15 Feb 2010

Experience, logic, show government policy prolonging economic woes

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That’s the title the Augusta Chronicle gave to my op ed, which ran on Feb. 13. I don’t think it’s available online, so here is the text they ran:


The U.S. economy shed another 85,000 jobs in December, when most analysts had expected no change or even slight job creation.

Meanwhile, the Obama administration continues to push for health-care reform and other measures that will require higher taxes. Ironically, it is the federal government’s policy activism itself that is largely to blame for the prolonged economic slump.

Some politicians speak of “creating jobs” as if they were growing fruit, but in reality the total job creation in the economy during a given period is the cumulative result of millions of decisions by entrepreneurs and business managers. The official tallies reported each month are the net figures.

In October 2009, for example, 3.7 million people were hired in the private sector, which may surprise many readers. The same month, there were 3.9 million job “separations” in the private sector, a category that includes quits, layoffs, discharges, and retirements. That is why the media reported that the private sector shed jobs in October, because on net employers eliminated more positions than they created.

Such monthly losses had been steadily shrinking. In early 2009, net job losses exceeded 600,000 per month, but the figures gradually fell until the gross gains and losses virtually balanced each other by November. It was only natural, then, to assume that there would be decent net job creation in December, as these trends continued.

Yet, that did not happen. Many analysts were taken by surprise that employers remained skittish about adding new employees, even though conventional measures suggest that the recession had officially ended last summer. What’s happening?

To understand fully the net job loss figure for a given month, economists would need to get inside the heads of millions of employers to understand the motivations behind their actions. There is no single explanation for why so many jobs were destroyed, just as there is no single reason why a certain number of car accidents occurred in December. Nonetheless, economics can shed some light on the general trends.

A contributing factor was the changing fortunes of health-care legislation. As details solidified and it became more apparent that a health-care bill would pass the Senate – this was before the upset election of Scott Brown in Massachusetts – many business owners would have calculated a rising cost per employee. Facing a new set of incentives, the predictable reaction would be for such businesses to hire fewer workers, lay off more workers, and/or delay hiring new workers than they otherwise would have done.

To recognize this fact doesn’t mean that health-care legislation is necessarily a bad thing. Many of the proponents of the legislation are being disingenuous, however, when they deny that raising the total cost of an employee will influence a business owner’s decision over how many employees to carry.

The irony is that Obama administration officials and sympathetic pundits understand perfectly well how incentives work in the context of climate change. The “cap and trade” system favored by the administration would artificially raise the price of industrial activities that release greenhouse gases. The whole rationale for this so-called “market-based solution” is to prod businesses to move away from carbon-intensive operations and toward “greener” methods.

If a higher price for carbon causes businesses to use less of it, the same logic applies to increasing the price of employees with related health-insurance expenses – they will use fewer employees.

Regardless of the merits of President Obama’s policy initiatives, it is undeniable that he is casting certain industries as enemies. In such a hostile and uncertain environment, where no owner can know who will face a public dressing down tomorrow- and a massive tax hike – it would be foolish to add employees as if this were a normal economic recovery.

The private economy has recovered from recessions in the past. What distinguishes our present recovery is the incredible amount of government “help.” As the media remind us, not since the Great Depression have the federal government and Federal Reserve meddled so much in the private sector.

So it shouldn’t surprise us if this turns out to be the most sluggish economic recovery since the 1930s.

(The writer is a senior fellow in Business and Economic Studies at the California-based Pacific Research Institute.)

3 Responses to “Experience, logic, show government policy prolonging economic woes”

  1. David says:

    In addition to potential extra expense from health care legislation, people have got to be nervous about what the administration will do next. I don't own a business, but I am planning on buying a house in the near future, and thinking about how the next round of tax credits will affect that process makes me nervous.

    I think homebuying tax credits are a horrible idea, but if they would allow me to raise the price of the house I am selling, then that is what I will do. I'm sure business owners are thinking something similar.

  2. Anonymous says:

    Dr. Murphy,

    I enjoyed the article, specifically where you zinged the use by politicians of "creating jobs".

    As an aside, there is no such thing as a greenhouse gas.

  3. Anonymous says:

    Very well presented. Very informative, very instructive.