Activist government policy is undermining the economy
There are a number of governmental proposals floating around that purport to create jobs and enhance the flagging middle class. Sadly, they will likely come to naught for there is precious little any government can do to positively affect economic growth and job creation in a permanent sense. In fact, most of what the government does do tends to distort the market in negative ways.
The fundamental problem is that, other than directly dumping cash into the economy, what used to be called fiscal policy-now deceptively spun into the term “stimulus,” government policy cannot significantly affect demand. Furthermore, government infusion of money tends to create only short-term gain at the cost of long-term dislocation of capital and labor.
For example, during the Great Recession that began in 2008 and lingers still, the payroll taxes an employer pays on behalf of his employees, were temporarily cut. This was supposed to spur employment. In effect, it was designed to increase the supply of people working. However, this presupposed that the reason employment was down primarily stemmed from the cost of hiring people.
This assumption was patently false. The problem was that there was insufficient demand for the goods and services the economy could produce. A local business owner sarcastically noted to me that, the problem was not that he couldn’t find employees, it was that people weren’t buying his product. “If people would buy what I make, I’d hire everyone I needed. I just don’t need them.”
This is the dirty little secret about government spending. It tends to affect supply inputs not the demand for outputs.
Demand is the driver of the economy; supply only dictates the price of those goods and services. Perhaps marginally cheaper prices might spur consumptions, if those savings are passed along. More often than not, during hard times owners would rather keep the savings and build up some spare capital to weather the difficulties they are facing, hence no real positive impact on growth.
When the government does go out and “buy” stuff, like more military hardware, the impact is temporary. Logically, the purchase of then extra bombers is not going to spur demand for yet more bombers. The problem is demand and since the government tends to restrict sales of military technology, the demand (after their own purchase) is still limited.
Another key factor is that psychology affects demand just as much as price. People are reluctant to make purchases if they are uncertain about their future. If you think you may lose your job, you are unlikely to go out and purchase a new car, even if it is a good deal. Until the broader economy improves and people believe the future is getting better, demand will continue to falter.
There is a yet more insidious effort by the current administration to affect the economy; namely the push to raise the minimum wage. Hiking the amount of money the lowest paid employees get paid does have some intuitive appeal. To see the attraction, one only has to look at the economic conditions in which a large portion of our local population live.
The sad reality is that the vast majority of the jobs that have been created through City and County incentives are low wage. We have given massive tax breaks in our attempts to attract retail and hospitality activity. In effect, government action continues to consign a significant portion of the population to near poverty. It should be noted that this has been done with the best of intentions, but undertaken without a clear understanding of how the market really works.
Despite its emotional appeal, raising the minimum wage will have a significant and negative affect on the economy. Under conditions of fixed demand, raising costs will increase prices and stifle demand. The lack of understanding stems from the fact that most politicians have never made a payroll.
Raising the minimum wage to fifteen dollars an hour, for example, not only affects minimum wage workers, it impacts everyone. Wages for more skilled personnel who are making below that point must go up because they are worth more than unskilled workers. When their wages go up, it affects those currently making more than they were…and the cycle continues.
The impact of this situation on businesses is to significantly increase the cost of production. In the current environment, layoffs are virtually inevitable. If the prices go up and demand is fixed, fewer goods and services are bought. Less production means the need for fewer workers. Efficient employees are kept and the rest are let go. This is how the market works and it is very good at equilibrating supply and demand.
There is also another negative consequence. As lay-offs occur, people’s perceptions turn negative. They will be inclined to make fewer purchases further depressing demand…and the cycle continues.
Moreover, raising the minimum wage is tantamount to admitting that working the line at a fast-food joint is now a career, not a transitional job. That prospect alone is enough to crush the human spirit and speaks volumes about the direction our country is headed.
If this analysis is correct, what does it mean for government? Elected officials are compelled to do “something.” Most of them made promises to “create jobs” or the like. Despite their bold prognostications, they cannot. No amount of “tax and spend” policy will make it so.
What government can do is let the market work. It is efficient. It always matches supply and demand in the long run. Bad business models must be allowed to die. “To big to fail,” is simply another term for corrupt spending. Within the collapsed banks, viable operations would have been acquired. The parts that were designed and run poorly would disappear, as they should. If there is a true unmet need, the market will incentivize its return without the government’s help.
We can only hope that things will improve, that policy makers will somehow garner a wisdom that is currently lacking. Of this, I am not optimistic.
In the end, we do it to ourselves. We believed politicians’ empty promises, elected them, and demand they follow through. Our country is declining because of our own self-delusion.