President Obama’s American Jobs Act is a road to economic hell.

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Oct. 24 2011 3:36 PM

Read It and Weep

Why the American Jobs Act is a road to economic hell.  

The trading floor of the New York Stock Exchange just after the crash of 1929.
The trading floor of the New York Stock Exchange just after the crash of 1929.

The following article is an excerpt from a piece that originally appeared in Defining Ideas, a Hoover Institution Journal, on Sept. 27, 2011. Richard Epstein will argue against the motion, “Congress should pass Obama’s jobs plan—piece by piece,” at the Oct. 25 Slate/ Intelligence Squared debate.

The dim news about the current economic situation has prompted the Obama administration to put forward its latest, desperate effort to reverse the tide by urging passage of the American Jobs Act, a turgid 155-page bill. The AJA’s only certain effect is to make everything worse than it already is by asking Congress to tighten the stranglehold that government regulation has already placed on the economy.

That sad fact would certainly elude anyone who accepted the president’s justification for the AJA when he sent the bill to Congress. This bill, he said, will "put more people back to work and put more money in the pockets of working Americans. And it will do so without adding a dime to the deficit." How? Why, by closing "corporate tax loopholes" and insisting that the wealthiest Americans pay their "fair share" of taxes.

What is so striking about Obama’s shopworn rhetoric is its juvenile intellectual quality. His explanation for how the AJA will create jobs is a non-starter because he does not explain how we get from here to there. As in so many other cases, the president thinks that waving a wand over a problem will make his most ardent wishes come true, even when similar earlier efforts have proved to be dismal failures.

One does not have to dip very far into the bill to find trouble. Section 4 of the AJA imposes "Buy American" restrictions on the use of funds appropriated under this statute for work on public buildings. "[A]ll the iron, steel and manufactured goods" used on such projects are to be fabricated in the United States. There are obvious administrative difficulties in deciding what counts as a "manufactured good" for the purposes of the act. But don’t sweat the small stuff. The fatal problem with this form of jingoism is that, in the name of economic efficiency, it forces American taxpayers to pay more for less. That upside down logic may seem sensible to a die-hard Keynesian, but not to ordinary people who realize that deliberate overpayment for inferior goods makes no more sense in the public sector than in the private one.

The universal statutory command to "Buy American" is not capable of rigorous enforcement, which brings us to another problem with the bill: It allows its legislative mandates to be waived when the head of the relevant federal agency finds that its enforcement is against the "public interest," including in hard to calculate cases where such deliberations increase project costs by 25 percent. The basic structure of the AJA thus uses large doses of administrative discretion to defang some of its most unrealistic commands. In so doing, it introduces what I have termed elsewhere the vice of government by waiver, where unbridled discretion creates uncertainty and breeds favoritism.

This process only adds to the cost of legislative enforcement. The real jobs created are for government bureaucrats who determine, under rules to be promulgated later, whether the rule or exception applies. The provision has it exactly backward. The correct piece of legislation should provide that no recipient of funds (assuming there are any) should be allowed to impose "Buy American" preferences—ever.

The bill only gets worse. Sections 101 and 102 of the act continue the policies of giving temporary payroll tax cuts and temporary tax credits to employers who hire additional workers. Cutting taxes, of course, is just fine, but the temporary nature of the cuts is wholly counterproductive. The Obama administration has two unflattering views of employers. First, they are cunning ogres who have to be watched lest they exploit or cheat workers. Second, they must be economic lightweights because they are willing to make long-term hiring commitments on the basis of short-term tax credits, like the one offered in the AJA.

The simple truth lies elsewhere. No rational employer will invest much in new jobs on the basis of short-term tax cuts. Employment will take place only when the gains from hiring exceed the transaction costs and taxes on the deal. The statutory provisions of the AJA promote uncertainty because no one can know whether, or for how long, these temporary tax cuts will be extended in the future. These short-term fixes are just another version of government by waiver. What is needed is the exact opposite: a stable tax system that gives people the confidence to hire permanent workers.

Moving on, the most ghastly AJA innovation is its new-fangled antidiscrimination law that now makes it essentially illegal to discriminate against unemployed workers. The multiple objections to this provision have been ably summarized by Chicago-based columnist Steve Chapman. Yet they all boil down to one simple point. Hounding employers into hiring unemployed workers will do nothing to create jobs.

The bill’s antidiscrimination provision is intended to prevent employers and employment agencies from stating that all job applicants must be currently employed. Choking off that information is a disservice to just these workers. With countless applicants for each position, nimble employers can easily manufacture some individuated reason to turn down a given worker. So why send desperate workers on a wild goose chase? It is better to have greater job mobility, so that when one worker shifts jobs another place is opened.

There is obviously at least some loose correlation between the inability to get a job today and the ability to hold one tomorrow. It hardly helps the economy to require employers to place their entire businesses at risk by making them hire workers they deem unsuitable. To allow for this possibility, the basic statutory command is quickly attenuated with a giant exception that allows the employer to look at the individual’s employment history and qualifications in making hiring decisions, or by finding out how the applicant has fared in a similar or related job.

The president should have cut back on the discrimination laws now in place rather than creating new such laws. Our vast system of unemployment antidiscrimination laws is costly to enforce. These laws assume, erroneously, that remote administrators have better information as to what characteristics are job-related than the employers whose successful operations depend on making the right calls. Still, it is tempting for government officials to get involved in these employment decisions, especially when they see documented instances of sheer bigotry. The National Employment Law Project, for instance, found that 150 firms, out of literally millions in this country, posted job notices requiring all applicants be currently employed. The AJA’s response was, however, complete overkill.

Put in proper perspective, the jobs act is a classic instance of yet another road to hell paved with good intentions. The greatest protection for all workers is redundancy in the labor market, which only comes when the full range of job restrictions, including the antidiscrimination laws, are consigned to the scrap heap. Once that is done, a few firms may well choose to discriminate on what grounds that everyone, myself included, would regard invidious. But why worry when thousands of others might actually develop innovative hiring and promotion policies after they are freed from an endless set of government restrictions.

The AJA misfires because it starts from unsound economic premises. What a worker needs is a job. Accordingly that worker should worry about the number of opportunities available to him, not the number of closed doors. It is far better therefore to seek a job in a growing economy, in which a small fraction of employers wish to hire you, than in a stagnant economy, in which no one gets hired at all. Judged by these standards, the AJA is an economic nightmare waiting to happen.

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