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.