Hercules vs. the Hydra

Originally published in Flourishing November/December 2012

In the June 2012 issue of this newsletter, I asked you to think about the reasons for America’s high unemployment rate.  Then in the next two issues, I wrote that government interference in the form of minimum wage laws have helped raise the unemployment rate among black inner city youth to nearly 40%; and that laws favoring union bosses over non-union workers have in many states forced wages to uneconomic levels. 

The important thing to keep in mind is that for most businesses, wages are their most significant cost.  So, when the price of labor is forced to uneconomic levels by government interference, unemployment and business failures are certain to be the result.  The principle also applies to government mandated, one-size-fits-all, health insurance benefits. All labor costs—however necessary or desirable they may seem—consume capital that might otherwise be deployed in new business investment and in creating new jobs. 

Now, as an exemplar of government overreach in other areas, let’s consider the national 55 miles-per-hour speed limit.  Passed by Congress in 1974 with the intention of reducing fuel consumption, that law—when it was obeyed—increased labor costs for the obvious reason that it required at least twenty percent more time for shippers to deliver the goods.  Because it was virtually unenforceable and widely ignored, the 55 miles-per-hour speed limit was ultimately repealed in 1995.  That alone tells you just how economically silly the law was. 

Then consider that from January 1, 2009 through December 31, 2011, the Code of Federal Regulations has increased by 11,327 pages.  According to the Office of Management and Budget, that brings the total register of federal regulations to 169,301 pages.  That’s a stack of paper 32 feet high.  I’m not sure I can throw a football that high.  Common sense tells me that every one of those pages adds to the cost of doing business.  And, what are the odds that in 169,301 pages of regulations there will be contradictory and ambiguous rules? The probability must be pushing 100%.  If I’m right, a regulatory violation is virtually guaranteed for every business in America.  That makes me suspect that the real purpose of our government is not to catch criminals, but to create them. I have to ask, “How many productive jobs could be created with the dollars it takes to pay and entertain the little Caesars who dream up 11,327 pages of regulations in just three years?”

Taxes come at businesses from virtually every legislative body, and for an unending variety of “needs”.  These costs—with the exception of most sales taxes—are not generally passed along to consumers, as is frequently claimed. It’s a myth; like labor costs, they’re usually paid out of capital.  Virtually every dollar taken out of the private economy by taxes is consumed; either by the government directly—where waste, fraud, and abuse are notoriously rampant—or by those who are the beneficiaries of government largess.  These are all dollars that won’t be voluntarily invested in the expansion of existing businesses, the launching of new enterprises, or the creation of new jobs.  Higher business taxes mean fewer jobs. 

Contrary to another myth, most entrepreneurs and business managers aren’t keen to take unnecessary risks.  In recent years, though, they’ve faced bellicose, irresponsible, and undeserved taunts and vague economic threats; all for the purpose of media attention and/or political expediency.  When the most productive people in America are collectively demonized by politicians and pundits for allegedly being selfish, predatory, unpatriotic, and unnecessary—as if every successful business in America is run by Bernie Madoff or Vito Corleone—is it any great surprise that many companies, especially relatively small businesses with 50 to 500 employees and limited legal budgets, are reluctant to expand and hire new workers?  I think not.

Finally, if this discussion wore you out or made you angry—as it just did me—I’m sorry.  But, just imagine how a business executive or small business owner must feel.  Concerned for the welfare of her employees and their families, responsible to her bankers and her investors, trying desperately to provide quality products and services to her customers—all the while dealing with government’s taxes, rules, mandates, and threats—she  must feel as Hercules felt in his battle with the Hydra.  She is my hero. mh

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The Unemployment Question (Part Two)

Originally published in Flourishing September/October 2012

Last month I discussed the effects of minimum wage laws, particularly on young and unskilled workers.  I showed that by mandating a cost of labor in excess of that labor’s value to employers, the government causes high levels of unemployment among these groups of workers.

Similarly, by mandating that companies recognize and negotiate with unions, government often causes even highly-skilled workers’ wages and benefits to rise to uneconomic levels.  Since companies have budgets with limited income and fixed costs—like land, machinery, and buildings—higher wages and benefits mean that fewer workers can be employed.  Of course, companies can try to raise their prices to cover their higher labor costs, but I invite you to ask any GM or Chrysler shareholder how that worked out. 

In 2007, just before the housing and credit meltdown, The Center for Automotive Research1 estimated that Detroit’s automakers were paying $6365 per hour for production labor and benefits, while Toyota was paying 4750 in its American auto plants.

At about the same time, CNBC reported2 that U.S. automakers had a future burden for union-negotiated healthcare benefits of $1,500 per car, which Toyota and other non-union auto manufacturers did not have.  Indeed, GM was referred to as a “benefits” company, not as an auto manufacturer.  In 2007, GM lost $38.7 billion – a loss of $4,055 per car sold. In that same year, Toyota earned a profit of $17.1 billion – a profit of $1,874 per car sold.  

In 2008, the U.S. auto industry lost more than 400,000 jobs.  Most have not returned. 

When government chooses sides in the business arena—sooner or later—both sides will lose.  mh

(The Unemployment Question will conclude in the next issue.)

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1.  Katie Merx, “UAW Contract: Nuts and Bolts,” Free Press, September 29, 2007.

2.  Phil LeBeau, “GM and UAW Seal Deal: Was the Strike Worth It?” CNBC, September 26, 2007.

The Unemployment Question (Part I)

Originally published in Flourishing July/August 2012

In the June edition of this newsletter I asked, “If things are so good, why is unemployment so stubbornly high?” I promised to give you my answer this month, but in fact, it will take me three months:

Human desires are unlimited.  At least mine seem to be.  I live at a substantially different level today than I did in my youth, or even as I did twenty years ago.  If you look at your own lifestyle today, I’m sure you’ll find things that you can’t live without, that twenty years ago either didn’t exist or you thought you couldn’t afford.

Not only are my desires virtually unlimited, there are very few things I really like to do—or can do—myself.  I’d prefer to hire other people to do them.  I’d like to have a full-time gardener, for example. 

It gets worse.  I’m reasonably satisfied with the things I own now, but if I could afford them, I’d like to have a Rolls Royce and a chauffer to drive it for me, while I read Victor Hugo novels and sip fine French wines.

I once saw a beautiful teakwood sailboat with two diesel back-up engines.  Sea-worthy, to say the least.  Linda created a beautiful watercolor painting of it that now hangs in her home office.  That boat would be really cool to own—if the price was right. 

The only thing that prevents me from owning and doing these things is the price of the labor involved.  If people would work for free, or almost free, I’d have all these things and more; virtually all my desires could be fulfilled.  I could even (someday) fly to the moon on one of Richard Branson’s space ships. Weightlessness—I could handle that, I think.

But, even if I had unlimited wealth and/or people would work for nothing, I could still find many more things that need to be done than I could find people to do them.  I think that’s true for most people and most businesses, too.  Especially, businesses. 

The point—to this point in my answer—is that there is always plenty of work to do, so a lack of work to do can never be the cause of unemployment.  The cause of unemployment must be something else.  But what?

The first and most obvious answer is that people sometimes voluntarily quit their jobs, and they may experience a delay before taking a new job.

That kind of unemployment is voluntary, and is perhaps the most common type of unemployment.  Similarly, people retire from working altogether, but we usually don’t call that “unemployment”; we call it “retirement”.

The most common type of involuntary unemployment is that caused by minimum wage legislation.  When I was about twelve years old, my dad “hired” me to “whip” weeds around sand piles and stacks of cinder blocks.  At twenty-five cents an hour, I could earn two dollars a day1, and he didn’t have to pay his truck drivers to cut weeds.  Delivering lumber, sand, and cinder blocks was worth more to him than weed-cutting.  Anyway, at twelve years of age, he wasn’t about to put me behind the wheel of a fully-loaded REO Speedwagon. 

Was he taking advantage of me?  The correct answer, of course, is, “Who cares?”  I had my two bucks – a lot of money for a twelve year old kid.  I had to pick up nasty cups and cans at the Yankee Dollar Drive Inn for seven days to make that much money.  But, that weed-cutting job – even with the latest string trimmer technology – couldn’t exist today; nor could the Yankee Dollar parking lot job; even allowing for child labor laws.  Minimum wage legislation explains why teenage unemployment now hovers around 25% nationally; and even more sadly, for black inner-city teens it’s much higher, 39.3%2.

Minimum wage legislation also helps to explain self-service gas stations.  Attendants—even teen-age attendants—can’t compete on price. Some people blame technology and our fast-paced lifestyles for the loss of these and other personal service jobs; but the real culprit is minimum wage legislation, which makes technological solutions comparatively more affordable than unskilled or low-skilled human labor.  Who – but for the vast cost differences – would not rather be greeted by a smiling service station attendant than by a dirty LED screen? 

I know some people won’t work for $2 a day—or even $7.25 an hour, the current minimum wage in Kansas—but some will, and in the process they’ll develop habits and skills that can help propel them toward higher paying jobs. (Did I mention that my girls paid for their college degrees by working in Dairy Queens and truck stops.)  I have to ask:  What are the values of personal independence, self-confidence, and pride worth?   mh

(To be continued next month.)

1    In the late 1920’s, my dad performed the same work for his father (my grandfather) at seventy-five cents per day.