Today’s economic trends are not promising. In the United States, the European community and Japan, the prospect of dismal growth is too often met with desperate measures that only make matters worse. There are endless claims about the failure of austerity to spur growth, and impassioned attacks on the folly of unbridled spending that will drown the nation in debt. What a choice!
The debate over the proper level of government spending and taxation is itself a powerful cause of our current economic malaise. The current uncertainty over the use of these key policy levers leads to further uncertainty about the possibility of a rise in interest rates that will send the economy into a tailspin. Unstable currency injects a gratuitous element of uncertainty into every private transaction denominated in dollars. That uncertainty is a cost to both parties in any routine business transaction. When the costs of transacting rise to the point where they exceed the anticipated gains from trade, the deal is off.
Thus, suppose that S owns something that he values at $10 and which B values at $15. A voluntary transaction that costs nothing to arrange would generate a gain of $5 by moving the resource to B.
The zero transaction cost model may be mythical, but its implications are intensely practical. In the example given, so long as the costs of the transaction in the aggregate are kept below $5, the deal goes through. The result is otherwise when those costs go above that level. The constant uncertainty about taxes and regulations is a deal-killing transaction cost that produces no collateral benefits. So long as macro-economic policy remains fixated with moving all the levers at once in different directions, it will act as a drag on the marketplace. Stability of expectations is key to a strong macroeconomic market.
Microeconomic Madness on Employment
The same mistakes are now very much at work in labor markets, where they do more than their fair share to increase the high level of unemployment. The dominant, though mistaken, attitude is perfectly captured in a letter by Risa Kaufman, the Director of the Columbia Law School Human Rights Institute, who claims that “the United States’ failure to enact meaningful protections enabling workers to accommodate the demands of work and family is not only out of step with countries around the world, but it is also counter to international human rights standards.”
This “failure” is also a huge relief. Bad as our own national employment situation is, it would be far worse if the United States acted in line with those misguided countries throughout the world that now endure unemployment rates that touch or exceed, as in the case of Spain, 25 percent precisely because they seek to secure this phalanx of workplace protections as a matter of public law.
To be sure, innovative employers may adopt some types of worker protections to keep able women employees in the workforce, whether in the form of child-care benefits, flex time or split positions. But it is one thing for a particular employer to adopt these policies, and quite another for a heavy-handed political entity to impose them on employers who think that these purported benefits are not in line with their best business interests.
In these cases, employers’ unwillingness to offer these protections is well-nigh conclusive evidence that the cost of the disputed benefits package exceeds the gains for his or her employee. If the situation were otherwise, the benefit would be included, as is routinely the case with the thousands of perks that particular employers offer to all or some of their employees. What explanation other than market demand could explain why so many employers offer benefits packages that go far beyond international minimums or local law?
The situation reverses when such benefits packages are required as a matter of law. At this point, firms divide themselves into two categories. Those that would have provided the benefit anyway will continue to do so. But they will do so less efficiently than before, as they will lose the power of self-correction and must incur the oft-heavy compliance costs to satisfy the prying eyes of government regulators. Wages will fall as compliance costs rise and the two sides are left with the unhappy task of dividing a shrunken pie in order to implement what Kaufman calls these “widely accepted human rights norms.”
The other scenario is worse, for now the net size of the mandated loss exceeds the joint gains that the employer and employee hoped to accrue in the labor market. So now the transaction is squelched, and one more person is added to the ranks of the unemployed because of the supposedly moral judgment that having no job, albeit with the promise of rich benefits if ultimately obtained, is superior to having a job with a thinner benefits package.
What theory of human rights finds a moral imperative in killing jobs to satisfy some abstract and noble ideal?
Paid Family and Maternity Leave?
One of the key causes that is taken up by human rights advocates is that of paid maternal and family leave. Writing in the New York Times, Professor Stephanie Koontz asks with evident disdain why, fifty years after the publication of Betty Friedan’s The Feminine Mystique, the United States—along with such countries as Suriname, Liberia, and Tonga—is alone among the developed nations of the world in denying paid maternity leave to mothers.
Similarly, the movement for mandatory paid-sick leave, as reported by Melanie Trottman in the Wall Street Journal, has also gathered support in the wake of recent flu outbreaks at the city, state, and national level. About 40 percent of private workers do not get this benefit.
These pushes for change ignore all of the inter-firm differences that make certain policies unwise for some companies even when they make good sense to others. Yet when the objection is raised that “such laws weigh on businesses and ultimately hurt workers,” the point is treated as odd. Recent evidence from Connecticut indicates that when firms with greater than fifty employees are required to let workers accrue sick leave (up to five days per year)—one hour for each 40 hours worked—jobs are lost.
But none of these concerns are sufficient to slow down the train wreck. After all, it is always possible to shrug and proclaim that “employers are going to have to re-evaluate their financial situation”—which they may well do by lowering wages or refusing to expand their labor force.
Discrimination Against the Unemployed
The frustration with persistent levels of unemployment has spawned yet another legislative crusade—prohibiting employers from discriminating against those who are currently unemployed in job applications. Such laws are already on the books in New Jersey, Oregon, and Washington D.C. The charge is led on the strength of anecdotes of people who have been down on their luck in getting jobs in a down economy. Of course, many of these anecdotes are true—which is to say that being unemployed is at best an imperfect proxy for whether a worker has out-of-date skills or a bad attitude.
Yet statutes of this sort, including the versions now circulating in Congress, can do nothing to address the underlying problem of high unemployment rates. So long as the number of jobs remains constant, the best that can happen is that one unemployed person gets a particular job only by displacing another worker. It is likely that the new round of legal protections for the unemployed will only reduce the number of jobs available, as employers pull back in order to avoid a new source of potential liability.
The defenders of the new approach may add that the New Jersey statute was limited in its scope by Governor Chris Christie. The statute seems to apply only to explicit statements by employers that persons who are currently unemployed will not be hired, except in cases where the employer advertises for internal promotions.
Still, the situation is far worse than the status quo ex ante. Take the New Jersey legislation as it stands: every employer now has to review its external advertisements for compliance to the law and be prepared to answer government investigators about general practices and particular charges.
When the situation produces no improvements, the defenders of these laws will take it upon themselves to say that stronger sanctions must be put into place. Indeed just that measure has been taken in the District of Columbia, where the law extends the coverage so that “No employer or employment agency shall: (1) Fail or refuse to consider for employment, or fail or refuse to hire, an individual as an employee because of the individual's status as unemployed.”
Once again, there are no private actions, but now the scope of the investigation has become broader under a set of rules prepared by the Mayor, which will take effect unless overridden soon by the D.C. Council. At this point, the scope of administrative authority is necessarily expanded because virtually any unemployed person who is turned down for a job could claim discrimination, so long as the employer knows of his unemployment status. The prospect of multiple violations being levied against the employer from a single filing cannot be ignored— and all this when the unemployment rate in Washington, D.C. stays at 8.6 percent, notwithstanding the huge influx of government jobs.
At this point, it is important to address the grand disconnect that defenders of so-called human rights law have between their own dubious sense of equity and the overall issue of growth. For each aggrieved employee, there is an aggrieved employer who has been forced to close or contract his business because of these regulations. To understand why equity does not lead to growth, it’s important to look at the bigger picture. Intrusive labor laws increase the ranks of the unemployed, which puts greater pressure on the public systems of support. Anxious lawmakers and advocates will then push for greater job protections that only exacerbate the very conditions that they are trying to eliminate.
What policymakers and activists must take into account is that no amount of cheerleading can eliminate the simple fact that private business actors respond to incentives in rational and predictable ways. Neither Congress nor the states can repeal the law of unintended consequences. But so long as political actors continue to tempt fate, the economic downward cycle will continue apace as new legal rules stifle economic growth. Until deregulation, in labor markets and beyond, becomes our national policy, stagnation and drift will dominate the economic landscape.
Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).