During the 2012 presidential campaign, President Obama caught some flak for a speech in which he claimed that businesses aren’t responsible for their own success. Using convoluted logic, Obama said that business owners ought instead thank the government, by way of the taxpayers, for developing the business environment that allows them to succeed.
Two years later, Hillary Clinton famously remarked, “Don’t let anybody tell you that it’s corporations and businesses that create jobs. You know that old theory, trickle-down economics. That has been tried, that has failed. It has failed rather spectacularly.” She later tried to walk back that claim, saying she meant to say ‘business tax breaks’ don’t create jobs.
Statements like these reveal a fundamental misunderstanding of the role of the entrepreneur in the economy, particularly the entrepreneur’s role in job creation. Moreover, these sentiments, shared by virtually the entire establishment regardless of political ideology, grossly overstate the effectiveness of the government’s interventions in the labor market. In fact, there’s a strong argument to be made that when economies grow and jobs are created it’s despite government intervention, not because of it.
So how does the government undermine job creation? For the answer, we look to an article from economist Walter Block. In it, Dr. Block outlines a number of specific government interventions and explains how they negatively impact the economy. Some of the interventions have been covered here before, like occupational licensing. Others, such as minimum wage laws, deserve their own post and will be covered more in depth in the future.
We will cover each issue point by point because they are all important and give us a better understanding of the depth of government involvement in the economy.
Most economists, Austrian or mainstream, believe that minimum wage laws reduce employment. More specifically, these laws reduce the employment opportunities for young and unskilled workers. These are often the workers that minimum wage laws are designed to help.
Comparable worth legislation is when the government decides that one lower paid occupation has the same social ‘worth’ or ‘value’ as a higher paid occupation and artificially adjusts the wages to match of the lower to the higher. This causes unemployment in the artificially adjusted occupation by pricing many of the lower skilled workers out of the market.
Many people applaud the government’s intentions when legislating for better working conditions. We instantly think of the plight of the coal miner working 18 hour days in dangerous conditions. What we don’t often hear of are the ridiculous regulations masquerading as improved working conditions, like having to keep a restroom at 68 degrees.
Per Dr. Block:
When the government forces businesses to hire only union workers, it discriminates against non-union workers, causing them to be at a severe disadvantage or permanently unemployed. Unions exist primarily to keep out competition. They are a state-protected cartel like any other.
Employment Protection, Payroll Taxes, and Unemployment Insurance
Employment protection laws are intended to shield employees from undue termination. Instead, they give employers incentive to not to take a chance on borderline employees. When you add in payroll tax and unemployment insurance burdens, the cost to employ individuals goes up, as does unemployment.
Occupational licensing laws and other barriers to entry overwhelmingly affect minority and lower class entrepreneurs. Block cites the example of the Florida woman whose home-based soup kitchen was shut down for being an unlicensed restaurant. As a result, many homeless in the area go hungry. This is not an isolated incident.
Laws against peddling hurt low income start up entrepreneurs and those that buy their wares, people that also tend to be low income. Dr. Block references that the most vocal and influential supporters of anti-peddling laws are established businesses and department stores.
For a young person with no skills, working can provide some pocket money, a sense of personal satisfaction, and all too important discipline and responsibility that pay off in spades when they are ready to join the labor force. Sadly, government has killed those opportunities. Paper routes, lawn mowing, and even lemonade stands are all but outlawed for ambitious children. Essentially, young people are being robbed of the chance to gain real skills, putting them at a disadvantage later in life.
The Federal Reserve
Maybe most importantly, Dr. Block addresses how the Federal Reserve, along with the government creates unemployment.
By bringing about the business cycle, Federal Reserve money creation causes unemployment. Inflation not only raises prices, it also misallocates labor. During the boom phase of the trade cycle, businesses hire new workers, many of whom are pulled from other lines of work by the higher wages. The Fed subsidy to these capital industries lasts only until the bust. Workers are then laid off and displaced.
Government interventions in the economy vary in scope and purpose. One thing they all have in common is that they create distortions in the market. Minimum wage laws, for example, distort the labor market via the pricing mechanism. Licensing, anti-peddling, and others distort the market by creating barriers to entry for new entrepreneurs, thus protecting existing firms. These aren’t the type of actions that create and protect jobs no matter what Barack Obama or Hillary Clinton say.