Unemployment - increasing and personal

Bureaucrats hire economists to do studies and produce numbers. Politicians use those numbers to buy votes. With enough votes, politicians use your taxpayer dollars to hire more bureaucrats to hire more economists to produce more statistics.

Meanwhile, your neighbor's home was foreclosed.

The house is falling apart. The lawn is brown, except for the weeds. Another neighbor has lost her job. Many are concerned that the businesses they work for may not be able to employ them much longer.

You don't need a bureaucrat to know that things are bad.

But they told us anyway. The Colorado Department of Labor and Employment recently told us that 8,400 Coloradans lost their jobs last month and another 11,300 became so discouraged that they quit looking for work.

Over 20 years ago, I opened Paradise Rock Gym, my first business. Adams County government welcomed my business, eliminating red tape, allowing me to focus on building my business, gaining customers, and selling something that people willingly bought. I willingly provided benefits for my employees, so they would willingly continue working for me. It was a solid middle class business, helping middle class people earn a living while pursuing their dreams.

These days, our government, with its insatiable desire to control our lives, regulate our businesses, and confiscate our money prevents businesses from doing what I did.

The bureaucrats tell us what we already know - our government is hurting us, the very people it claims to help.

Electricity, Unemployment, and...

This is my final column for Metro North Newspapers. On Thursday, January 5, I became a candidate for State Representative, and can no longer be a columnist.

How many times do we pay for renewable electricity?

Xcel Energy is asking for another rate hike which will add 6% to your electric bill. The rate hike is to pay for electricity they aren’t generating.

Xcel used to sell 300 megawatts of electricity to Black Hills Energy, a utility that serves southeastern Colorado. In 2004 Xcel forecasted that they would need that electricity and would no longer sell it to Black Hills. Now Xcel says it doesn’t need those megawatts because demand isn’t as high as they forecasted. It costs money to own an idle power plant, hence the requested rate hike.

Coincidentally in 2004, Colorado voted to require 10% of Xcel’s electricity to come from renewable sources. That’s a reasonable and worthy goal. As the economy grew and need for electricity rose, new renewable generation could fulfill the requirement. But then our legislators got carried away with it. They increased the requirement to 30% by 2020. 

Xcel has 328 megawatts of renewable energy, slightly more than the excess capacity. So let’s see how many times we pay for electricity:

1. We pay for power plants.
2. We pay for renewable power plants.
3. We pay for subsidies for renewable energy.
4. We pay for more gas power plants, because coal power plants can’t respond quickly enough if the wind quits blowing.
5. We pay for subsidies for energy saving washers, dryers, furnaces, even window shades, which reduce demand.
6. We pay to upgrade power plants so that they will cause less pollution.
7. Then we pay for idle upgraded power plants.

Who is responsible for this mess? Legislators who believe they know best how to run an economy. Friederich Hayek called this the “Fatal Conceit.”

Misclassified

It’s personal now.

The Colorado Department of Labor and Employment (CDLE) intends to end the practice of “misclassifying” employees as independent contractors. They claim that one in seven Colorado workers is misclassified. The club where I coach swimmers has decided that rather than risk the possibility of a CDLE audit I have to be an employee instead of an independent business owner. Even though I carry my own insurance, market my services, and set my hours, nobody can defeat the power of a CDLE auditor. Employees cost more than contractors, so the club reduced what they are willing to pay for my services.

As a “new hire” my loss of a business counts as a created job in labor statistics. In the very near future, Colorado may see an increase in jobs when many employers reclassify their independent contractors. At the same time, real unemployment will increase. Some independent contractors will lose work because of the extra cost to their employers. Some employers will go out of business because they can’t afford the cost of reclassifying workers. Think about that - one in seven workers (small business owners) is at risk, but the state will claim better hiring.

Farewell?

This will be my last column for Metro North Newspapers. Tomorrow I’ll be filing paperwork and standing for office (That’s how they say it in Australia, and I like the idea of standing for office rather than running.) As a candidate for State Representative, I’ll have to forfeit my job as a columnist.

My column is called “Wake Up Call.” I hope I’ve made my case that government has run amok, and we need to limit what it does. That doesn’t make me an anarchist. Government provides some very important functions. However, the opposite of limited government is unlimited government, and we don’t want to go there. It’s time that we wake up and enforce limits.

Undoubtedly, what I’ve written will be twisted and used against me. But if I wrote nothing, they will just make stuff up anyway. I hope, despite what they say about me, you will remember this: I believe that the aggregated wisdom of millions of free people living under the rule of law beats the heck out of legislators and bureaucrats. As I stand for office, I stand with you for your rights.

Reality Over Hope - Three Jobs Saved

We cannot solve our problems with the same thinking we used when we created them. Albert Einstein 

President Obama has explained his new stimulus program. Let’s see how the old one did. Obama’s Council of Economic Advisors (CEA) reports that the American Recovery and Reinvestment Act (ARRA) has been a success, creating or saving 2.4 million jobs through the first quarter of 2011 at a cost of $666 billion. As pointed out by The Weekly Standard, this comes to approximately $278,000 per job. We’d have saved $427 billion by just writing $100,000 checks to each person who has a job because of the stimulus.

The CEA is a group of three economists appointed by the President to…advise the President on economics. Being economic advisor to the man that spent $278,000 per job only to see unemployment stuck at over 9% would be a tough job. How do you tell the President that he wasted oodles of money and prolonged the recession –without losing your job? The report relies on Obama’s old campaign slogan. Heavily invested in HOPE, the president might see only what he wants to see in the report, and believe the skewed conclusions.

The report mentions twice that nobody can observe what would have happened in the absence of the stimulus. We can observe that the economy reversed its downward trend one quarter before the stimulus, and that the biggest positive jump was in the first quarter before 98% of ARRA funds had been spent. And we can see that as stimulus spending increased, the economic growth trend reversed again, going down. The report says that it can’t determine the cause of what happened, but in a triumph of hope over reality, it misconstrues facts, confuses correlation with causation, and lays the groundwork for more stimulus. 

It gets worse. The first company that got a government guaranteed loan under ARRA was Solyndra, a California solar panel manufacturer. Government guaranteed loans, by the way, are actually guaranteed by you and me. Solyndra got $535 million. Assuming all of its 1100 workers were hired because of the stimulus money, that’s over $486,000 per job. Now Solyndra is bankrupt. Solyndra’s 1100 jobs were lost because Obama was mistaken in his choice of handout recipients. How many more failures will we see? If a company requires a subsidy, it probably doesn’t deserve it. 

We’re not done with that CEA report yet. It relies on “independent approaches and supplements those estimates with those of numerous outside analysts”. The data was cherry-picked to create the desired outcome: Impress the President and save the jobs of three economists. If outside data is included, where is data from other countries that demonstrate whether their stimulus programs worked? 

Our nearest “rich country” neighbor is the closest thing to that which the CEA said could not be observed – the effect of doing nothing. Canada did next to nothing. According to David Lee, writing for the Mises Daily, Canada’s stimulus package “was little more than a clever display of political gamesmanship whereby the appearance of action was maximized, while the action itself was minimized…It is precisely in this abstinence that we find Canada's source of relative success”. Canada’s economy grew 3.3% in 2010. Job losses have been recouped. Their unemployment rate is 7.2%, compared with ours at 9.1%. A recent business survey indicates record hiring expectations and optimism about future demand. 

Canada is perceived as the hope-over-reality bastion of socialism in North America. But the truth is that in 1993 “Canada underwent one of the most fiscally responsible periods in its history…[Finance Minister] Martin made it clear from the start that the priorities of the government would be fixed squarely on eliminating the deficit and the record of the following decade leaves little doubt that this was a commitment that was delivered upon powerfully”. 

While the CEA shows us that they can save their own jobs, Canada shows us that government non-interference is how job creation really works.

The Anti-Stimulus Program

Politicians often lack a foundation in basic economics, or we probably wouldn’t be facing the possibility of a financial collapse. The average individual has a better intuitive understanding of basic economics than many of our elected officials, or even famous economists. Humans, from the time they first began to trade, have understood supply and demand, pricing, and the use of scarce resources. Billions of people know how to balance spending against income. Our most famous economists, however, are so wrapped up in fallacy that they have forgotten the basics. And history. 

Nobel Prize winning economist Paul Krugman is leading the call for a new WPA-like program. The WPA (Works Progress Administration) was a depression era jobs program. In 1935, just when it appeared that the economy was turning around, President Roosevelt feared that it wouldn’t turn around fast enough. Even though his administration was spending tax money at an enormous rate on public works projects, he created the WPA to give jobs to even more people, lower the unemployment rate, and right the economy. This was a stimulus plan, featuring “shovel ready jobs.” 

Did it work? No. Even the government at the time counted WPA workers as unemployed. Since the private sector could not provide jobs for them, it’s obvious that the economy had not improved.

During the depression, the WPA faced several unanswerable questions that undoubtedly limited its effectiveness. A new WPA program would face similar questions in a more complex world. Nobody can know the right answers. 

1. What wage should be paid? The WPA had a limited budget. They could put more people to work by paying lower wages. But low wages puts downward pressure on wages in general. In the free market, that’s not a problem. Remember basic economics of supply and demand? Labor is a market good. If there are lots of workers available (lots of supply), wages will already be depressed. But government labor is not a free market. It is controlled by unions who spend billions of dollars to elect their bosses. An influx of cheap labor would be bad for unions. Union supported politicians are not likely to do anything to jeopardize union power. 

2. What kind of work should they do? Again, we see a conflict with the unions. They will object strenuously to the government hiring non-union workers to compete with them at their skilled jobs. The WPA jobs will have to be low skilled, or workers will have to be unionized. Republican politicians who are rarely the beneficiaries of contributions from unions are not likely to let union power expand through government spending.  

3. How do you evaluate worker performance? Private sector workers must create value for their employers. The primary purpose of WPA jobs will be to lower unemployment. The longer it takes to complete a particular project, the more employment is created. If creating employment is the goal, the least efficient projects will be the most successful. In the private sector, that’s called waste. In this case, it’s a waste of our tax money. 

4. Who should get the jobs? If the goal is to reduce suffering caused by unemployment, it makes sense to hire the neediest people. Those people may have the fewest work skills. Hiring the least capable workers leads to even more inefficiency. This is more waste of our tax dollars. 

5. The program is ripe for corruption. During the depression, more WPA money went to districts with politicians that supported Roosevelt. WPA workers were pressured to register and vote as democrats and campaign for democrats.  

Now the biggest questions. Who has the wisdom to administer it? How big should it be? How long should it last? The Obama administration told us that the stimulus package would keep unemployment below 8%. They were very wrong. But government has a long history of throwing more money at failed programs. A new WPA would be another example.

Unemployment Insurance Problems In Your Own Backyard

Did you know that if you hire your neighbor's kid to mow your lawn, you are liable, under Colorado law, for unemployment insurance for that kid?  

The fact is you cannot sell your labor for a price you are willing to accept unless it meets government criteria. As an employee, you must receive minimum wage -- and be covered by Unemployment Insurance (UI), workers compensation insurance, and have taxes withheld. This is how our state and country disrespect individual enterprise. Let's consider how this affects the small businesses that hire most of the people in our land:

In a recent blog I railed against the Unemployment Insurance (UI) system because it reduces private sector jobs.  The system creates a whole slew of perverse incentives, including these:

§       Businesses are more reluctant to hire an employee who might eventually become an unemployment claim that will raise UI tax rates.

§       Employers facing layoffs have an incentive to fire employees for cause so they avoid an unemployment claim.  This damages the work record of the employee, making it harder to find a new job.

§       In 2009, legislation gave The Colorado Department of Labor and Employment (CDLE) expanded powers to investigate businesses for potential “misclassification” of employees.  With the UI trust fund being $500 million in the hole, CDLE has reason not merely to audit for enforcement, but also to coerce businesses into paying taxes they should not owe. 

Employees don’t see a deduction on their paychecks to cover unemployment insurance.  Nevertheless, they pay for it.  In a competitive labor market, a tax paid by an employer is money that could otherwise be used for employee compensation.  Yet few of the employees who pay for UI taxes will ever receive the benefits.  You only get benefits if you become unemployed “through no fault of your own”.  Employers and CDLE both have strong incentives to prevent payment of benefits.  The UI system is of limited benefit and is a drain on job creation and payrolls.  

To me though, the worst part is that the government limits your right to provide labor.  That is exactly NOT the purpose of government.   Government’s role is to protect your property rights, including your right to sell your labor as you see fit.  You might disagree with me about the value of unemployment insurance, but it is indisputable that it restricts liberties. 

There is a class of people who are exempted from these restrictions: independent contractors and business owners.  If you want to mow your neighbor’s lawn for money, or design a software system for him, you can become a business owner.  Your neighbor won’t have to withhold taxes, buy worker’s compensation insurance, or pay UI taxes.   

But there’s a catch. Colorado law has a list of nine criteria that you must meet to be a valid independent contractor. If you don’t meet all nine, your neighbor will be liable at least for UI taxes.  It is solely the judgment of the auditors from CDLE that determines if you have met those criteria.   

In a recent audit, the auditor interpreted the rules to mean that if an independent contractor gets more than 50% of its revenue from one business, it could be reclassified as an employee and be subject to back taxes, interest and penalties. Such a ruling, were it applied universally, would be totally impractical.  A new contractor could not go into business until it had secured at least two contracts, each for half of its business.  An enterprise would be precluded from doing more than 50% of its business with its best customer.  

The criteria are vague and arbitrary. They lead to abuse by the CDLE who are empowered by the 2009 legislation to enforce the criteria in any way they see fit for the purpose of supporting a UI system that reduces job creation, damages resumes, and robs individual liberties.   

The legislature must change the law to loosen the restrictions on independent contractors. There is only one criterion that is not arbitrary and open to interpretation by unelected and unaccountable bureaucrats: the willingness of an individual to become subject to the risks of business ownership. By expanding the definition of independent contractor, more people will be able to opt out of the failed unemployment insurance system.

Who Pays For Unemployment Benefits?

Imagine you just interviewed for a new job. The employer tells you “You’re a great match for our company, and we’d be excited to have you work for us. We offer good pay, flexible hours, a comfortable work environment, and great benefits.” 

You say, “Great! When can I start?”

“Unfortunately, our benefits are so great, that we can barely afford them for the people we already have. So even though we’d love to have you work for us, we can’t afford to hire you.” 

You reply, “I don’t need all the benefits. I really need the job.” 

“Unfortunately, the benefits are mandated by government, so our hands are tied. Best of luck to you with your job search.” 

In Colorado (as of October, 2010, the latest information my research team (me) could find) every 95 people that receive wages represent one job that won’t be created because of unemployment insurance (UI) taxes.  That means those taxes potentially increase unemployment by 1%. And those taxes are increasing rapidly, so 95 people may soon become 75 or 65, and 1% becomes 1.3 or 1.5%. 

During this recession, Colorado’s Unemployment Insurance Trust Fund (UITF) has been bankrupt since January, 2010. Colorado pays $1.51 in benefits for every $1.00 it receives in UI taxes.   Despite our state constitution’s ban on deficit spending, the UITF has been borrowing money from the federal government since then.  We are currently $500 million in the hole.  Unemployment Insurance taxes are going up to cover the deficit, and with fewer businesses and employees to tax, the rates are skyrocketing. 

Our unemployment system creates huge problems. First is the incentive not to hire. Every new hire is a potential unemployment claim against the employer. Claims raise rates.  It’s better not to hire someone you may later have to lay off.  Second, employers are inclined to fire “for cause” if layoffs are necessary, so that the employee will not be able to make a claim against the company. This damages the resume of the new job seeker. 

But aren’t the benefits worth it? The Congressional Budget Office (CBO) says of the options it studied for government programs to stimulate the economy, UI is the most effective.  It also says that every dollar spent on unemployment generates up to $1.90 in economic growth.  This is preposterous on its face.  If it were true, we could all quit work and the economy would not just recover, it would flourish.

One option the CBO ignored is not taxing employers and not borrowing money to pay for the benefits.  If a dollar taken from an employer by the State and then redistributed to a beneficiary (who spends valuable but unproductive time to meet the State’s requirements) can generate positive economic growth, then a dollar left in the hands of an employer surely would generate more growth.  

Contrary to popular opinion, employers do not pay UI taxes. Sure, they write the checks. But the money comes from you and me, the workers, consumers, shareholders, etc.  UI taxes (as well as any other tax) are a cost to the business, and the business passes those taxes on.  If they don’t or can’t, that leads to fewer profits, business failures, and lost jobs. But if the business you work for fails, you’ll get unemployment benefits! That should make you feel better – you’ll be a beneficiary of the tax that added to the burden that led to the failure of your employer! 

And who gets the benefits?  The government and business both have incentive to deny claims to unemployed people.  Claims increase the experience rate of companies, and that raises their tax rates. Businesses will do their best to terminate for cause so that claims will not be paid.  Colorado government wants to display their “fiscal responsibility” by running a sound program that doesn’t run out of money and eliminates fraud and abuse.  So a relatively small percentage of those who lose their jobs actually receive the benefits.  Even now, only 37% of the unemployed receive benefits. 

So when you go to that next job interview, look at the employees.  Every 95 of them represents the job you won’t get, courtesy of your government.