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Government Interference in the Economy Has Been an Unmitigated Disaster
Raymond Richman, 11/13/2014

Few Americans know the economic harm that government mismanagement of the economy has caused. The Community Investment Act—still in force—was the principal cause of the housing bubble that led to the Great Recession, whose effects we are still experiencing. And government intervention in the economy continues to cause untold economic misery. For example, the minimum wage law has denied employment to millions of unskilled workers with dreadful consequences to them and to our society. The Corporate Income Tax was enacted to appease anti-business sentiment. Its proponents unknowingly created a tax that violates all the criteria of a good tax. Americans widely support free trade notwithstanding the fact that some of our trading partners entertain policies that steal American jobs and whole industries. Americans are unaware that the federal government (and some state governments) have given away billions in subsidies and tax credits and conducted a war on fossil fuels in the name of preventing global warming. It has become a world-wide disaster. Scientists are in disagreement as to how much of the global warming is caused by the burning of fossil fuels. Scientists are unanimous in acknowledging that the billions spent to date have had no effect whatsoever on climate change. Moreover, the dynamic oil and natural gas industry has been the major contributor to employment growth during the past six years and is reducing our chronic trade deficits which have cost Americans millions of jobs. Americans are willing to provide low-rental housing for the poor but are unaware that while rentals are low, the cost per unit was astronomical. And Americans should know that many other government policies have slowed America’s rate of economic growth, among them excessive and costly unnecessary government regulations which have raised costs to the consumer and produced little of no benefit. Let us look at a few of these policies.

As a concession to his union supporters, Pres. Franklin Roosevelt in the 1930s signed a number of union-supported laws benefiting the unions, among them a minimum wage which from the 1950s created an army of unemployed. The unions did not want the minimum wage for their members but for the employees of firms competing with their unionized employers. The effect was largely on black workers. Until 1950, blacks had lower unemployment rates than white, now twice as many blacks are unemployed than whites. Setting a minimum price for a product as everyone who has had a course in economics knows, reduces the sales of that product, in this case the services of unskilled labor. As every economist knows, government experiments with price controls, setting maximum prices, has always created scarcities and black markets. Governments have seldom set minimum prices; the minimum wage is an exception. Workers willing to offer their services below the minimum find that the law prohibits them from working.  Except in times of war and economic boom, as a result of the minimum wage, millions of workers are unable to find jobs.

The minimum wage makes it difficult for the unskilled, regardless of race, to find initial jobs so essential to acquire skills. Some state minimum wage laws exempt the employment of teenagers, which is a step in the right direction. In 2012, the unemployment of black male teenagers reached a scandalous 42%.Yet the minimum wage is very popular. Why? Because all but a small fraction of workers are paid more than the minimum wage and perhaps they believe erroneously that high wages are due to the minimum wage when they are due to the fact that they have the necessary skills to produce more value than the minimum wage for their employers. In addition to its negative economic consequence, the minimum wage has caused a multitude of negative effects. It has led to a proliferation of single parent families, which returned many blacks to conditions they had not experienced since slavery: complete dependence on handouts,  high crime rates, poor educational achievement, and so on. Prior to passage of the minimum wage, the black unemployment rate was less than that of whites. The ideal solution is to exempt teen-agers and all those who have never held a job for as long as, say, three months.

For more than two decades, federal and state governments spent hundreds of billions of dollars subsidizing alternative energy sources by grants, tax credits, policies like “junkers”, subsidies to the purchase of hybrid and electric autos, etc., subsidies to producers of wind and solar energy, etc. There is no evidence whatsoever that these expenditures have reduced global warming one iota. Onerous environmental regulations have inflicted great costs on utilities, on coal producers, on the auto industry raising costs to consumers on almost everything they buy. The solution is to let nature take its course and rely on market forces to find alternative energy sources as sources of fossil fuels get exhausted. We may even find eventually that the period of global warming may be short-lived. Many scientists have raised doubts that the burning of fossil fuels is a major determinant of climate change. In any case, we know from geological evidence that the earth was much warmer at various periods in its history.

The federal government in another intrusion in the market economy, decided to subsidize housing for the poor. While public housing rentals are low, the average cost of building such units is astronomical. We’ve witnessed dozens of apartment buildings built to house the poor end up having to be razed after a short span of a few decades. By contrast, privately built apartment buildings hardly ever have to be razed. No one has ever been held accountable for the fiasco of the razing of thousands of high-rise public housing apartment buildings in Chicago, St. Louis,  Pittsburgh and other cities. To the contrary, the annual budget of the federal Department of Housing and Urban Development has increased year after year for decades.

In the national income accounts, a positive trade balance shows up as a positive contribution to the Gross Domestic Product, representing a surplus of goods and services produced in the US and exported. A negative trade balance shows up as a deduction from GDP, representing goods and services produced abroad and imported.  The trade deficit of goods is a good indication of how many jobs are lost to foreigners. If the average worker produces, $100,000 of goods per year, a trade deficit in goods of $700 billion suggests that 7 million American workers have been displaced by workers abroad.

                    Trade Balance ($ Millions)       

                      Total            Goods     Services

1990            -80,864       -111,037     30,173

2000           -372,517      -446,783     74,266

2005           -714,245      -782,804     68,558

2006           -761,716      -837,289     75,573

2010           -494,658      -648,678   154,020

2011           -548,625      -740,646   192,020

2012           -537,605      -742,095   204,490

2013           -476,392      -701,669   225,276

The table shows that the US government’s policy of free trade, regardless of whether or not the trade deficit is produced by unethical policies or our trading partners, has reduced the demand for American workers by several millions. Assuming the average American worker produces $100,000 of value-added, a trade deficit in goods of $700 billion translates into reduced demand for 7 million American workers. My colleagues and I have proposed a scaled tariff, a single country variable tariff, to bring trade into balance with any country which for whatever the reason legal or illegal, we have a chronic trade deficit. In this instance where government action is essential to protect the jobs of American workers, our government has chosen not to intervene.

Congress has passed the Davis-Bacon Act that requires all bidders on federal government contracts to pay union wages. The reason is obvious. The Democrats who enabled passage of the bill were appeasing one of their loyal constituencies. The taxpayers’ interest is that government contracts should go the lowest qualified bidder.

One has to mention the degree to which government has chosen to regulate businesses which has made the US an unattractive place to invest and create jobs. It is still true that thata government governs best that governs least. Economists Nicole and Mark Crain, in a report commissioned by the National Association of Manufacturers, found that regulations cost  the economy more than $2 trillion in lost growth every year and cost manufacturers on average $19,564 per employee and the average US company $9,991 per employee. Some of the costliest regulations U.S. firms face are environmental regulations. These alone cost manufacturers $10,497 per employee per year.

One of the problems of increasing government is that it is practically impossible to terminate a proven bad government program. In 1930, the federal government had nine departments – state, treasury, war, justice, post office, navy, interior, agriculture, commerce, and labor. Now there are fifteen, adding departments of education, housing and urban development, energy, homeland security, transportation, and health and human service .War and Navy were combined in a single Department of Defense. In addition, there are many specialized agencies that have cabinet rank. These include the Environmental Protection Agency, the Office of Management & Budget, the United States Trade Representative, the United States Mission to the United Nations, the Council of Economic Advisers, and the Small Business Administration. Except for the Office of Management and Budget, many would say that most have done more harm than good.

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]