The law of unintended consequences is well known in economic policy analysis; but the outcome is not always a bad thing.  Partisans are angry or puzzled that businesses and corporations are enjoying renewed profits while unemployment remains at stubbornly high levels.

It is a normal dynamic for business to cut expenses when the economy or an industry tumbles, as it does with some degree of cyclical regularity.  During the rebound such a company will find itself more profitable at levels of volume far below the cyclical peak as the economy recovers.  It is not unusual to see business profits grow sharply during a recovery, often much before  employment recovers.

Unemployment, however, seems to recover more slowly with each successive cycle. One reason is an ever increasing minimum wage.  The impact of a higher minimum wage on unemployment may be muted during a boom but that does not mean that its effects do not appear later during a recovery, years after the damaging legislation was passed.

Added to the higher minimum wage is unemployment benefits that now run years instead of months.  The higher wage discourage employers from hiring and the longer unemployment benefits discourage workers from working.  Working is a habit that can easily be broken with a few years of unearned ‘benefits'.

The health care bill adds a particularly sharp disincentive to hire.  Not only is the actual and perceived cost to employers high, it is so uncertain that new employees become a liability that is hard to measure.  This has businesses avoiding new hires in favor of capital spending that will create new efficiencies with fewer people. 

Just as higher fuel prices will create incentives for companies to use more fuel efficient vehicles and drive fewer miles, higher employment costs will create incentives to use fewer workers.  Higher taxes, or the threat of them, further reduces startups and entrepreneurial activity.  It was the growth of new companies that spurred the economic growth and job creation of the 1980s under Reagan.

This recovery is meager and jobless because it is not driven by entrepreneurial activity, but by larger established companies cutting labor costs and benefiting the most from the largess of government.  Larger companies also have the infrastructure to handle increasingly complicated regulations that few small companies can absorb.

Another big difference this time is that the Federal Reserve is unable to paper over the problem with loose money.  For years the Maestro and the Fed seemed to magically make problems created by bad fiscal policies disappear.  Now with the Fed tapped out after massive infusions into the financial system, and with a mind numbing debt, the Fed has become ineffective at creating any economic growth.  The Fed, charged with the dual mandate of sustaining economic growth and keeping unemployment low is now unable to do either.

The official inflation rate is understated because wage rates and housing prices have remained low.  But most consumables such as gasoline, food,  and industrial commodities- the stuff that the workers with stagnant incomes actually buy- are sharply higher.

Success is knowing what worked yesterday. What worked with a billion dollars may not work with a trillion.  Policies that addressed normal business cycles may not work during financial collapses and debt liquidation. 

There is no longer any place for the consequences of terrible policies to hide.  This is a jobless recovery because government policy has made it so.  

Henry Oliner

www.rebelyid.com