Tuesday, August 2, 2011

It's Micro Not Macro

There is no doubt that Keynesian policies work sometimes. Tax cuts and federal spending, in some circumstances, can be intelligent policy. The problem we face as a country is that this is not one of those times. Our current economic malaise is driven by micro-economic considerations, not macro-economic considerations. The failure to understand the source of our problems is a failure common to politicians of all stripes.

The problem is too much government interference in the everyday operation of small business. Over the years, the Congress and virtually every President have piled legislative mandate upon mandate on the backs of small businesses who would like, if they could, to expand their businesses and hire more employees. But, how do you do that if the cost of an employee is a multiple of what you actually pay that employee? That is the heart of our current problem.

Our competitors in the global economy, excepting Europe and Japan, do not face the same obstacles in their countries that small businesses face in the United States. There are two broad problems.

One problem is the litigation environment. In the name of fairness, we have enabled employees to sue their companies for all manner of evils -- some real, some imagined. Plaintiff lawyers love this. On the flimsiest of reasons, a small business can be put out of business by a lawsuit based upon things that are, often as not, beyond their control. An example is one employee making an unfriendly remark to another. That is grounds for a lawsuit. Businesses factor the fear of lawsuits into their costs and such potential litigation means that adding employees can be prohibitive regardless of what you pay them.

The second problem is the direct burden of payroll taxes, health care mandates, occupation and safety regulations, the increasing threat of unionization (even if your employees don't want a union), such things as "family leave" legislation, and a blithering array of mandates from all levels of government. All of these things make employees far, far more expensive than simply the wage that you pay them. Most of these things don't exist in the economic environment of our competitors. You can condemn our competitors all you want because they don't adopt our social and union policies, but the fact is the rest of the world wants to grow not stagnate and all of these "labor-friendly" policies are very, very costly to business. They know that, but apparently we don't.

You constantly hear that demand-creating macro-economic policies are what we need. If you want to see the poster child for this view, read Paul Krugman in the New York Times. He pushes that theme constantly. But the reality is that any aggregate demand increase in the US is likely to translate into business for our competitors, not for US businesses. Only if you outlaw imports can you avoid the fact that the rest of the world can undercut us because their businesses are not laden down with our social policies.

These social policies were not always a feature of American business life. Even things like social security were fairly moderate until the last twenty years and medicare is only fifty years old. Demographics have made these problems a huge, huge burden for our economy and for our businesses and have savaged the US private savings rate. The overburdensome regulation and the litigation environment is almost unique to the US. We are simply not competitive any more in the labor market and that is not going to change.

So the discussion about macro policy is misplaced. No amount of tax cuts or federal spending makes American labor competitive, given all of this. We priced our workers out of the market, even though their wages don't reflect it.