Wednesday, April 25, 2012

Regulations and Employment

The Republicans in general and Mitt Romney in particular are running against "job-killing regulations". This drew an angry response from Ruth Marcus, one of the Washington Post's stable of left-leaning columnists.

If an employer's costs increase as the result of a regulation, Livermore notes, that is another way of saying that the employer has to hire workers to, say, install new technology while other employers hire workers to produce the new equipment.

At the same time she does admit that there are problems with estimates from both sides.

Lesson One: If you plug your cherry-picked assumptions into your preferred model, it's easy to obtain the desired result. Lesson Two: Jobs are only part of the larger picture

Starting with the first quote, it is true that regulations often result in hiring new workers. From a short-term, limited basis, new regulations can create jobs. But let's look further than that. If costs increase because of regulations, it means that productivity has decreased. While some small losses in productivity can be absorbed, large losses have to be passed on. This means price increases.

Things can go in three different ways from there. If a producer has foreign competition without the additional regulatory burden then it places the American company at a disadvantage and leads to lost sales. From there a company may have to reduce its workforce (think GM) or move its operations overseas (think Apple). Both lead directly to long-term job loss.

The final possibility is if a product has no foreign competition and outsourcing is not possible. Examples of this are power companies and gasoline. In both cases, new regulations lead to increases in costs which are passed on to the consumers. This acts as a drag on the economy as a whole. The new regulations may have helped a few sub-industries but the money to pay for them come from everyone's pockets. That means less money is available for other things.

This is known as the Broken Windows Fallacy. If I break the windows of the shoemaker's house then I have created economic activity for the glazier (window maker) but taken money from the shoemaker. There is no net economic gain.

Marcus is correct that jobs are only part of the larger picture. We have clean air laws today because in decades past the air quality was bad enough to affect people's health. But, the environment is much cleaner than 40 years ago. Additional improvement carries a high price tag so the benefits of the new regulations have to be measured against the economic hardship they cause.

As a member of the left, Marcus sees expanding government authority as a good thing and excuses it by insisting that it creates jobs but, as she pointed out, different models give different results. The models that show net job gain tend to look at it fromt he point of view of the glazier and ignore the shoemaker.

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