Big Decisions with Big Risks Are Not Driven by Small Gains

“About the time we can make the ends meet, somebody moves the ends” – Herbert Hoover

A few years back I served on our church’s pastoral search committee. Our previous pastor had moved on, so the six of us set out to find a replacement. During one interview, the candidate (who eventually would fill the position) told us that interviewing pastors was kind of like going on one date, and then proposing marriage. Indeed it was a big decision, with big ramifications, and not the kind you could dither with for years.

Everybody is faced with big decisions in their lives. They get married, choose careers, buy houses or cars, and on and on. Efficient market theoreticians would like to believe that people make these decisions by calculating all related costs and benefits down to the most minute detail and choose the highest expected payoff. While it is likely true that people try their best to choose something like the highest expected payoff, they probably can only handle a few big considerations in that calculation – not every plausible scenario or angle.

I imagine this plays out for the “jobs bill” now being thrown around in the political debate …

Charles Smith over at “Of Two Minds” has an interesting post out regarding the “jobs bill” and whether it will or won’t impact hiring. Smith (and “Robert F.” who wrote a “letter to the editor”) says that the tax incentives for hiring are paltry in comparison to the actual hiring decision process. When considering a new hire, the employer is facing a lot of potential liabilities (and headaches) – and a few hundred or a thousand dollars in tax breaks doesn’t even come close to pushing him over the edge … it may not even enter the calculation. Consider Robert’s rant (in part):

“Once I hire someone, I am party to a relationship that is full of risk. What usually happens is the ‘check harvesting’ situation where just enough work is done to extract a paycheck. I am on the hook for matching Social Security tax, medicare tax, city occupational tax, unemployment tax, federal unemployment tax, workers comp insurance and all the abuse that goes along with that system. I have to withhold State and Federal income taxes with ridiculous penalties for late payments. Often I will get served with a garnishment or child support levy for an employee, and I am on the hook for all this. If I fail to withhold on a garnishment I become liable to pay the debt.

I have been through terminations where I was threatened with a gun, had to call the cops, etc. The usual take is that the police will take action after the homicide spree is done with. My nice Chrysler car got a cinder block thrown throught the window a few years back (oh, but there’s no proof it’s the guy I fired one week ago who punched his fist through the window and had the paramedics haul off out of my office.)” [the rant goes on for a while – it’s not bad.]

The most logical argument from the other side is “hey, if the extra few thousand dollars pushes the decision over the edge then it will lead to more hiring.” I don’t get that impression.

It actually reminds me of the Keynesian arguments in favor of inflation of the money supply. That if we continually strip the value of savings, then people will spend instead. This spending will induce greater production and send the economy off to the races. But people don’t really make decisions about when to buy a new washer or dryer based on inflation expectations – they buy new washers and dryers when the old ones break.

Yes, it is plausible that one will try to squeeze another year out of an older TV if they thing prices will continue to drop – and inflation can (though it is not always the case) send prices higher to avoid this delay. But consider what that means. In order to get you to spend money you really don’t have to, to buy a product you really don’t need yet, they want to push prices higher – they want to make your resource management less efficient because it makes for a better short term economic story. This doesn’t hold up long term.

Look, employers will hire when the economy turns around. They will hire when it makes economic sense to do so, when they can find quality employees to meet a growing workload. Regardless of the current economic conditions, the historical trend has been pretty clear – the economy will do better when it is freer. When people are freer to trade productive capabilities with others in the marketplace with less and less  intervention from the government … then the economy will heal itself.

The jobs bill is not going to do this. It’s not even about jobs – it is about politics and the 2012 election. And, by the way, that’s OK. These are politicians after all, and they will play politics at all times. We don’t begrudge them that, and we even admire the way they play the game.

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