annual tax bill. To do it they needed to rewrite the zoning which would allow them to build a really tall smokestack which would only have been visible to about 10 property owners… but through which more greenhouse gas and mercury emissions would have passed than the entire state curently produces. The plant would have been a top 10 private employer with the average job paying about 150% of my states median wage.

Our locals voted down the proposal by about a 60/40 margin… and would probably do so again even in the worst recession in living memory.

Posted by y2kurtus | Report as abusive

“They tried to build one in my state on the site of a closed nuke plant. It was a parcel of land upon which nothing else will ever be built on any human time scale.”

Makes sense… Coal plants release even more radioactivity than (properly operating) nuclear plants. Might as well site one on a location that once held the other.

Posted by TFF | Report as abusive

@y2kurtus: You are correct, of course, that $2 Billion would be insufficient for even a small plant. It’s better to to ask about the $/bpd ratio. I figured I would pro-rate the thought-experiment’s number into it and consider only the labor component of the total cost since the inquiry seems to allocate the entire amount of money to employee expenses.

But a project of this sort has exactly the characteristic which the Economists claim we need. Given current oil and coal futures prices and existing technology it is already likely a profitable venture (ask Sasol) and a gigantic value-creating investment is just what we require. It is both extraordinarily capital-intensive (giving somewhere for the Fed’s wall of extra cash reserves to go), and, at least temporarily, very labor intensive in both low and high-skilled construction trades – precisely the places hurting the most is the US economy right now.

The obvious question is “Well, why don’t you go out and build one and borrow all that cheap cash and hire all those suffering workers right now?” The neutral answer has unfortunately taken on a political slant, but it remains accurately termed, “regulatory uncertainty”.

As valuable as this project may be for economic growth, employment, national security, energy independence, stabilizing world motor fuel supplies and prices, easing the trade deficit, breaking OPEC’s power and preventing billions from flowing to terrorist sponsors – no one knows whether the project would get an EPA green light, and if so, at what cost because of the carbon issue. And even if we knew, who is to say that the law won’t change in the future? One can buy and sell futures to hedge against supply and product price uncertainties, but one cannot hedge against elections and the law over the expected lifetime of a plant.

If Shady Solyndra can get loan guarantees, maybe the EPA can give a CTL plant “carbon guarantees”. The project agrees proactively, in the absence of any law so requiring, to pay a carbon emissions tax of $X per ton, but the GOV guarantees to waive any amount above that, or pay for compliance/upgrade costs should the law change. But in the absence of that kind of rock-solid assurance, no one’s going to take the risk no matter how much free cash they have access to. With just a regulatory guarantee, you’d see a million extra people employed and billions in extra spending before the next election without a single dime of stimulus money. But, alas, this won’t happen in the current environment, even given our desperate circumstances.

@TFF: One of the advantages of the CTL process is that the reactant coal is gasified and so heavy metals, including radioactive elements, do not escape with emissions.

Posted by Indy-1 | Report as abusive

“My idea: outsourced mortgage servicing. Create a mortgage servicer from scratch, where everybody who calls in is given a single point of contact — a unique individual who owns their problems and is charged with finding solutions to any problem, including refinancing and loan modification.”

That’s assuming you can find enough qualified people to do the job well.

If you offer health insurance benefits as well, I’d gladly sign documents (with my own name, or someone else’s…your choice) for $30K/yr. As long as I don’t have to read any of ‘em.

Posted by NedStark | Report as abusive