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My thoughtful lefty friends regularly try to convince me when I suggest that the current Administrative is not exactly “business-friendly” that I am perhaps being too harsh… and whenever I am about to soften a bit and hear more of their arguments, along comes a story like this:

The job creation bill that President Obama sent to Congress earlier this month includes a provision that would allow unsuccessful job applicants to sue if they think a company of 15 more employees denied them a job because they were unemployed.

Do any of the actual economists in the White House get listened to? I can assure you that every single member of his economic team would tell him that such a proposal only has the possibility of reducing employment. Now, I can think of two reasons why the President would go ahead and float this idea then:

  1. He understands economics full well, and knows that such a provision has no chance in hell in getting through the legislation. Therefore it is a costless attempt at politicking and satisfying his disaffected base.
  2. He has become so enraged that his economic policies have not been working, and thinks, like FDR did, that businesses are not hiring just to spite him, that he forgets the economics he knows and wants to ram something like this down business’ throats.

I still go strongly with #1. I know folks want to think #2 is plausible, but I think that following up the desire to tax the rich more with a move like that would politically backfire – I think there are limits to how much “warfare” the median voter can stomach. Remember, the median voter is employed.

For interested readers, there are two reasons that this proposal is a problem, both pretty obvious.

  1. Being unemployed is a signal about unobserved characteristics that help firms decide who is more productive. Banning the use of such information is asking firms to have less information about the quality of their job applicants. In any case, is it even possible to monitor and enforce such a policy? This is worse than banning colleges from using test scores to determine the quality of their applicant pool. In a pooling equilibrium then, absent the ability of firms to use this information, all workers may be worse off – with lower wages prevailing than would otherwise be the case. Now there is more to say on the long term implications – including the possibility that lower wages are needed right now, and this is one way to get them since the central bank does not want to accommodate as much as the fiscal authorities want it to. That’s a stretch of course.
  2. Independent of the pooling possibility from (1) this act plain and simple raises the cost of interviewing and hiring workers. When the costs go up, then we get less. Firms are even less likely to hire in this environment than before, and given the need to expand output, it is much more attractive to employ a machine to do the trick, to outsource some of the work, or to ask the existing workforce to do more. Ask yourselves, if you were hiring people, how would YOU respond to an increased risk of a lawsuit?

And as usual, the President’s reaction to this? To just deny it. Because if a President denies something, then it must be true.

Obama said recently that discrimination against the unemployed makes “absolutely no sense,” especially because many people find themselves  out of work through no fault of their own

Sure buddy. I think I need to throw out my intermediate micro notes now. I want to publicly apologize to the 1,000 or so students I have had in that course, we owe you some money back.

HT to Alex R.

5 Responses to “I Just Don’t Want to Believe It”

  1. JR says:

    Well obviously economics is the only incentive driving policy from Washington. If only human behavior could be defined by a mathematical equation, it would all be coherent.

  2. Men in government think like dictators, not merchants. They see their place in the world as leaders, and part of their job is to demand and dictate how the world shall work under their watch. It’s a different world-view that is not compatible with conservative economics. He wants to run the nation as if the nation is his corporation, and each business within his borders are middle managers. He considers it practical to simply send a TPS report to all of them demanding that they avoid using employment status as a determinant of the candidate’s ability to perform the desired duties within Obama’s giant nation-corporation.

  3. Harry says:

    In the past the threshold for many federal and state rules and regulations was fifty employees; now we have shrunk that to fifteen.

    In either case, 49 or 14 employees, there is a powerful incentive at the margin not to hire, given the lawyering-up and the record-keeping, not to mention the cost of insurance to protect against a discrimination lawsuit in federal court.

    This is not to say some small companies would not hire if they got a flood of new business, but if hiring more people meant more equipment, a bigger building, or any additional burden, one would think twice about expanding.

    #1 probably is the best explanation.

    Now a NEW idea would be to create a safe-harbor law narrowing discrimination laws to just race, religion, and sex, along with a loser pays rule, and limiting damages to actual dollar losses.

  4. RIT_Rich says:

    Do you think Obama ever took an intermediate micro class?

  5. Harry says:

    Rich, I doubt he did, nor did many of his close advisors. Maybe a few of them took Econ 101, reading Samuelson, learning far enough to learn about ogolopilistic versus monopolistic prices. Who knows whether Bill Ayers got that far, as a disciple of Alinsky.

    The last forty years seem to have passed them by, as if there were nothing to learn, and everything to forget. OK, the last eighty years, assuming anyone has bothered to read a book.

    Obama got his education at Columbia where a long time ago abandoned standards for its students, a universe apart from Amherst or RIT. His economic education may well have come from Mother Jones.

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