Sunday, June 17, 2012

We Have Less of All These Things Because We Hoped for Too Much

Published in The Tennessean, Sunday, June 17, 2012 and Forbes with archives.

by Richard J. Grant

When unemployment rates are high, it is not difficult to find the real reasons. Once in a blue moon, we might have no other explanation than that it was a perfect storm of random events, such as technological breakthroughs or social transitions. But in a free society there is no enforced barrier to each person’s adaptation to changing circumstances. In the face of entrepreneurial innovation and energy, any such perfect storm would quickly disperse.

The key phrase here is “free society.” Societies with chronically high unemployment tend to be those with governmentally induced disincentives to work or hire. Only government has the systematic power to thwart our natural proclivity to adapt and improve. Only government can subject all industries simultaneously to the effects of its macro policies, such as rising or falling interest rates, the general burden of taxation, the moral hazard inherent in the promise of bailouts, and the uncertainty and perverse incentives of open-ended regulatory programs.

Our most recently reported unemployment rate, at 8.2 percent, is higher than historical data would lead us to expect this long after a recession. Real GDP growth has also been lower than expected at only 1.9 percent during the first quarter of 2012.

It is no help to describe the problem as “a lack of demand.” Individual businessmen could be forgiven for believing that it is. Certainly each of their business situations would be better if they had more buyers. But their immediate problem is not some general lack of “aggregate demand.” Product demand is not uniform across industries but rather reflects the changing priorities of consumers and investors. Some businesses are suddenly faced with the fact that fewer people want what they are selling at the price they are asking.

Recessions occur because companies’ production plans have diverged from the plans and expectations of their customers and investors. Somebody is going to have to adapt; that means changing the product or changing how it’s produced or changing its price. For some industries, it is just a matter of waiting — and the freer the market, the shorter the wait.

This time, we seem to be waiting longer. We have a fiscal and regulatory environment that has raised the cost and uncertainty of hiring workers while inhibiting productivity improvements. Many health and safety regulations increase costs and reduce flexibility without really improving health and safety. Increased minimum wages price the least-productive workers out of jobs. Increased and extended unemployment benefits reduce the cost of failing to find a new job. The arbitrary powers of the National Labor Relations Board serve to politicize industrial relations and to create antagonism where none need arise. This is a recipe for unemployment.

Without capital and the tools and technology that it supports, workers are not worth much. A tax and regulatory environment that punishes capital is an environment that makes workers less productive. Less-productive workers are lower-paid workers.

Investment capital comes from anyone who saves for the future. And if most capital is saved or deployed by “millionaires and billionaires” then raising tax rates on millionaires and billionaires is anti-labor just as surely as it is anti-capital.

However well-intended, the heavy hand of government has driven up the costs of medical care, education, energy, manufacturing, and employment. We have less of all of these things because we hoped for too much from government.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

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Copyright © Richard J Grant 2012