As we enter the home stretch of our series of lectures to provide economic literacy for a group that has little or no experience with the economic realities that the rest of us face, we’re going to take the tone down a bit. Of course, after our last lesson explaining why your deficit spending is why you belong in jail, we have nowhere to go but down. Today we’re going to shift to the unintended consequences of your actions, and why so often your actions that you think are doing good actually cause more harm.
We’ll open up with two anecdotes to illustrate this claim. Shortly before Obamacare was passed I was talking with a friend who, with a few business partners, runs a company. The combination of the partners, admin staff, book keepers, etc. had them with a staffing level of 52 full time employees. We were talking about possible implications of the impending legislation and I asked how his business would react if the bill were passed. My friend shook his head and explained that, as it was being proposed at the time, Obamacare would exempt any small business with fewer than 50 employees. "Guess what happens to three of our staff", was his partnership’s mitigation strategy.
Another person I was talking to worked in education, and his role was in the semi-seasonal part of the field (no classes in summer). He was telling me that he and some coworkers started their own local electrical repair company. Unfortunately, they soon realized that the combination of taxation and regulatory hoops that they were forced to navigate led them to close their business down. You might be thinking that this is no big deal since there are plenty of electricians in the phone book (for younger readers, think of a dead-tree version of Google) and my friend still has his full time job with this venture only being extra money for him. Hopefully by now you’re seeing the bigger picture and understand the negative impact of this over-regulatory problem. This is less money that this business owner now has to spend and invest, and of course, pay tax revenue against. Consumers lose as well. Increased competition means that the electricians have to work harder to earn people’s business, whether through higher quality, lower prices, or faster service. Each competitor removed from the market means slightly less of these benefits available to the public. This is not to suggest that electricians should go unlicensed, as anyone who has had to deal with faulty wiring can attest, but you should be looking at the entire process of what is needed to start and run a business and ask yourself if you’re doing more harm than good.
Anecdotes are well and good, but they are not the basis for policy changes. I don’t want to follow the leftist arguments that generally follow the lines of, "This person lost everything because he had bad medical insurance – let’s destroy our existing health care system". I’m going to show you a real world macro example. I’ve used this before, and an instance was the luxury taxes passed back in 1991 when George "Read my lips…" Bush 41 caved into congressional Democrats and passed tax increases on luxury items, such as yachts, jewelry, and furs. The results were predictable, and since you’ve been paying attention to the past lessons, you’ve already figured out what happened. Lesson Two’s laws of supply and demand kicked in – when a good becomes more expensive, less of it is consumed. Sales of these luxury items plummeted. Thanks to the lost business the affected companies had to lay off workers and unsurprisingly the new revenues that elected officials banked on never materialized.
The same phenomena is still happening today, and on an ever expanding scale. With an overreaching government at the federal, state, and local levels so many of your colleagues are genuinely surprised that the economy hasn’t turned around as President Obama assured us. Having paid close attention to these lessons, you are naturally unsurprised by the current state of the economy. At the federal level, the looming specter of Obamacare hangs over every business. We have a law impacting how every organization handles its employees that is still being written a year and a half after its passage, as the Catholic Church just painfully learned. The Dodd-Frank bill has spawned new regulatory hoops for anyone who wants to invest in a business, complete with overlords who are immune from congressional oversight. At the state level, not surprisingly the states with the highest unemployment rates are generally the ones that enjoy the least economic freedom. During our honeymoon in New Orleans last year, Sister Babe and I went on a tour where we met an attorney from California. He remarked to us that he could walk into any business in his home state and easily find at least eight code violations. Sound far fetched? Look at the local level and how difficult it is just to open up an ice cream shop in San Francisco.
Unfortunately, this lack of understanding pervades up to the highest level of our government in the president himself. President Obama doesn’t seem to understand that when you make labor more expensive, you get fewer people hired. The president keeps talking about how he wants business to come back to America and expand, while being completely oblivious to the fact that he can immediately turn around and say that he strives to make them less profitable by raising taxes on their profits and investment. When I caught the highlights of his remarks (I never watch STOTUS addresses regardless of party or president, pure political cheerleading), I was reminded of that old saying, "You’re pointing up at the sky and telling me it’s raining, but when I look down you’re peeing on my leg." Even Steve Wynn, not exactly Rush Limbaugh in his political leanings, called out the president’s hostility toward prosperity.
Many of the political class scratch your heads in puzzlement as to why businesses are refusing to hire and are sitting on record levels of idle capital. Naturally, you share the same instincts as one legend of professional wrestling, and you may be thinking that those assets need to be confiscated.
What’s mine is mine… And what’s yours… It’s mine too!
You’ve already learned that businesses’ greed is not a bad thing, especially if you want to see low unemployment. To recap, business are in business to make money and be profitable. When there is a prospect to earn greater profits, businesses expand their operations, and when they expand, they need to hire more people to handle the additional work. So when you make pronouncements that the people who make the sacrifices and take the risks to be successful need to be punished in a manner completely arbitrarily set by you, they are naturally leery of earning too much profit right now. Let’s not also forget that more and more Americans are waking up to our ever expanding federal debt and the inevitable massive tax increases or inflation that will be needed to pay for it. When instead of hiring people to help grow their business they must first dedicate staff to dealing with all of the regulatory burdens you see fit to drop on them, they become reluctant to expand. And when hiring new employees means having to deal with Obamacare’s mandates or expanding with a new operation where the employees chose to not unionize can get you a call from Big Labor’s thugs in the NLRB, or learning that the EPA is working diligently to bankrupt you, hiring people doesn’t seem like such a good idea after all.
Leftists seethe at the fact that businesses are sitting on unprecedented levels of cash and are not using it to hire and expand. Given the current business climate, why would anyone expand? Sure, some companies are, but the new business model has become to invest in the campaigns of sympathetic politicians who will either steer business their way or regulate their competitors away. Granted, this sort of crony capitalism has always existed and will always exist, but it’s never been a good thing for an economy and it’s particularly worse when we have one in its current state. As distasteful as you may find it that businesses are sitting on all of this excess capital, remember that they are greedy, and if you take away the impediments to their profitability they will leap at the opportunity to get a jump on their competition.
You might be wondering why businesses aren’t hiring, given all of these great incentives you have given them? You’ve offered tax credit incentives for hiring veterans who have been out of work for more six months (As appealing as that may sound, guess what kind of impact this has on veterans who have been out of work for four or five months). There have been offerings of research and development and all kind of other tax credits for companies who hire. So why do we still have a real unemployment rate of over 10%? Remember, businesses live on a longer timeline than you do. Do you know who makes a long-term business decision to take advantage of a short term tax credit? That’s right – the businesses who are already planning to expand or hire anyway. Nobody makes a long term move that will impact them for years to come based on a quick cash grab. Here is another anecdote to illustrate this point. Back in my call center days I was working a job fair in search of inbound customer service reps. One candidate who approached me made her big selling point to me about her multiple disabilities (I remember her physically looking completely fine) and about all of the tax credits my employer would get for hiring her. All that I could think was, "How many days is she actually going to show up for a job where attendance is critical, and on top of the 50-60 hour work week I’m already putting in how much extra time am I going to have to spend dealing with paperwork for her or figuring out how to staff around her absences?" She wound up being interested in a different company that was there that day, but any short term benefits of hiring this person would be more than offset by long term headaches. And had she been interested, I would have been forced to follow that sad mantra of, "find a legal reason to not hire her."
By now I think you get the point of unintended consequences, but I want to show another example. Recently some treasure hunters found some centuries old sunken Spanish gold off of the coast of Florida. Naturally, the Spanish government wanted its gold back, and of course the treasure hunters wanted to keep their treasure. Both sides have fair claims – the hunters want to be compensated for their time, effort, and risk involved, and of course Spain wants the gold back that was taken from it. Although I sympathize more with the hunters, if Sister Babe and I were robbed of a large sum of cash and years later a private individual took it upon himself to find our money after the law had given up the search we would want every penny back. But in fairness to the bounty hunter, how much would we have gotten without his efforts? Zero. This is what Spain is saying the treasure hunters deserve for their efforts. A court ruled that Spain gets all of its money back today, and guess how much they can expect to see returned to them in the future? Probably around the same amount that they feel the treasure hunters deserve. The article is a short but good read, and at the end the author explains what we can expect to see in future efforts.
Of course, sometimes unintended consequences can have positive effects. Take the example of the businessman who moved from California to Washington. Upon realizing that Washington’s favorable tax laws left him with an extra $7,000 per year that would have been otherwise confiscated by the government, he did something radical and extreme with his money. You guessed it – he invested it in his business. He used it for business travel, to visit customers, and pump money back into the California economy as he worked to maintain his business relationships in the bay area. Are you learning yet?
I understand that unlike previous lessons this one did not have the same linear flow, and instead had this more chaotic mixture of theory, macro level effects and anecdotes. While putting this lesson together I considered grouping it into sections, but decided that leaving the lesson in its current format would help to drive home another point. That is, that the economy is such a vast and complex entity that trying to think that it can be neatly categorized, understood and controlled is simply impossible. There are too many factors and too many externalities for anyone to completely account for. Hopefully you are now beginning to understand that. You also now know that if you supported The Affordable Health Care Act, had you read and understood what its real impact would be, you would never make unintelligent or dishonest remarks like, "If you like your plan, you can keep it", or that "your premiums will not increase." Hopefully nobody would support such an incompetent leader such as that, right? If you’d like to see another "unintended" consequence of our president’s landmark piece of legislation, look at the impact it’s having on medical research and development.
Any journalists reading this might be wondering why, despite the title of this lesson that no mention has been made of journalism. The more perceptive pressies have probably already picked up on it. I am, of course, helping you to remove something from your vocabulary that taints so many of your stories regarding the economy. Yes, it is that favorite word of yours, "unexpected." Now that you understand that actions cause reactions, never again during the Obama presidency will you have to write headlines like "Jobless claims unexpectedly rise" or "Unemployment remains stubbornly high." Even the recent slightly positive news uses the same theory if you’ve been paying attention to the previous lessons. "Jobless claims unexpectedly at lowest level in …". When you have fewer people hired in the first place and so many already unemployed or discouraged workers who have given up the job search the number is not unexpectedly low. It’s not class warfare; it’s math. Hopefully in the not too distant future you will get to write a headline that reads, "Government unexpectedly takes its foot off of the throat of the private sector." But don’t hold your breath.
Up next: Chapter Ten: Solutions! or You’re not part of the problem – you are the problem.
Lesson One: It’s Not Your Money
Lesson Two: Intro to Microeconomics, or Why Prices Matter
Lesson Four: You Don’t Create Jobs – It’s Time to Get Over FDR!
Lesson Four A: By Definition the Government Can Not Create Wealth
Lesson Six: You are Greedy – That is a Bad Thing!
Lesson Seven: You Don’t Invest; You Spend
Cross Posted from Brother Bob’s Blog