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.
A huge part of the issue is that the US economy has been ravaged by the export of production, especially what we might call marginally skilled labor, to third world markets such as China, Mexico and India. Producers have moved production to geographies where labor costs merely a fraction of that required for domestic manufacturing with impunity. Yet, they are able to bring those products right back into what has historically been a wealthy market and sell those goods at the high prices to which they have been accustomed to generate much higher profits.
As an example, consider Briggs and Stratton which can only be called an historically US domestic manufacturer. They have produced small air cooled engines for consumption by the US market since 1908. Practically on the centennial of the company’s existence, the leadership decided to close domestic production facilities in the Midwest and migrate them to China. This was done under the guise of needing to establish a presence in China’s emerging market so that they could stake claim and not lose valuable Asian market share to competitors. However, I’m not so sure that the Chinese market is consuming all of those Briggs and Stratton engines to drive their lawn mowers. I’m not even totally sure that they consume lawn mowers at all.
If we wish to maintain a middle class in our society we are going to have to take a long hard look at trade policy with nations such as China, Mexico and India. I realize that there are other factors that have contributed to the loss of jobs that pay a “living” wage in the United States. But, the export of production is surely one of the primary causes if not the major one. Agreeably, automation has eliminated a few menial tasks enabling employers to dispense with a few employees. However, the winding down of domestic production eliminates hundreds and even thousands of jobs in fell swoops. These are the folks who find themselves in the unfortunate circumstance of flipping burgers at fast food chains next to their teenage children.
In an ideal world, one would think that this movement of intellectual property and capital into those markets would have benefited the citizenry therein tremendously. Sadly this is not the case. One only need examine the socioeconomic conditions in cities such as Juarez where a generation of boys who grew up unsupervised in single mother homes (where those mothers have toiled for long hours at substandard wage rates in so-called “maquiladora” zones) roam the streets in gangs extorting monies from shop owners and such. Juarez has become a veritable war zone with a staggering murder rate.
Or, consider the tragedy at the FoxConn factory in China where several of the workers who slaved in deplorable conditions to assemble the latest technical gadgets we consume in the West leapt to their deaths having chosen to commit suicide rather than continue living in the misery Western greed helped to create for them. Upon exposé of these suicides and the labor conditions in which they had subsisted, Apple visited the factory on a fact finding / root cause analysis mission. When Apple’s emissaries returned to the US, FoxConn’s solution was to simply place nets around the tops of the buildings and produce public relations articles insisting that the suicide rate among technology workers in China was no higher than that of the general population.
These events have historical precedence in the United States (and Great Britain). Collective labor fought long and difficult fights to pry compromises from management in the wake of such tragedies as the Triangle Shirtwaist Factory Fire, Ludlow Massacre, Johnstown Flood and Homestead Strike. At the climax of the Gilded Age, the more desperate and rash elements of the populace made an assassination attempt on Carnegie’s strong man (Henry Clay Frick), and even assassinated a sitting President (William Mckinley). Should we as a people having gone through such growing pains allow current executive leadership to create the conditions for such tragic events to be repeated outside our sovereign boundaries? Or even worse, be complicit with them in the injustice having voted for and allowing politicians to remain in office who acquiesce to the demands of modern “Captains” of industry? They are not “Captains,” but rather, “Tyrants!”
How might these situations that have evolved in the rush to move production into low cost markets been different if many more of the goods produced by those workers must also have been sold in those markets? Might a Chinese executive considered raising the wages of his workers; thereby, enabling them to also purchase the fruits of their labor as Henry Ford effectively did when he doubled the wages of his workers in the early part of the Twentieth Century?
We will only know if we can muster the courage to act.