Thursday, February 25, 2010

Regulation is a Luxury Good

The title is from a comment to Eric Raymond's post, where he writes on unemployment:
We’ve spent the last seventy years increasing the hidden overhead and downside risks associated with hiring a worker — which meant the minimum revenue-per-employee threshold below which hiring doesn’t make sense has crept up and up and up, gradually. This effect was partly masked by credit and asset bubbles, but those have now popped. Increasingly it’s not just the classic hard-core unemployables (alcoholics, criminal deviants, crazies) that can’t pull enough weight to justify a paycheck; it’s the marginal ones, the mediocre, and the mildly dysfunctional.

If that doesn’t scare the crap out of you, you’re not paying attention. It’s a recipe for long-term structural unemployment at European levels of 10%, 15%, and up. What’s even crazier is that the Obama administration wants to respond to this problem by…raising taxes and piling more regulatory burden on employers.

I'd amplify his last sentence. Downturns have always been a spur to efficiency for private companies. Everyone wants more headcount and resources, but when profits are falling, there's a triage effect that well-run companies go through. Expenses get justified, and then re-justified. Plans get re-planned. The result is a more efficient allocation of resources.

Ideally, you wouldn't need a downturn for this, but my experience is that there's a slow decay of efficiency (in private sector companies) during the good years, and then a sudden step-wise ratchet when things get tight. The effect is for companies to remain more or less efficient over the long haul.

This simply doesn't apply to Government. Government employment has been increasing monotonically for as long as I've been paying attention, which would be probably 30 odd years now. Efficiency measures are terribly difficult to apply to government (perhaps intentionally so), but where you can apply external metrics you see an inverse relationship of headcount to output. Education comes to mind, where the inflation adjusted cost of primary and secondary education has roughly doubled in the last three decades, at the same time that test scores have plummeted.

Congress (both Democrat and Republican) and the White House both sound like the Middle Manager who always wants just a few more headcount for his team. I mean, who doesn't? What hasn't happened (so far) is the corrections that focus those resources on the most important goals. If you assume that the most important goal for Congress and the President is getting re-elected, it's hard to see how this can possibly be reformed from within.

So what's the purgative for the public sector, short of tar and feathers, rope and lamp post? While I don't have any proof, it seems that the Tea Parties are a spontaneous outbreak of resistance to government friction that's reached an intolerable level and, with Health Care "reform" and Cap-and-Trade on the horizon, should promise of being able to entirely sieze up the engine. I wonder how a political platform of "I'll reduce government headcount by 15%" would poll.

One thing that seems highly probably: the American public simply will not tolerate European levels of unemployment. We're a restless and independent crowd, at least compared to the plebes on that side of The Pond.

Dang, I sound like Ron Paul.

RTWT, especially the comments thread which is really interesting.

UPDATE 25 February 2010 14:57: The discussion in the comments about the underground labor market as a reaction of regulatory friction is particularly interesting. In some European countries - Greece especially, but Italy to a large extent too - tax evasion via off-the-book exchanges have been raised to an art form. With polls showing north of 70% of the public believing that our government lacks legitimacy, something will change. The nature of the change will be interesting.


Divemedic said...

Except we have not yet reached the point where people are willing to give up Government windfalls in exchange for Government shrinkage.

As long as everyone is of the mindset that "cutting Government spending and regulation is good, as long as you don't cut the things I like." Nothing will change.

Cut social security, the elderly complain.
Cut welfare, the left complains.
Cut military spending, the right complains.
ad nauseum

Paladin said...

The current crew of miscreants will never have a positive impact on employment because they don't understand it.

Businesses hire people only in an environment where they are doing so much business that they can't avoid it. In that environment, if they don't hire then they are passing up opportunities to make more sales.

Bam and his Crew think business should hire people because its their civic duty to do so.

Idiots all.

elmo iscariot said...

One thing that seems highly probably: the American public simply will not tolerate European levels of unemployment.

Refusing to tolerate something doesn't mean too much if you can't or are unwilling to identify and deal with the cause. The US medical industry is a gigantic bloody mess in large part because of all the crushing government regulation heaped on it, and when Americans decide they "simply will not tolerate it" anymore, they're screaming for _more_ regulation.

Why would the rest of the economy be any different? Let unemployment stay up that high, and they'll be screaming for the government to come to the rescue with punitive regulations that tax business to raise bailout funds for businesses that can't afford to hire. They'll only figure out that the perpetual motion machine doesn't work after the whole system falls apart.