Economy 101

This post is in response to Russel D Moore's June 1st, 2010 post on the BP oil spill in the Gulf of Mexico which can be found here:

http://www.russellmoore.com/2010/06/01/ecological-catastrophe-and-the-uneasy-evangelical-conscience/

This article attempts to persuade us to trust the government more than we do now. I don’t mean government in general, I mean this administration and session of congress specifically encouraging regulation. This article would be more agreeable if it didn’t rely on the premise of Moore trying to bring the economy and the regulation of it to light as if regulation was something that we as Christians forgot about. Moore has a very simplistic view of the economy and, frankly, he portrays an economy that isn’t in line with reality.

Moore views the economy as a child that needs to be restrained from doing bad things. As the argument goes, the economy will always do what is bad when given the chance. What is the fix? Tell industries how to do their job regulation by regulation, even more than we already do.

If the economy really was as Moore views it, an unruly teenager bent on doing what feels good regardless of consequences, then I agree with his conclusion that we need to slowly but surely tell this teenager what is and isn’t OK and punish him when he steps outside those lines. Do we know every line? I don’t think Moore presumes that anyone does which implicitly tells us that we need to regulate more as we see more.

My problem is that the economy isn’t how Moore views it. It is not an entity bent on rewarding evil and hurting the rest. The economy is a well oiled machine. The phrase “unintended consequences” doesn’t apply anywhere better than when the government interferes with the economy. The government sees the bad issue and tries to fix that one detail. What’s wrong with that? When you fix one detail you aren’t messing with just that one, but with a numerous succession of others. The government usually fails to anticipate these unintended consequences and regularly refuses to even acknowledge their existence.

Minimum wage is a good example. We need a minimum wage because we need to make sure people are making enough money and not exploited! So let’s raise it to $7.25 an hour. But why stop? Why not $20 or $30, or why not $100 an hour? “Well that’s ridiculous Victor, companies won’t be able to afford $100 an hour!” They won’t? What will they be able to afford? Where is that magic boundary that determines where a business will start losing money and how do we find this boundary? I know, let’s give that seemingly arbitrary decision to 535 men in Washington to decide, half of which have never owned or operated a business, some of whom have never worked for any business but argue vehemently that they know what businesses need to do.

Consequences? Let’s follow up with this example. Some owner in Virginia pays 10 employees $5.00 an hour. Assuming 20 hour weeks, that’s $100 per employee a week or $1000 a week total for the owner. Let’s say he’s in the stage of the business where he’s breaking even in efforts to get his business’s name out there in hopes that it will pick up, otherwise known as the beginning stage. Now let's say the government raises the minimum wage to $7.25 and his funds stay the same. His workers will immediately get an increase in pay but the new law doesn't address the growth of his business. Because of this new law, the owner’s payroll expenses jump to $1450 from $1000. $2.25 isn’t a big deal right? But his payroll just increased almost %50 without improving output or providing more workers. If he’s to continue to break even he has to let people go otherwise he starts losing money. Except when he lets people go he has to make up for the hours lost, in this case 60 or almost a third of the working hours he had at his disposal, so he either works for free and makes up for it himself or he has to close his business because it is now losing money, not making it.

“But Victor, minimum wage is a good thing that helps people climb out of poverty!” Well what about these 6 workers that were let go due to the law? How close are they to getting out of poverty? The dilemma only grows. Because if the owner has 20 workers to choose from that operate under the same wages he will choose the best ones. It becomes harder for people who do not possess any skills to get a job in this company now because even those that are experienced can’t keep a job there. This creates a barrier to entry. Now this law makes it harder to acquire useful skills to those who do not possess any. So it’s a two-fold blow. You lose jobs, in this case 6 optimistically but possibly all 20 if the owner can’t operate his business with the reduced help, and you keep entry-level workers from being able to enter the job market.

All that to say, regulation is not always a good thing. In the same way you need to know how an engine works before you start fixing one, you also need to know how the economy works in order to fix it and not just stop something it does. Example: removing the lubricant from the pistons of a car because it's an environmental hazard and yet that would destroy the car. Often the government moves an important piece and says it will be OK but when the machine stops working properly they blame something else usually unrelated, "well if you had stopped deregulating seat belt laws the lubricant wouldn't have mattered".

That is what is most worrisome about this article, and in my opinion self-condemning. Moore says the deregulation is the problem. What he neglects to tell you is which regulation was taken off the shelf. What regulation and its lack of enforcement led to this catastrophe in the Gulf of Mexico? Without knowing that you could just as easily argue that it was existing regulation that gave BP an incentive to not care about what damage it would cause such as the current accident.

Moore says deregulation is the problem, until he tells me which one, I remain unconvinced.