Next Up: The No-Jobs Bill

Last July while many of us were in Vancouver attending the Agora Financial Symposium, the Congress of the USA passed yet another increase in the mandatory Minimum Wage. I wrote about it at the time (see Why Minimum Wage Means Maximum Slavery).

In that article, I pointed out that as the government-required minimum wage increases, fewer and fewer new jobs become available and existing jobs disappear. Feeling the ‘heat,’ the Feds are now contemplating still another “stimulus” to create the very jobs they destroyed last summer. I predict their current efforts will be another abject failure.

Step back for a moment and view the overall economic conditions now faced by Americans. Well-documented economic shenanigans by banks and brokerage firms caused a major melt-down in our economy. In their attempt to survive, many businesses cut back on expenses including labor. Simply put, jobs were lost. The official rate of unemployment nation-wide skyrocketed to over 10%. The true rate of unemployment is now at 20% when you include all the folks who have simply given-up looking for a job or are reduced to part-time work. And this is now the point at which the unintended consequences begin.

Still another government program (pogrom?) has been in effect for decades: Unemployment Insurance. The benevolent intention was to provide a “helping hand” to folks who’d lost their jobs during that period in which they looked-for and obtained other employment. In our current malaise, those benefits have been extended and extended. Benefits can now be collected for up to 40 weeks and an extension to that “limit” is also being considered by Congress. So let me ask you: If you can be paid for not-working, do you really have a sincere desire to look for new employment? Are you not more inclined to relax, bide your time and hope that you can ultimately find that high-paying replacement job? Moral hazard anyone?  (Editor’s note: a splendid young former marine–two tours–I’ve known all his life is using his $870 after withholding every two weeks to finance college this semester, which I suppose to be an unintended consequence, indeed!)

Want to know how to very quickly reduce unemployment to near-zero? Eliminate unemployment benefits all together. Heartless as that may sound, consider what is now going on behind the scene.

You’ve been laid-off. You had what passed for a good job at a good rate of pay. Now you can’t find another job that you 1) Like, and 2) Pays you what you want to be paid. So you remain unemployed. You’re unemployed NOT because you can’t find work, but because you can’t find a job that meets your unrealistic (in today’s economic circumstances) requirements. Since Uncle Sugar is willing to pay you unemployment benefits for up to 40 weeks, no big rush to take just-any-job, is there? This is yet another moral hazard created by our government.

Do you suppose the folks in Washington don’t know this? Since they do know, the question remains: Why do they pursue what they know won’t work? Ah, again, we simply follow-the-money.

Washington is comprised of politicians. Politicians spend their entire careers primping (pimping?) for their next election. Virtually everything they do and consider doing is predicated on getting themselves re-elected. Nothing that might be in second place even comes close. How they approach that objective varies from person to person, but one thing is common among all. They try to win points with potential voters who will support their re-election. Enter you as an out-of-work voter. What can I, the politician, do for you to convince you to help re-elect me in my next run for re-election? Why, I can pay you to do nothing. I can pretend to be on your side against the “greedy employers” who are only looking out for themselves. I can pretend to help you buy time while you look for that elusive job that pays you far more than the current market will bear. I can help make you feel special. I can pretend that I care about your welfare. Just remember my name when it becomes your turn to vote. That’s all I ask.

The game called politics simply pits the “ins” vs the “outs.” Those that are in do everything they can think of to stay in, and those that are out do everything they can think of to get in. That’s the entire game. Period. If something positive gets accomplished in the process, well that’s an unexpected side benefit. Unfortunately, under normal circumstances, far more goes wrong than goes right. This, then, is the result of the law of unintended consequences.

Sound cynical? You know it’s true. But since it’s not your ox that’s being gored, why should you care? After all, you’re the one getting the free unemployment ride.

Human nature demands that you look-out for number one. That’s natural. That’s rational. What is not rational is to ignore the fallout that occurs when you try for a free lunch at someone else’s expense. Not smart. That’s the action that comes back to bite you when you’re not looking and least expect it.

In a recent article, Chris Mayer of Agora Financial’s Capital and Crisis newsletter wrote about what he called the Yellowstone Booms and Busts. He noted that “In the late 1800s, Yellowstone National Park’s game population — its elk, bison, antelope and deer — began to disappear. So in 1886, the U.S. Cavalry took over management of the park. And its first order of business was to help bring back the game population.”

Well, you can already guess what happened. “The surging elk and deer populations ate a lot more. This caused the plant life to diminish. Aspen trees, for instance, started to disappear, eaten by the numerous elks. This hurt the beaver population, which depended on the aspen tree. The beavers built fewer dams. The beaver dams were important in helping prevent soil erosion by slowing the flow of water from the spring melt. Now the trout population took a hit, because it didn’t spawn in the increasingly silted water. And so on and so on…”

I referenced this brief account because it is usually easier to understand the concept when it is presented in a detached manner. Yet the identical domino effect occurs every time some artificial interference prevents a natural occurrence from taking place. When government steps in and tries to do something that would not otherwise take place, far-flung consequences also occur. We never know in advance what those might include. We can, however, make an educated guess.

In this case, no jobs will result from government efforts to create jobs. It is also reasonable to expect that the opposite will occur. Fewer jobs will be available because of government interference with the free market. Government efforts will utilize funds that might otherwise have been available for businesses to use as capital with which to create jobs. Governments simply do not create jobs. Private industry creates jobs. Governments create interference with job creation. But government job creation “sounds good!” Too bad it simply just doesn’t work.

What does work? You’ve heard the answer many, many times. Have government just get out of the way and let private industry do their thing in a free market environment. Period.

That statement doesn’t set well with the political class, however. Henry Blodget, of all people, posted a short article by Joseph Stiglitz on February 17, 2010 entitled We Need a Second Stimulus Now, Says Nobel Laureate Stiglitz, or Americans Will Be Unemployed for Years. No, Mr. Stiglitz and Mr. Blodget. That is exactly what we DON’T need. A second Stimulus will simply prolong the high unemployment for years. Government getting out of the way and allowing private industry to correct the government-created problems is the only way the unemployment problem can be solved quickly. Fortunately, the reader responses to this article were overwhelmingly critical of Stiglitz’s position, too. That tells me the American Public is no longer easily bamboozled by the political solution.

As I’ve been considering this no-jobs problem, a Broom Hilda cartoon from perhaps 30 years ago came to mind. To paraphrase from memory, Broom Hilda is sitting in her rocking chair while a friend is reading to her from that day’s newspaper. “The government announced today that a massive new government spending program will be established. It will employ hundreds of new government workers at a cost of millions of dollars. ‘We don’t really expect the program to accomplish anything, said a spokesman, but what the heck, it’s not our money.’ Broom Hilda then gulps and her friend responds “I made-up that last part just to see if you were listening.” In the final frame, Broom Hilda remarks “Now tell me you made-up the first part, too!” I’ve always been impressed that a clever political cartoonist can present in just one to perhaps four frames a concept that otherwise takes 1500 words of prose to develop. If we adjust that cartoon for the intervening inflation over the past 30 years, that cartoon today would read “thousands of new government workers costing billions of dollars.” Scary indeed.

Yet, isn’t that exactly what Washington is doing these days? The cartoon would be funny if it were not so true. Just throw more money at each and every problem. Don’t give any thought as to whether or not additional money is the solution. Just make it look to the public as though we’re doing something.

The year 2010 is what is called a mid-term election. You can already see the “I want to be re-elected” class starting to scramble. Several notable politicians have announced they will not run for re-election. I guess they no longer wish to expose themselves to the embarrassment of being defeated at the polls. Wouldn’t it be interesting if most of the so-called incumbents were simply defeated in their bid for re-election? That’s not a permanent solution, but it sure sounds like a good start.

Tex Norton

February 22, 2010

The Daily Reckoning