March 09, 2004

Here Endeth the Lesson

Andrew Olmstead offers a concise explanation of why government-mandated costs to businesses reduce employement.

He doesn't go far enough.

Consider the following additional factors:

  • Government regulation costs money. Construction businesses have major outlays on environmental impact statements, for example; but there are many other examples. Perhaps the biggest cost regulation incurs is the cost of having lawyers dedicated to discovering what regulations the company is required to comply with, and what regulations do not apply. With new regulations published daily, this can be a fairly time-consuming (and thus costly - lawyers aren't cheap) process.
  • The tax code costs money for compliance. If you think doing your 1040A is complex, try doing a corporate tax return. With the new auditing rules in the wake of Enron, WorldCom, et al, it is now imperative that company officers understand the books in some detail, even if they are not involved with the financial affairs of the company in the normal course of business. Otherwise, they risk damaging lawsuits. And corporate officers' time is not cheap. In fact, it's more expensive than lawyers' time.

I could go on, but it would get boring and technical pretty quickly. Suffice it to say that any cost placed on a business by the government can have one of only three effects: it can increase costs to consumers, reduce employment, or reduce profits.

Of course, the hope of most people who advocate government regulation and government-mandated costs is that profits will be reduced instead of the other possible effects. But this is na´ve. If a company's profit margins are larger than a certain amount (about 5% for most settled industries, and about 15% for most insurgent industries), competitors will come in at a lower profit margin, and thus a lower price, and steal the market. If a company's profit margins are sustainable, a lower profit margin must be raised. Otherwise, the company is in serious danger of going out of business in the trough of the normal business cycle, or in the event of any of a number of catastrophes. Or, alternately, the company will be able to sustain a cash position that would protect it from the downtrends of the economy, but be unable to attract investment and thus unable to grow.

Each of these cases leads back to one inevitable conclusion: profits cannot be reduced below a certain level over the long-term, and thus increased government costs can only decrease employment or increase costs to consumers.

Further, in this globalized age, government costs can only marginally increase costs to consumers (in most industries). If costs rise, then imports from countries with less regulation or cheaper working costs become more enticing to consumers, and drive out domestic competition. "Drive out domestic competition" means, in the bluntest terms, that companies will either move operations overseas or go out of business.

In other words, in the current world economy, government-mandated costs - direct or indirect - must reduce employment.

Here endeth the lesson.

Posted by Jeff at March 9, 2004 11:40 PM | Link Cosmos
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