Good Reading -- September 2009
Some really good stuff in here. Hope everyone is doing well.
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The Cost Conundrum -- a great article about healthcare in the U.S.; along with the second article below, one of the best articles I've read in a while.
The Checklist -- another excellent artice from the same author about healthcare practices, but highly applicable to investing and other processes. I've heard (but can't confirm) that the great investor Mohnish Pabrai has cited this article as a key contributor to his investing process (either way, he does advocate checklists). A must read.
Reconstructing American Home Values -- good overview of the current and historical U.S. market
Overcoming Short-termism -- extremely important editorial from the Aspen Institute (of which Buffett is a member) about a major, major problem in corporate America. I would argue, though, that better transparency/disclosure and accounting standards should be priority #1, not #3. I would actually rank the points' importance in reverse order of their appearance -- I'm less optimstic than the authors about any attempt (regulatory or otherwise) to unleash market incentives to encourage more patient capital.
All the Right Moves -- article about chess master and tutor Bruce Pandolfini. Similar to The Checklist in its applicability to investing. Pandolfini "is teaching [his students] how to think. 'My goal,' he says, 'is to help them develop what I consider to be two of the most important forms of intelligence: the ability to read other people, and the ability to understand oneself.'"
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The best investor letter I've read this year and an excellent overview of the financial meltdown, along with some worthwhile opinions on fixing the mess.
A food-for-thought article about improving productivity (particularly in monotonous but necessary jobs) by implementing a four-day, 40-hour work week
PERSPECTIVES (Paul Singer)
LEVERAGE AND RISK MANAGEMENT FAILURES: THE MAIN CAUSES OF THE MESS
There is plenty of blame to spread around, but the main causes of this mess are the prolonged period of low interest rates and easy money, and a breakdown in regulatory and corporate oversight. The “rocket scientists” of Wall Street enabled financial firms to structure around all restrictions on leverage, so effectively there were no impediments to dramatically increasing exposures. Furthermore, senior management at most of the major financial institutions failed to manage their risks properly, and built leverage well beyond any historical boundaries.
Had there been strong restrictions on leverage, not evaded by holding companies, misrated securities (e.g., subprime CDOs) and misclassified instruments (e.g., CDS as “insurance”), the risks could not have reached such insane levels, or caused such severe damage, as experienced in this crisis. Had there not been a widespread push to borrow money, reduce equity and put up little or nothing for homes, the housing boom could not have gotten quite so exposed and the resulting crisis so large. This “witch’s brew” – an insatiable desire to leverage up, the widely-held notion that the optimum leverage is “more,” and the conviction that equity is just a tool of financial engineering and that the ideal capital structures have minimum equity -- has actually been simmering for decades, reaching a boil and becoming dangerous only when these notions became pervasive.
Leverage in the global financial system has risen steadily for the last 50 years, while the cushion of safety imposed on traders (margins and reserves) has shrunk. The leverage grew on a platform of warped compensation incentives and erroneous assumptions about the volatility of the modern world, as well as the impact on volatility of the leverage itself.
We always assumed that the investment banks and major trading institutions (such as AIG) knew “where the bodies were buried” and could “game” that knowledge. Thus we were surprised when those “sophisticated institutions” blew themselves up. In the process of fooling investors, regulators, and ratings agencies about the instruments and the risks, they apparently fooled themselves (or more accurately, their bosses) most of all. Hedge funds must post collateral for nearly all derivatives and other complicated instruments, but -- for no good reason -- dealers and rated counterparties do not. It’s ironic that most of the big institutions were saved only on the basis of government cash infusions and/or guarantees, and now the rescued survivors are able to make extra profits because many of their competitors are gone. Furthermore, in their role as counterparties, they still refuse to give margin deposits to hedge funds, even though many of them would be far less creditworthy than their hedge fund customers were it not for governmental sustenance.
SAVING THE FINANCIAL SYSTEM
The financial system needed to be stabilized, and as a result of the intervention by governments around the world, the domino collapses were halted. Check. However, the way it was done, particularly in the U.S., was reactive rather than strategic. The government threw money around in a helter-skelter manner. In some cases the government guaranteed the institutions, and in other cases it injected money. Some of the money was equity, some was debt. In our view, the government should have supplied funds in a way that let financial institution stockholders and unsecured bondholders bear losses before the taxpayers, quickly reduced leverage and risk at such institutions, and increased transparency.
To this day, the government has not taken steps to force the impaired institutions to recognize losses and clean up their balance sheets. Private investors will provide capital to these companies today only because their investments are explicitly or implicitly guaranteed. But that condition cannot be permanent. For the most part, the failed institutions are still being managed by the same teams which blew them up.
The best way to clean up the banks is to sell the “bad” assets to liquidating trusts at today’s market values (the term “bad bank” is a misnomer, since these entities will not carry on any banking activities). Notwithstanding banks’ grousing to the contrary, all of these assets are able to be priced; it’s just that they don’t like the prices (even despite the recent rally). These sales may instantly render many of the old banks insolvent, but the government could simultaneously put in new money in exchange for a senior position in the banks’ capital structure. The old stock and old unsecured debt would be impaired or wiped out and replaced by contingent claims on excess proceeds from the asset sales, which would be conducted by the liquidating trusts with all reasonable dispatch. However, there would probably not be excess money to give back to the old stockholders and bondholders after the toxic assets were sold, because the losses assumed in today’s prices are real, not imaginary. But the old banks would be clean and back in business. Losses would be borne by the folks who assumed the risks of those losses in the first place, the taxpayers would be maximally protected, and confidence in the American financial system would be restored. Wiping out the unsecured bondholders, by the way, has a zero probability of discouraging new investment by new bondholders. Bankruptcy processes wipe out debt every day, and new money is gladly invested into those enterprises when the old debt is expunged and the entities appear solid.
The government’s goal in its financial policy actions should have been to save the system and important societal functions, not particular firms and stakeholders. Bank holding companies, as presently structured, are not necessary to the financial system’s smooth functioning, and if they are insolvent, they need to be reorganized at minimal risk to taxpayers. The sacrifices ought to be in accordance with law and contractual priorities, not political favoritism or cronyism. Trustworthy financial statements, the solidity of this country’s economic and financial stewardship, and belief that America protects the rule of law, are much higher values than protecting the shareholders and unsecured bondholders of impaired financial institutions from losses which these holders assumed when purchasing the securities.
What is being shaped by current policies is a global financial system dominated by a very few large financial institutions which are under strict government control, not just to limit their risk-taking but also to control their basic business functions.
AUTO INDUSTRY TAKEOVER
A good example of the heavy-handed use of government power is the recent “rescue” of the U.S. auto industry in the blink-and-you’ll-miss-it bankruptcies of Chrysler and General Motors.
Presently, as a result of prior deals with labor, the companies have 95,000 active workers but are supporting the health care of approximately one million retirees and dependents, while also providing pensions to approximately 770,000 retirees and dependents. These legacy costs (especially the pension costs, which were not meaningfully reduced in the recent bankruptcies) impose a weighty burden on the ability of both GM and Chrysler to generate profits on a sustained basis in competition with foreign car companies (including the “transplants”). The combination of the inventory cycle and an economic recovery in the next couple of years may mask this longer-term challenge for a period of time, but we expect these companies to have difficulty competing over the long haul, absent further restructurings at some point in the future.
We agree that it would have been imprudent to allow the domestic auto industry to collapse into chaos in the midst of the current severe economic downturn. However, we are critical of the methods utilized recently to put the industry on firmer financial footing. The normal workings of the bankruptcy process were cast aside. Stakeholders were variously bullied or cut out entirely from the process. Recovery levels to different creditor groups frequently bore little or no relationship to the priority or secured status of their claims. Taxpayers are being asked to save thousands of union jobs that pay above-market wages and benefits and to fund enterprises that have uncertain long-term prospects given the weight of high wage and legacy costs, restrictive labor rules, and a government and union-influenced management structure. Moreover, the government effectively delivered to the unions an upfront payment of many billions of dollars, representing the difference between proper treatment of the unions’ junior (Chrysler) and pari passu (GM) claims, and what the unions actually received in the restructurings. Already, major investment funds are publicly discussing the desire to avoid situations in which either the Federal government or organized labor is involved. That is a good point, but not the main point, since the government was not a player when most Chrysler and GM creditors lent money to the automakers. Rather, the main point is that capital will go where it is welcome and treated fairly and with an understandable rule-of-law framework. Many poor countries, with their kangaroo courts, opaque and claque-like systems, and overt rewards for political favorites, are destitute for a reason. Investors who commit capital under these conditions are suckers, and when others later perceive that reality, the flow of capital into these countries completely dries up, to the impoverishment of their citizens.
We find ourselves trying to overlay a new and unknowable set of risks to situations where the bedrock foundation of rules and laws can now be effectively removed, without warning, ex post facto, by governmental fiat. We fear the true cost of the government's foray into ends-justify-the-means restructurings in the automotive industry has yet to be tallied and will ultimately prove to be a lingering millstone around the domestic economy, credit markets and our stare decisis-driven bankruptcy system for years to come.
There is no persuasive reason why the government was compelled to act the way it did, even if it felt an extreme sense of urgency. Section 363 of the bankruptcy code was used to an unprecedented extent to authorize the selling (for all intents and purposes) of an entire manufacturing company to a new entity, the control of which resided among a select few of the debtor’s constituents, without a vote of creditors and with a structure that effectively decided recoveries of claimants. The wildly disparate recoveries bestowed upon similarly situated creditors, and the granting of higher recoveries to certain junior classes that happened to contain core political donors to the Administration’s election campaign, were seen by many as raw political payback. Perhaps the following quotes will sum up this situation:
President Obama told CBS on March 29th that he planned to outline a set of "sacrifices from all parties involved -- management, labor, shareholders, creditors, suppliers, dealers" that he would like to see met.
President Obama, at an April 30th press conference: “Now, while many stakeholders made sacrifices and worked constructively,…some did not. In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout.…I don’t stand with them….It was unacceptable to let a small group of speculators endanger Chrysler’s future by refusing to sacrifice like everyone else.”
Statement of “Non-TARP Lenders of Chrysler” on April 30th: “[W]e represent many of the country’s teachers unions, major pension and retirement plans and school endowments who have invested through us in senior secured loans to Chrysler. Combined, these loans total about $1 billion. None of us have taken a dime in TARP money….[T]o facilitate Chrysler’s rehabilitation, we offered to take a 40% haircut even though some groups lower down in the legal priority chain in Chrysler debt were being given recoveries of up to 50% or more and being allowed to take out billions of dollars.”
Ron Bloom in Senate hearings on June 10th: “This restructuring process has required deep and painful sacrifices from all stakeholders – including workers, retirees, suppliers, dealers, creditors, and the countless communities that rely on a vibrant American auto industry.”
UAW, in May publication, “UAW GM: Modifications to 2007 Agreement and Addendum to VEBA Agreement”: “For our active members, these tentative changes mean no loss in your base hourly pay, no reduction in your health care, and no reduction in pensions. In addition, we were able to slow the import of vehicles coming from China and other foreign sources and put some of that work in two U.S. plants originally slated to close.”
GETTING THE ECONOMY BACK ON TRACK
We think it is risky for investors to fixate on a particular scenario of economic recovery. Policymakers around the world are obviously reacting to novel events with little or no understanding of how we got here and what to do next. There is no theory or well established experience which has led to the actions and policies that governments have undertaken to date.
Regarding monetary policy, we hope someone can send us research proving that a zero percent interest rate is a wise policy response to current conditions. In modern history, we are aware of only one instance in which a major country instituted such a policy: Japan. By virtually all measures, this experiment continues to fail. It has produced no real growth for close to twenty years and Japan’s balance sheet is wrecked, notwithstanding the fact that the yen has not collapsed and inflation is nonexistent. We shall see if these conditions persist, but armed with that singular experience, the Fed seems to act as if it has been scientifically proven that zero interest rates will not cause an inflationary conflagration, or that inflation is something that can be dealt with easily. We are skeptical.
The 2002-04 episode of 1% interest rates sparked the world’s greatest debt and real estate bubble, which was followed by a widespread asset price collapse and deep recession. So now the low interest rate policy has gone to its ultimate level, zero, in an effort to stave off economic implosion and to promote recovery. Bernanke’s goal can be summed up as ‘no repeat of 1933.’ We actually don’t think American democracy and world stability would survive another 1933. But this objective is not the only important one. We think an equally crucial goal should be ‘no repeat of 1923’ (the German “wheelbarrow” inflation). At the moment, the notion of hyperinflation seems like hyperventilation given the current downturn and the amount of spare capacity in the world. Yet, with three major countries at zero interest rates, fiscal and monetary stimulus pouring in from all quarters, and bottlenecks that are just starting to build due to a variety of factors (environmental, climate, “NIMBY,” and growing anti-capitalist sentiment), we believe that the ammunition is being stockpiled for a major bout of global inflation which is likely to be much more difficult to dampen than authorities currently believe.
Up to now, those who predicted a dollar crisis have been wrong; or maybe they have just been early. Last year’s run-up in commodities prices was pretty large, but did not create a self-reinforcing upsurge of consumer prices, given the overall context of the debt overhang and other deflationary forces. However, the next stage (the timing of which is highly uncertain) of the breakdown of fiscal and monetary discipline in the industrialized West (led by America) could manifest itself in a sharp fall in the dollar and a large rise in consumer prices. If it took 20% interest rates in the early 1980s to cool down 8-9% inflation, imagine what it will take when the unprecedented deficits and monetization initiate the next round of consumer price inflation.
On the fiscal side, the government’s strategic approach should be to provide stability and prevent a self-reinforcing downturn, but also to offer long-term incentives for behaviors which will enhance prosperity, multiplier effects on growth, savings, individual responsibility, freedom, innovation, efficiency, the rule of law, predictability, and the attractiveness of America as a haven of opportunity. A wise stimulus package would concentrate on projects of lasting value regarding infrastructure, energy, research and development, and education. It would focus on regaining America’s competitiveness, rather than just shoveling money out the door as quickly (not as thoughtfully) as possible. Instead, the stimulus spending to date has been a gigantic package of “political business as usual” programs, a good many of which will be used by states and localities simply to plug holes in their budgets and avoid reining in their spending to match their long-term resources. Interestingly, most of the actual spending is reserved for 2010 and later, which is strange unless motivated by election timing considerations. There is also current talk of a second stimulus package, which is puzzling given the size, timing and inconclusive results of the first package.
Unfortunately, little of the existing fiscal or financial government spending or legislation is aimed at cutting waste and making the government operate more efficiently. Thus, by next year the U.S. government will owe an extra couple of trillion dollars with no longterm benefits in efficiency, growth, and innovation or reductions in supply-chain bottlenecks. This situation will also be true the year after that, and so on. We have not seen a convincing explanation of how the government will exit from this massive extra support, and we do not understand how the programs and spending will make the economy perform better when the crisis is over.
The need to improve the economy’s performance is underscored by the fact that U.S. growth during the last dozen years owed more to debt and financial engineering than to solid creative competitive industries. America’s ability to compete in world markets at prevailing wages and exchange rates has been gradually hollowed out. But that weakness has been masked by the phony growth of the financial sector and the ethereal fantasy that banks, investors, business folks and consumers had an unlimited ability to issue and incur debt. The savings ethic disappeared, and borrowing skyrocketed far faster than GDP growth, year after year. Those who pointed out the obvious impossibility that such trends could be sustained, and railed against the economy’s underlying and deepening global uncompetitiveness, were ridiculed and told “but you have been saying that for years, and America is still so strong and resilient.”
In contrast to the goals that we espouse regarding financial and fiscal measures, the government’s ambitions seem less productive: to reduce corporate profits, raise taxes on high-income individuals, and bring additional sectors of the economy under government control. Regarding the last point, as incompetent as many financial executives were in the current crisis, government management will be assuredly worse in many ways, based on our observations: arbitrary actions, the appearance and reality of crony capitalism (awarding money and benefits to political favorites), and the creation of an uninviting atmosphere for capital, jobs and entrepreneurs.
We are fearful of a tipping point, in which more and more people vote for the people who promise to give them money or benefits directly taken from fewer and fewer “providers.” It is not easy to get people to assume responsibility for their lives when someone promises to get “the government” (that is, nameless others) to give them what they need or want.
Regarding near-term economic prospects, it would be surprising if the current zero interest rate environment and the large stimulus and bailout money and guarantees do not stabilize the American economy, even though most of the stimulus funds have not yet been spent. Moreover, inventory rebuilding in many industries could provide a lift. Thus, the economic numbers could look better in the next few months, although we expect unemployment to keep rising and commercial real estate prices to keep falling. However, because of what we perceive as the infirmities in the government programs and policies, the economic landscape in 2010-12 could be characterized by sluggish growth, meager employment recovery, and, somewhere out there, surging inflation.
LAND OF OPPORTUNITY
For some time now, the U.S. government (going back well before the current Administration) has been acting as if investors around the globe have no choice but to invest in U.S. assets denominated in dollars. Such an arrogant attitude has enabled successive governments to drop interest rates to the vanishing point, create money out of thin air, and incur unrepayable obligations without limit, all without any sense of responsibility or belief that America must arrange its affairs to be a desirable place in which to invest. In our strong opinion, acting with prudence, enacting (and enforcing) understandable laws, and otherwise creating a hospitable environment for capital, creates a framework in which capital wants to come here. Acting with arrogance and disdain for capital and capitalists, and ignoring the naturally inflationary bias of fiat currencies, is to take very large risks with the drivers of American (and global) prosperity.
The fact that the U.S. has gotten away with this profligacy and disdain for investors’ choices for so long does not mean it can do so forever. Recent events must have been very jostling to investors here and abroad. The bending of the rule of law, zero interest rates, massive and careless expenditures and deficits, and arbitrary and whimsical discrepancies in different bailouts are all chipping away at confidence in America’s special attractiveness. Confidence in the competence of America to manage its economic and financial system may not be fragile, but it is not infinite, and policymakers are testing its limits perhaps without knowing it. If and when confidence breaks, there will be no signal enabling the “smart money” to take action ahead of the pack -- the smart money is the pack.
A reserve currency country is given special leeway, but it also has a distinctive responsibility. The rest of the world is currently looking for alternatives to America and the dollar, but has not yet found one. This lack of palatable alternatives should not give American policymakers license to ignore the need for predictability, prudence, and fairness. All of this concern comes under the heading of squandering one’s natural advantages. Unfortunately, it has been going on for a long time.
A worrying trend which has come out of the antagonistic attitude in the U.S. and U.K. toward capitalism is that companies are beginning to think of leaving to escape punitive and hostile regimes. For each company that actually leaves, there must be many others which simply decide not to locate in America or the U.K., or perhaps in the highest-tax states in America.
Populists think that raising taxes on the wealthy and on U.S.-domiciled businesses will increase revenues, and that those increased revenues can then be redistributed to others. However, several compelling data points suggest otherwise. Local, state and national sovereigns around the world may learn some hard lessons about how markets work and about competitive taxation and regulation. As New York City Mayor Michael Bloomberg observed recently, in response to the reflexive urge of the New York State legislature to raise taxes on high earners: "The first rule of taxation is you can't tax those that can move too much." That is exactly what is happening: people and businesses are moving. Between 1998 and 2007, Florida’s population grew by nearly 1.6 million people; by contrast, New York lost over 1.9 million people over the same period, along with four Congressional seats. Not coincidentally, Florida has no income or estate tax.
The bigger issue for countries like the U.S. (with the world’s second highest corporate tax rate) and the U.K. (threatening dramatic changes in its tax regime) is that companies are moving, or would like to do so. In January, KPMG reported that the percentage of firms considering moving their tax residence had more than doubled since 2007 to 14 percent. Informa, a major publisher of academic and scientific journals with over $2 billion in sales and 9,000 employees, had this to say about its recent decision to redomicile out of the U.K.: “...[T]he Informa Board considered a number of factors which together make Switzerland the most appropriate location for the parent company of the Informa Group: a highly stable political and economic environment; a less complex taxation system which offers upfront certainty of treatment and does not seek to impose tax on the unremitted profits of subsidiary companies in other jurisdictions; its business infrastructure including global connectivity, and its location and time zone.”
Many other companies (Accenture, Ace, Covidien, Foster Wheeler, Ingersoll Rand, Transocean, and Tyco) have changed their tax residence from the so-called tax havens to jurisdictions like Ireland and Switzerland in order to avoid the reach of proposed U.S. tax law revisions.
The primary changes that have evoked such dramatic action in both the U.K. and the U.S. relate to the taxation of overseas profits. Under deferral rules that have been in place since the advent of the corporate income tax in 1913, U.S. companies are permitted to defer U.S. corporate tax on the earnings of their foreign subsidiaries and affiliates until those earnings are repatriated to the U.S. parent. Deferral rules are intended to protect U.S. companies from bearing higher tax burdens than do their foreign competitors. Indirectly, by reducing the tax burden on corporate groups as a whole, deferral removes potential penalties for foreign investment, making the U.S. if not a neutral domicile, at least only marginally less tax competitive.
Governments should realize the fallacy of thinking that they can squeeze more taxes out of people and companies that have been caught in a web of rules and regulations, since it will hinder their ability to attract new creative and industrious people and companies. Capital and people go where they are well treated, where the rules are clear, fair and competitive, and not changeable, arbitrary, capricious or vindictive.
FINANCIAL REGULATION
An 80+ page (single-spaced) proposal was recently issued calling for a comprehensive change in financial regulation. There are a number of elements of this proposal which represent an over-reaching power-grab by the Treasury and the Fed, but in this section we will focus critically on just two aspects: (1) a proposal for registration of hedge funds with the SEC; and (2) a call for special scrutiny of financial companies which could threaten the global system.
Hedge funds are subject to the anti-fraud provisions of the securities laws, and generally serve large and sophisticated investors. Nearly all hedge funds issue annual audited financial statements, and they posed no systemic risk during the recent financial crisis. The SEC cannot effectively regulate hedge funds. Any comfort that investors would gather from SEC registration would be misleading. The SEC proved the case by failing to stop the Madoff fraud, even though compelling evidence of its existence was delivered to them, years ago, on a silver platter. We recommend reading the Markopolos 19-page letter to the SEC, but we warn that it will not enhance your trust in government supervision. Hedge funds are too diverse and complicated to provide any meaningful benefit to investors of registration. It would be cumbersome and expensive, and the regulators are quite sure to embarrass themselves again soon.
The most important need in a modernized financial regulatory regime is a limitation on leverage. It was excessive leverage, primarily at regulated entities and their affiliates, which brought down the house. Leverage ought to be controlled, and margin and capital requirements raised, regardless of the way it is disguised and regardless of the form of the entity holding the risk. Mandating that regulators identify the (ever-shifting) entities which are systemically important is an impossible task. Extremely large concentrations of important risk can emerge suddenly via lender inattention, the inventiveness of financial “rocket scientists,” or the misunderstanding and/or misrating of securities. If leverage is regulated and controlled, globally, a recurrence of the recent collapse is highly unlikely. If the focus is on systemically important institutions, instead of the entire system, there will be gaps, and the next generation of financial wise guys and gals will find new ways to enrich themselves and once again place the global system at risk.
T.G.I.Thursday
An energy- and money-saving solution that pretty much everyone can get behind: three-day weekends.
Workers of the world, unite in giving Utah a round of applause. The Beehive State has made Thursday the new Friday, and by proving the benefits of this condensed calendar, Utah has brought us all closer to the dream of a shortened workweek.
A year ago, Republican Governor Jon Hunstman announced the Working 4 Utah initiative, essentially putting 17,000 of the state’s 24,000 executive branch employees on a 10 hour a day, four day a week schedule. The goal for the cash-strapped state was energy savings. Now that a full year has passed (we checked in on the program back in April), a clearer picture of the benefits is coming into focus.
Learning from the lessons of Utah, here are five reasons the “TGIT” (Thank Goodness It’s Thursday) four-day, 40-hour workweek just might make sense:
1: Energy savings and reduction in carbon emissions
Closing state offices on Fridays has cut energy use by 13 percent in Utah. Officials hope to bring that number closer to 20 percent as the kinks are worked out (and as they figure out how to actually shut down some of the heating and cooling systems in some of the buildings). Through these energy savings alone, Utah is shrinking its carbon footprint by about 6,000 metric tons. If you add in the gasoline savings from fewer commutes, that number is doubled—to roughly the equivalent of taking 2,300 cars off the road for a year.
2: Traffic reduction and commuter health
Of course, as fewer workers commute on any given day, there’s less traffic. But the hour shift for the four-day crew also thins out the traditional rush hours, speeding up travel for everyone. Besides easing the mental burden of traffic, commuters are exposed to fewer airborne pollutants. A California EPA study found that “50 percent of a person’s daily exposure to ultra fine particles (the particles linked to cardiovascular disease and respiratory illnesses) can occur during a commute.”
3: Budget boost
There are big savings to be had in operational costs when shaving a day off the workweek. As of May, nine months into the program, Utah had saved $1.8 million. And, according to Governor Huntsman, “the cost savings will only grow if the four-day workweek is granted permanent status” because the state can renegotiate long-term leases and further refine “smarter” energy, heating, and cooling systems in buildings.
4: Happier, healthier workforce
Lori Wadsworth, a researcher at Brigham Young University, surveyed Utah workers who’ve transitioned to the 4 x 10 schedule and found that 82 percent prefer it. And, according to Wadsworth, “Utah employees actually show decreased health complaints, less stress, and fewer sick days.” And while absenteeism has dropped, productivity and quality of service have improved—customer complaints, for example, at state agencies like the DMV are down. Early evidence seems to quell the initial fears that 10-hour workdays would “burn out” employees.
5: Economic stimulus through savings
It costs money to go to work—commuting expenses like gas, tolls, or public transit fares are obvious, but plenty of workers also pay for five days of childcare every week. Collectively, Utahans are expected to save $5 million to $6 million annually on commuting alone. Thus the four-day workweek has macroeconomic benefits as well, leaving more cash in the pockets of workers.
While we’ve come to take it for granted, the the Monday-through-Friday, 8-hour workday, 40-hour workweek has only been the standard since 1938 when the Fair Labor Standards Act was passed. It made plenty of sense at the time, and improved the lives of loads of American workers who regularly endured dangerously long hours with scant free time. But, in reality, the Monday-through-Friday grind was rather arbitrary, and as Utah’s experiment has already shown, it could well be time for a rethink.
So who’s next? Some cities like El Paso, Texas, and Melbourne Beach, Florida are already launching their own T.G.I.T. programs, and a GM plant in Ohio is shifting to the four-day workweek as well. Big states with massive public payrolls like New York (which has a public workforce 10 times the size of Utah’s) and California are also paying very close attention. Said John Harrington, Utah’s state energy manager, “I can’t even name all the places that have called us.”