DRI-280 for week of 7-7-13: Unintended Consequences and Distortions of Government Action

An Access Advertising EconBrief:

Unintended Consequences and Distortions of Government Action

The most important cultural evolution of 20th-century America was the emergence of government as the problem-solver of first resort. One of the most oft-uttered phrases of broadcast news reports was “this market is not subject to government regulation” – as if this automatically bred misfortune. The identification of a problem called for a government program tailored to its solution. Our sensitivity, compassion and nobility were measured by the dollar expenditure allocated to these problems, rather than by their actual solution.

This trend has increasingly frustrated economists, who associate government action with unintended consequences and distortions of markets. Since voluntary exchange in markets is mutually beneficial, distortions of the market and consequences other than mutual benefit are bad things. Economists have had a hard time getting their arguments across to the public.

One reason for this failure is the public unwillingness to associate a cause with an effect other than that intended. We live our lives striving to achieve our ends. When we fail, we don’t just shrug and forget it – we demand to know why. Government seems like a tool made to order for our purposes; it wields the power and command over resources that we lack as individuals. Our education has taught us that democracy gives us the right and even the duty to order government around. So why can’t we get it to work the way we want it to?

The short answer to that is that we know what we want but we don’t know how government or markets work, so we don’t know how to get what we want. In order to appreciate this, we need to understand the nature of government’s failures and of the market’s successes. To that end, here are various examples of unintended consequences and distortions.

Excise Taxation

One of the simplest cases of unintended, distortive consequences is excise taxation. An excise tax is a tax on a good, either on its production or its consumption. Although few people realize it, the meaningful economic effects of the tax are the same regardless of whether the tax is collected from the buyer of the good or from the seller. In practice, excise taxes are usually collected from sellers.

Consider a real-world example with purely hypothetical numbers used for expository purposes. Automotive gasoline is subject to excise taxation levied at the pump; e.g., collected from sellers but explicitly incorporated into the price consumers pay. Assume that the price of gas net of tax is $2.00 per gallon and the combination of local, state and federal excuse taxes adds up to $1.00 per gallon. That means that the consumer pays $3.00 per gallon but the retail gasoline seller pockets only $2.00 per gallon.

Consider, for computational ease, a price decrease of $.30 per gallon. How likely is the gasoline seller to take this action? Well, he would be more likely to take it if his total revenue were larger after the price decrease than before. But with the excise tax in force, a big roadblock exists to price reductions by the seller. The $.30 price decrease subtracts 15% from the price (the net revenue per unit) the seller receives, but only 10% from the price per unit that the buyer pays. And it is the reduction in price per unit paid by the buyer that will induce purchase of more units, which is the only reason the seller would have to want to reduce price in the first place. The fact that net revenue per unit falls by a larger percentage than price per unit paid by consumers is a big disincentive to lowering price.

Consider the kind of case that is most favorable to price reductions, in which demand is price-elastic. That is, the percentage increase in consumer purchases exceeds the percentage decrease in price (net revenue). Assume that purchases were originally 10,000 gallons per week and increased to 11,200 (an increase of 12%, which exceeds the percentage decrease in price). The original total revenue was 10,000 x $2.00 = $20,000. Now total revenue is 11,200 x $1.70 = $19,040, nearly $1,000 less. Since the total costs of producing 1,200 more units of output are greater than before, the gasoline seller will not want to lower price if he correctly anticipates this result. Despite the fact that consumer demand responds favorably (in a price-elastic manner) to the price decrease, the seller won’t initiate it.

Without the excise taxation, consumers and seller would face the same price. If demand were price-elastic, the seller would expect to increase total revenue by lowering price and selling more units than before. If the increase in total revenue were more than enough to cover the additional costs of producing the added output, the seller would lower price.

Excise taxation can reduce the incentive for sellers to lower price when it is imposed in specific form – a fixed amount per unit of output. When the excise tax is levied ad valorem, as a percentage of value rather than a fixed amount per unit, that disincentive is no longer present. In fact, the specific tax is the more popular form of excise taxation.

The irony of this unintended consequence is felt most keenly in times of rising gasoline prices. Demagogues hold sway with talk about price conspiracies and monopoly power exerted by “big corporations” and oil companies. Talk-show callers expound at length on the disparity between price increases and price decreases and the relative reluctance of sellers to lower price. Yet the straightforward logic of excise taxation is never broached. The callers are right, but for entirely the wrong reason. The culprit is not monopoly or conspiracy. It is excise taxation.

This unintended consequence was apparently first noticed by Richard Caves of Harvard University in his 1964 text American Industry: Structure, Conduct, Performance.

ObamaCare: The 29’ers and 49’ers

The recent decision to delay implementation of the Affordable Care Act – more familiarly known as ObamaCare – has interrupted two of the most profound and remarkable unintended consequences in American legislative history. The centerpiece of ObamaCare is its health mandates: the requirement that individuals who lack health insurance acquire it or pay a sizable fine and the requirement that businesses of significant size provide health plans for their employees or, once again, pay fines.

It is the business mandate, scheduled for implementation in 2014, which was delayed in a recent online announcement by the Obama administration. The provisions of the law had already produced dramatic effects on employment in American business. It seems likely that these effects, along with the logistical difficulties in implementing the plan, were behind the decision to delay the law’s application to businesses.

The law requires businesses with 50 or more “full-time equivalent” employees to make a health-care plan available to employees. A “full-time-equivalent” employee is defined as any combination of employees whose employment adds up to the full-employment quotient of hours. Full-time employment is defined as 30 hours per week, in contradiction to the longtime definition of 40 hours. Presumably this change was made in order to broaden the scope of the law, but it is clearly having the opposite effect – a locus classicus of unintended consequences at work.

Because the “measurement period” during which each firm’s number of full-time equivalent number of employees is calculated began in January 2013, firms reacted to the provisions of ObamaCare at the start of this year, even though the business mandate itself was not scheduled to begin until 2014. No sooner did the New Year unfold than observers noticed changes in fast-food industry employment. The changes took two basic forms.

First, firms – that is, individual fast-food franchises – cut off their number of full-time employees at no more than 49. Thus, they became known as “49’ers.” This practice was obviously intended to stop the firm short of the 50-employee minimum threshold for application of the health-insurance requirement under ObamaCare. At first thought, this may seem trivial if highly arbitrary. Further thought alters that snap judgment. Even more than foods, fast-food firms sell service. This service is highly labor-intensive. An arbitrary limitation on full-time employment is a serious matter, since it means that any slack must be taken up by part-timers.

And that is part two of the one-two punch delivered to employment by ObamaCare. Those same fast-food firms – McDonald’s, Burger King, Wendy’s, et al – began limiting their part-time work force to 20 hours per week, thereby holding them below the 30-hour threshold as well. But, since many of those employees were previously working 30 hours or more, the firms began sharing employees – encouraging their employees to work 20-hour shifts for rival firms and logging shift workers from those firms on their own books. Of course, two 20-hour shifts still comprises (more than) a full-time-equivalent worker, but as long as the total worker hours does not exceed the 1500-hour weekly total of 50 workers at 30 hours, the firm will still escape the health-insurance requirement. Thus were born the “29’ers” – those firms who held part-time workers below the 30-hour threshold for full-time-equivalent employment.

Are the requirements of ObamaCare really that onerous? Politicians and left-wing commentators commonly act as if health-insurance were the least that any self-respecting employer could provide any employee, on a par with providing a roof to keep out the rain and heat to ward off freezing cold in winter. Fast-food entrepreneurs are striving to avoid penalties associated with hiring that 50th full-time-equivalent employee. The penalty for failing to provide health insurance is $2,000 per employee beginning with 30. That is, the hiring of the 50th employee means incurring a penalty on the previous 20 employees, a total penalty of $40,000. Hiring (say) 60 employees would raise the penalty to $60,000.

A 2011 study by the Hudson Institute found that the average fast-food franchise makes a profit of $50,000-100,000 per year. Thus, ObamaCare penalties could eat up most or all of a year’s profit. The study’s authors foresaw an annual cost to the industry of $6.4 billion from implementation of ObamaCare. 3.2 million jobs were estimated to be “at risk.” All this comes at a time when employment is painfully slow to recover from the Great Recession of 2007-2009 and the exodus of workers from the labor force continues apace. Indeed, it is just this exodus that keeps the official unemployment rate from reaching double-digit heights reminiscent of the Great Depression of the 1930s.

Our first distortion was an excise tax. The ObamaCare mandates can also be viewed as a tax. The business mandates are equivalent to a tax on employment, since their implementation and penalties are geared to the level of employment. The Hudson study calculated that, assuming a hypothetical wage of $12 per hour, employing the 50th person would cost the firm $52 per hour, of which only $12 was paid out in wages to the employee. The difference between what the firm must pay out and what the employee receives is called “the wedge” by economists, since it reduces the incentive to hire and to work. The wider the wedge, the greater the disincentive. Presumably, this is yet another unintended consequence at work.

ObamaCare is a law that was advertised as the solution to a burgeoning, decades-old problem that threatened to engulf the federal budget. Instead, the law itself now threatens to bring first the government, then the private economy to a standstill. In time, ObamaCare may come to lead the league in unintended consequences – a competition in government ineptitude that can truly be called a battle of the all-stars.

The Food Stamp Program: An Excise Subsidy

In contrast to the first two examples of distortion, the food-stamp program is not a tax but rather its opposite number – a subsidy. Because food stamps are a subsidy given in-kind instead of in cash – a subsidy on a good in contrast to a tax on a good – they are an excise subsidy.

Food stamps began in the 1940s as a supplement to agricultural price supports. Their primary purpose was to dispose of agricultural surpluses, which were already becoming a costly nuisance to the federal government. Their value to the poor was seen as a coincidental, though convenient, byproduct. Although farmers and the poor have long since exchanged places in the hierarchy of beneficiaries, vestiges of the program’s lineage remain in its residence in the Agriculture Department and the source of its annual appropriations in the farm bill. (Roughly 80% of this year’s farm bill was given over to monies for the food-stamp program, which now reaches some 47.3 million Americans, or 15% of the population.)

The fact that agricultural programs help people other than their supposed beneficiaries is not really an example of unintended consequences, since we have known from the outset that price supports, acreage quotas, target prices and other government measures harm the general public and help large-scale farmers much more than small family farmers. The unintended consequences of the food-stamp program are vast, but they are unrelated to its tenuous link to agriculture.

Taxes take real income away from taxpayers, but – at least in principle – they fund projects that ostensibly provide compensating benefits. The unambiguous harm caused by taxes results from the distortions they create, which cause deadweight losses, or pure waste of time, effort and resources. Subsidies, the opposite number of taxes, create similar distortions. The food stamp program illustrates these distortions vividly.

For many years, program recipients received stamp-like vouchers entitling them to acquire specified categories of foodstuffs from participating sellers (mostly groceries). The recipient exchanged the stamps for food at a rate of exchange governed by the stamps’ face value. Certain foods and beverages, notably beverage alcohol, could not be purchased using food stamps.

Any economist could have predicted the outcome of this arrangement. A thriving black market arose in which food stamps could be sold at a discount to face value in exchange for cash. The amount of the discount represented the market price paid by the recipient and received by the broker; it fluctuated with market conditions but often hovered in the vicinity of 50% (!). This transaction allowed recipients to directly purchase proscribed goods and/or non-food items using cash. The black-market broker exchanged the food stamps (quasi-) legally at face value in a grocery in exchange for food or illegally at a small discount with a grocery in exchange for cash. (In recent years, bureaucrats have sought to kill off the black market by substituting a debit card for the stamp/vouchers.)

The size of the discount represents the magnitude of the economic distortion created by giving poor people a subsidy in excise form rather than in cash. Remarkably, large numbers of poor people preferred cash subsidies to markedly that $.50 in cash was preferred to $1.00 worth of (government-approved) foodstuffs. This suggests that a program of cash subsidies could have made recipients better off while spending around half as much more money on subsidies and dispensing with most of the large administrative costs of the actual food-stamp program.

Inefficiency has been the focus of various studies of the overall welfare system. Their common conclusion has been that the U.S. could lift every man, woman and child above the arbitrary poverty line for a fraction of our actual expenditures on welfare programs simply by giving cash to recipients and forgoing all other forms of administrative endeavor.

Of course, the presumption behind all this analysis is that the purpose of welfare programs like food stamps is to improve the well-being of recipients. In reality, the history of the food-stamp program and everyday experience suggests otherwise – that the true purpose of welfare programs is to improve the well-being of donors (i.e., taxpayers) by alleviating guilt they would otherwise feel.

The legitimate objections to cash subsidy welfare programs focus on the harm done to work incentives and the danger of dependency. The welfare reform crafted by the Republican Congress in 1994 and reluctantly signed by President Clinton was guided by this attitude, hence its emphasis on work requirements. But the opposition to cash subsidies from the general public, all too familiar to working economists from the classroom and the speaking platform, arises from other sources. The most vocal opposition to cash subsidies is expressed by those who claim that recipients will use cash to buy drugs, alcohol and other “undesirable” consumption goods – undesirable as gauged by the speaker, not by the welfare recipient. The clear implication is that the food-stamp format is a necessary prophylactic against this undesirable consumption behavior by welfare recipients, the corollary implication being that taxpayers have the moral right to control the behavior of welfare recipients.

Taxpayers may or may not be morally justified in asserting the right to control the behavior of welfare recipients whose consumption is taxpayer-subsidized. But this insistence on control is surely quixotic if the purpose of the program is to improve the welfare of recipients. And, after all, isn’t that what a “welfare” program is – by definition? The word “welfare” cannot very well refer to the welfare of taxpayers, for then the program would be a totalitarian program of forced consumption run for the primary benefit of taxpayers and the secondary benefit of welfare recipients.

The clinching point against the excise subsidy format of the food-stamp program is that it does not prevent recipients from increasing their purchases of drugs, alcohol or other forbidden substances. A recipient of (say) $500 in monthly food stamps who spends $1,000 per month on (approved) foodstuffs can simply use the food stamps to displace $500 in cash spending on food, leaving them with $500 more in cash to spend on drugs or booze. In practice, a recipient of a subsidy will normally prefer to increase consumption of all normal goods (that is, goods whose consumption he or she increases when real income rises). Any excise subsidy, including food stamps, will therefore be inferior to a cash subsidy for this reason. In terms of economic logic, an excise subsidy starts out with three strikes against it as a means of improving a recipient’s welfare.

So why do multitudes of people insist on wasting vast sums of money in order to make people worse off, when they could save that money by making them better off? The paradox is magnified by the fact that most of these money-wasters are politically conservative people who abhor government waste. The only explanation that suggests itself readily is that by wasting money conspicuously, these people relieve themselves of guilt. They are no longer troubled by images of poor, hungry downtrodden souls. They need feel no responsibility for enabling misbehavior through their tax payments. They have lifted a heavy burden from their minds.

The Rule, Not the Exception

These common themes developed by these examples are distortion of otherwise-efficient markets by government action and unintended consequences resulting from the government-caused distortions. By its very nature, government acts through compulsion and coercion rather than mutually beneficial voluntary exchange. Consequently, distortions are the normal case rather than the exception. Examples such as those above are not exceptions. They are the normal case.

DRI-380 for week of 8-26-12: Markets, Government, Law and Truth

An Access Advertising EconBrief:

Markets, Government, Law and Truth

You listen to the radio regularly. A manufacturer of health-oriented dietary supplements prefaces their infomercials with this disclaimer: “This product is not intended to diagnose, treat, prevent or cure any disease.” During each program, you note that the attributes of the products discussed and promoted are clearly intended to do one or more of the above. Is the disclaimer a lie, or are the products fraudulent?

You often browse business-related magazines and websites. In articles devoted to job interviews, you are startled by the asymmetrical advice given to employers and job applicants. Why are employers legally ordered not to ask many questions, while applicants are encouraged to ask as many questions as they wish?

You are a student of economic regulation of business by government. You followed FDA regulation of the cigarette industry from its inception to the agency’s recent proposal for large graphic warnings to appear on cigarette packages. You are unable to discern any logical thread unifying the series of agency rules and court rulings that have followed the onset of regulation. What is FDA trying to do?

You are a believer in the value of truth. What are the impact of markets and government, respectively, on the emergence of truth?

The Market, the Government and the Law

Economics is the science of rational human choice. Economists have long faced withering criticism from other scientists (physical and social) and from the general public. The standard criticism is that people do not act rationally – therefore economics is of little practical value.

The conclusion is wrong, but the premise contains a large grain of truth. Economics has tended to assume that producers, consumers and input suppliers possess all relevant information about the present and the future. This makes rational choice easy. Even when relaxing this assumption, the theory has substituted a probabilistic theory of uncertainty that is only slightly less unrealistic. As the late, great Nobel laureate F.A. Hayek pointed out in the 1930s and 40s, economics has ignored the true nature of the economic problem by assuming what the theory should prove. Rational choice demands the evaluation of a vast amount of data. But people don’t automatically possess the information economic theory assumes they do. The data doesn’t exist in one place or even in known information repositories. How are all this data assembled, evaluated and revised over time? How are the actions of billions of people coordinated to produce a coherent outcome?

Markets provide the incentive for individuals to contribute the bits of dispersed information necessary to comprise a functioning market. No individual possesses all the relevant information. Indeed, nobody has a full and complete picture of, let alone intellectual comprehension of, reality. Instead, each of us views reality fragmentarily through our own subjective prism. But markets bring each of us closer to comprehension by refining and revising that subjective view and drawing it closer to objective truth.

Any time somebody’s knowledge is incomplete or their perception is inaccurate, somebody can make a profit by acting within the market to expose the truth. Throughout human history, societies relying on markets have enjoyed more material success than those eschewing markets because objective truth is more productive of material wealth and human happiness than falsity.

By definition, governments exist to constrain human conduct. When governments prevent people from harming each other and violating basic rights, they contribute to wealth and happiness. When governments constrain lawful markets, they hinder the distribution of information and the gradual coalescing of objective truth from subjective perception. The Rule of Law evolved because governments that operated according to its precepts fostered prosperity. They confined themselves to narrowly limited proscriptive rules allowing citizens to understand and predict the impact of the law on their lives. Governments that took the opposite tack foundered, as did the totalitarian regimes of the 20th century.

This perspective on markets and truth helps us understand the relationship between government and truth.

Dietary Supplements

Throughout recorded history, man has eaten, drunk, sniffed, poulticed, smoked and otherwise consumed the bounty of nature to yield pleasure, reduce pain and promote health. Since the dawn of science and medicine, he has extracted vitamins, minerals, proteins, fats, carbohydrates, acids, alkalis, enzymes and various other substances for the same purposes. If all human beings were carbon copies and reacted identically to stimuli, the production of health and happiness would be straightforward. The actual range of human variation makes it anything but easy to ascertain the value of available substances for human purposes.

The success of science has posed a tempting pitfall. The temptation is to assume that scientific experts know – or can easily determine – what is safe and effective for human consumption. This implies that by giving a committee of experts legal dominion over this realm, we can avoid the problems associated with free-market provision of medicines, supplements and the like. Such problems include unfavorable reactions by individuals to products as well as products that do not live up to the billing of producers or the expectations of consumers.

Unfortunately, safety and efficacy are not only hard to determine, they also vary with each individual. Really, the only practical approach is to allow individuals and their physicians to make these determinations. Doctors will employ judgment informed by years of practice and results of continuing research. Research will be directed toward areas indicated by consumer demand, much as any other investment is guided by demand. The alternative is to put the process in the hands of government, which assumes that a small number of men are wise enough to know better than the mass of people what we want, what we should want and how to produce it.

Currently, “medicines” are controlled very strictly by the Food and Drug Administration (FDA). “Dietary supplements” are not. But the disclaimer noted above is included in advertisements to fend off product liability lawsuits. Failure to include it would allow consumers to sue the producing company because the supplements did not cure a disease, prevent its onset or ameliorate its spread. The question is: Does the disclaimer serve the cause of truth or hinder it?

Even the most casual observer of health and nutrition knows that thousands of health supplements are legally available to consumers. These range from fish oil in liquid and capsule form to resveratrol extract to vitamins A, B, C, D, E and K, including the various B subsidiaries. Ongoing research continually discovers new uses for known substances and devalues old uses. Currently, for example, research now suggests that vitamin D – long considered of secondary importance and easily obtainable with very modest exposure to sunlight – is vastly more important and difficult to maintain in optimal quantities without supplementation. The high hopes once held out for vitamins C and E in curing colds and preventing heart disease have been revised downward after considerable study and experience.

But the FDA wields tight control over the language that can be used in selling and advertising all these substances. And unless FDA-approved studies have been conducted specific to the treatment, prevention and cure of disease, the disclaimer noted above must appear on packaging and in advertising.

The undeniable drawback to this requirement is that the disclaimer is a lie.

Even a child knows that the purpose of all these products is obviously to treat and prevent disease. In some cases it is to cure disease. (It is unclear what health supplements would purport to diagnose disease; presumably this word is included so as to apply to devices and test kits as well as supplements.) Instances of this are legion.

When Linus Pauling began to promote vitamin C as the discovery of the age, it wasn’t merely in order to fulfill man’s daily requirements. No, he maintained that megadoses could cure colds and prevent cancer. Aspirin’s analgesic properties have been known for thousands of years, but it wasn’t until its blood-thinning action was touted as a preventative for cardiovascular artery closure that it became a therapeutic medicine. Subsequently, its active ingredient, salicylic acid, was implicated as a potential preventive of colon cancer as well. St. John’s Wort has been a folk remedy for prostrate enlargement for decades. Cranberry juice has been “prescribed” for urinary discomfort and kidney stones since time immemorial by old wives and do-it-yourself physicians.

How do people react when they read or hear the disclaimer? They are confused. One has only to peruse comments online to confirm this. “What’s the good of your product if it doesn’t ‘diagnose, treat, prevent or cure any disease’? is a typical question. The stock answer is that, in effect, the FDA mandates this disclaimer. This does nothing to allay fears of the timid and does nothing to deter the incautious. In short, it does nothing good. In turn, this begs one more obvious question: If the disclaimer does nothing good, what’s it doing there?

The answer is that the disclaimer protects sellers from product liability. By not promising anything, sellers cannot be held responsible if the product does not deliver anything. The fact that the sellers are lying does not seem to concern anybody. Everybody knows they are lying – except of course for the confused ones, who do not know. It is easy to blame tort lawyers for the confusion. But they are merely responding to the law as written or interpreted by the government. Why does this law exist?

When producers knowingly sell products that do not deliver stated benefits to consumers, that is fraud. A time-honored duty of government is to prevent and punish fraud. Presumably the law mandating the disclaimer exists because the government thinks it is wrong for producers to sell substances that may not always deliver their full intended benefits to consumers, even when producers knowingly intend and anticipate that outcome. But the effect of the disclaimer is to deceive consumers by lying to them about the intentions of producers and the benefits of their products.

The government’s position is as follows: It is terribly wrong for producers to deceive consumers by selling them non-existent benefits. But it is not wrong for producers to lie to consumers by deceiving them into not buying actual benefits; in fact, it is mandatory for producers to do this. (This is an implicit position, not an explicit one; it follows from the law governing FDA policy and the acquiescence to the course of tort litigation.)

An ancient principle of common law is salus populi suprema lex, meaning “the welfare of the people is the supreme law.” In other words, the overarching purpose of law is to improve the happiness and well-being of the citizenry. Does FDA policy do this? It is reasonable to suppose that FDA policy prevents some unhappiness resulting from unintentional deception of consumers by producers. It is worth noting, however, that markets themselves punish producers who promise benefits that they do not deliver. The punishment takes the form of lost customers, reduced revenues and foregone profits. The prospect of such losses acts as its own deterrent to laxity by producers in accurately describing and truthfully advertising product benefits.

Counterbalanced against the gains from the FDA policy are the losses from deceiving consumers by hiding or obscuring product benefits. Organizations like the Independent Institute and Economists Against FDA have told the story of the FDA’s ban on advertising the cardiovascular benefits of taking aspirin in response to first-heart-attack symptoms. The director of Cardiovascular Medicine of the Florida University College of Medicine estimated that as many as 10,000 lives per year could be saved if aspirin manufacturers were able to advertise these benefits. That estimate was made in 1995. As recently as 2008, the FDA was still threatening aspirin manufacturers who tried to market aspirin with labeling that claimed this benefit. And this is only one of the thousands of products with benefits that go unadvertised or that live under the cloud of the disclaimer.

Some may object to the characterization of the disclaimer as “confusing.” “Everybody knows that it doesn’t really mean what it says,” they may say. But if this is really true, then exactly what is gained by saying it- or rather, by having to say it? Let us leave aside the fact that there are clearly some people who are confused by the disclaimer. Compelling reasons exist for not insisting on a disclaimer that nobody takes seriously. When the law manifests itself in trivial, counterproductive and confusing ways, respect for the law in general declines. People begin to pick and choose which laws to obey, because they come to realize that they cannot know or hope to obey the complete body of laws. It becomes harder to law to perform its fundamental tasks. This shows up in small, seemingly random trends such as mounting disobedience of traffic and tax laws.

Job Interviews

Freedom of speech is commonly cited among the bedrock freedoms safeguarded by the U.S. Constitution and the American way of life. Thus, it is shocking to review a list of questions that employers and their representatives are legally forbidden to ask job applicants during an interview. Generally speaking, employers cannot inquire about applicants’ age, race, national origin, or status relative to marriage, disability or parentage.

Readers approaching retirement age will be stunned to discover that what once was small talk is now a crime. That includes conversational starters like “Where were you born?” and “Are you married?” The former is verboten because it might be a sneaky way of determining the applicant’s national origin, the latter because the employer might be trying to find out if the applicant’s home life might interfere with their work – an issue that they are entitled to probe only in government-approved ways. Similarly, “What is your native language?” is an obvious non-starter, as are “Do you have children?” and “Do you plan to get pregnant?”

“How old are you?” used to be one of the first questions asked of applicants whose age did not appear on their resume. Now it is taboo, prima facie evidence of the crime of ageism or age discrimination. The government is saying one of two things: Either employee productivity is assumed to remain constant with increasing age rather than falling or, alternatively, the employer has no right to get information about the employee’s productivity in advance of employment.

“Do you observe [insert name of religious observance day or days here]?” is a definite no-no, while “Are you available to work on holidays or weekends?” is permissible. This raises the potential for conflict by allowing the applicant to define a holiday. A Jew may treat Yom Kippur as a day of atonement but not a holiday, and may or may not choose to limit availability for work.

“Do you smoke or use alcohol?” is an infringement of the applicant’s rights because it “discriminates” against the use of a legal product consumed off the job and the business premises. The fact that the product has an obvious potential to affect job performance is irrelevant because the employer has only a limited right to inquire about the applicant’s productivity. Likewise, “Are you in the National Guard?” overlooks the fact that the employer has no unbounded right to inquire about the applicant’s availability/productivity. Viewed in this light, “Do you have a disability or chronic illness?” is a veritable abomination. After all, the employer can always ask if the applicant could perform particular tasks – “with reasonable accommodation,” of course, since each employer has a unilateral responsibility to create a level playing field between competing workers in the labor market.

After a suitable refractory period for recovery from the shock of seeing the burden placed on the employer, the student of job-interviews changes perspective 180 degrees and sits in the applicant’s seat. He expects to meet a comparable array of rules and prohibitions to those confronting the employer.

But there are none. Whereas the employer is verbally gagged like a juror at a murder trial, the job applicant enters a recumbent ACLU paradise of unhindered self-expression, free of legal duties, responsibilities and taboos.

As if this state of affairs weren’t incredible enough, the student who dips into characterizations of the interview process in the business press is whisked down Lewis Carroll’s fabled Rabbit Hole. Jacquelyn Smith of Forbes Magazine (7/6/2012, “Questions You Should and Shouldn’t Ask in a Job Interview”) informs us brightly that “A job interview is a two-way street. The employer asks questions to determine if the employee is an ideal fit for the job, and the smart candidate uses the interview [analogously].” She quotes “workplace expert” and author Lynn Taylor: “The fact that this is a two-way interview is often lost on many candidates, especially in this period of high unemployment when it seems like employers hold all the cards” [emphasis added].

The so-called “two-way street” of the job interview consists of clear, unimpeded driving on the applicant’s side of the road, while the employer’s side is lined with barricades, barrels and road hazards that a Joie Chitwood or Evel Knievel could hardly negotiate successfully. Not only do employers not “hold all the cards,” the federal government has marked the deck and stacked it in an effort to prevent the employer from accomplishing exactly what the magazine admits should be the objective of the interview – finding out if the applicant is an ideal fit for the job.

After all, in order to find out if the applicant is an ideal fit, the employer must be able to ask any and all questions deemed necessary. That must be true because that is what the word “ideal” means. But if there is one process in economic life that is implacably, unalterably opposed to truth, it is the job interview. With malice aforethought, the federal government has driven an Orwellian wedge between employer and applicant that has foreclosed all possibility of full informational disclosure.

The importance of this divide emerges from looking at just one of the forbidden topics listed above. We know that marital status is perhaps the key behavioral variable for the human female. The biological fact of women’s’ ability to bear children has intractable economic implications. Women are many times more likely to leave the labor force than men. These career detours mean that, in the aggregate and on average, their incomes and longevity-linked achievements will not equal those of men. But this does not mean that any individual woman might not be just as viable as any male job applicant. How can a rational employer, headhunting for a groomable CEO, distinguish between ideal and non-ideal female applicants? Clearly, marital status and/or family plan are the logical determinants. (The precise word is “discriminants,” but this word now has an unmerited pejorative cast – another Orwellian legacy of government policy.) And these are exactly the questions that the employer is forbidden from asking!

Unhampered, unhindered markets tend to promote truth. Truth enhances productivity. It also bolsters morality. In a purported effort to fight discrimination, federal-government labor-market policy harms the ostensible victims. Government regulation crushes truth to earth – and compliance officers are always on the lookout should it try to rise again.

By separating truth from hiring, government has vastly increased the costs of employment. When an input becomes more costly, other things equal, businesses use less of it. Consequently, what economists call the “natural rate of unemployment” rises – and up goes the actual rate of unemployment along with it. In Europe, governments have responded in true totalitarian fashion, much as Joshua ordered the sun to stop in the sky. They have made it incredibly difficult for businesses to fire or lay off employees. And businesses respond by not hiring employees in the first place. Unemployment rates exceeding 10% have been commonplace in Europe for decades.

In the U.S., the government responds in line with the age-old joke about a husband drying dishes washed by his wife: “Am I supposed to wipe off what you don’t wash off?” The U.S. government tries to wipe off with stimulative fiscal and monetary policies what its defective labor-market policies don’t wash off when they create higher unemployment. Unfortunately, contrary to popular belief, there is no successful theory of countercyclical government stimulus policies to fight recessions and end unemployment. And the created unemployment remains.

Thus, in the labor market as well, we are currently reinforcing George Orwell’s insight that a characteristic of totalitarian states is to suppress truth by suppressing markets.

Graphic Labels on Cigarette Packaging

The case of cigarette regulation parallels that of regulation of aspirin advertising. In both cases, freedom of “commercial speech” is subordinated to some ostensible greater good, as perceived by federal-government regulators. Yet despite this surface similarity, the underlying philosophy followed by FDA differed completely in the two cases. The agency’s reasoning was ad hoc; the only consistent thread was the insistence that its will prevail.

Cigarette packages have long carries text warning consumers of health dangers associated with smoking. Proponents of regulation have viewed this as a watershed in economic regulation. In fact, smoking has carried a de facto hazardous label in the market of public opinion since at least the 19th century. Textbooks dating to the early 20th century refer in general terms to its deleterious effects on lungs, breathing and longevity. Although the armed services provided them freely to their personnel, World War II movies like Thirty Seconds Over Tokyo referred to cigarettes as “coffin nails” – a nickname that testifies as strongly as any research study to contemporary public awareness of their dangers.

The impetus to the text warnings was a link between cigarette smoking and lung cancer. The link was forged by statistical correlation; populations and ethnic groups that smoked more had higher incidence of lung cancer. The precise medical pathway between the two was uncertain, primarily because the etiology of cancer itself was uncertain. Cigarette smoke irritates the nasal membranes of non-smokers and smokers alike, though, and this contributed to its growing unpopularity. As the size and strength of government grew, its use as a means of enforcing personal prejudice became more frequent. This was generally cloaked in more altruistic garb, and a public-health rationale for discouraging smoking was a convenient means of disguising prohibition as altruism rather than bigotry.

Gradually, more and more smokers have kicked the smoking habit. This has produced a sizable decline in the total number of smokers. Curiously, this has not prevented young people from continuing to pick up the habit, though. Not surprisingly, the former development has been ascribed to the beneficial effects of cigarette warnings, scientific “discoveries” of harmful effects, no-smoking laws and the like. The latter has been ascribed to the demonic motivations of cigarette executives and the baneful effects of their advertising campaigns targeting the youth market.

The real causes are more prosaic. For over a century, people continued to smoke although generally well aware of the possibility of a lethal result. They treated cigarettes the same way they treated any other tradeoff – by evaluating the degree of benefit and the likelihood of death (e.g., the cost). Lung cancer was not a pleasant prospect, true, but most cancers are incurred late in life. When life expectancy was less than seventy years – and the final years rated to be comparatively unrewarding – many people did not value the risk of losing those years to lung cancer as sufficient to forego a substantial benefit from smoking.

But as life expectancy steadily increased and medical science continually enhanced the quality of life by triumphing over disease and pain, the smoking tradeoff became less and less favorable. The later years of life became more productive and pleasurable, hence more valuable. The potential cost of losing them loomed larger. So people stopped smoking earlier and earlier. This effect operated least upon those for whom the prospective tradeoff was most distant; namely, the youngest prospective smokers.

All this had little or nothing to do with tobacco regulation and health warnings. But the money provided to state governments by progressive more draconian taxes and penalties levied against tobacco companies provided an attractive rationale for continuing the charade of regulation. In 2009, the regulatory zealots of the Obama administration took charge and instituted an across-the-board onslaught against health and pharmaceutical companies, as well as most other businesses. This included a demand for large graphic warnings on cigarette packaging.

The federal appeals court ruling illustrated the utter lack of regulatory coherence and unity across the spectrum of government. FDA was scored by Judge Janice Rogers Brown for failing to “present any data – much less the substantial evidence – showing that enacting their proposed graphic warnings will accomplish the agency’s stated objective of reducing smoking rates.” This does not justify abrogating cigarette manufacturers’ First Amendment rights, claims Brown, because “the First Amendment requires the government not only to state a substantial interest justifying a regulation on commercial speech, but also to show that its regulation directly advances that goal.”

The first thing to be said about Judge Brown’s verdict is that it is patent hooey, since the First Amendment says no such thing. Its five lines merely forbid Congress from “abridging the freedom of the press” – period. If there is more to it than that, it is to be found somewhere other than in the Constitution. Judge Brown’s pretense of solemnly measuring one weighty interest against another according to a formula specified by the Founding Fathers is merely a pretext for substituting her judgment for theirs.

The second point worth making is the inherent contradiction involved in requiring supporting data or substantive evidence for a policy not yet implemented. What sort of data could support that policy? Historic data on graphic images on cigarette packages in some other country? Why, yes, according to a representative of Campaign for Tobacco-Free Kids. Considering that it is already illegal to sell cigarettes to kids, this seems quaint indeed. He is apparently claiming that fear of death in the far future will succeed where fear of violating the law in the present failed.

The most absurd element of the ruling, however, is the idea that obedience to the First Amendment depends on the results of statistical investigation. If the science of statistics were as reliable as chemistry, that would be questionable enough. But social-scientific statistics are about as robust as a grass shack in a hurricane. The notion that we’ll tear up the First Amendment whenever a regulatory agency comes up with some really good numbers would be hilarious if it weren’t so terrifying.

It is hardly surprising that a previous Appeals Court ruling – focusing on the entire 2009 law rather than merely its graphic-warnings component – upheld FDA’s authority in full. The only point of agreement is that ultimate federal authority is unlimited; the warring government factions disagree about who wields it and what triggers its imposition.

The End of Truth

The raison d’être for the FDA is the preservation of lives and promotion of human happiness. In the aspirin advertising/dietary supplement case, the FDA took the position that it was entirely up to industry to demonstrate the benefits of aspirin. Even after the clinical studies did this, FDA continued to rely on First Amendment legalism and insist that expansive legal precedent allowed the agency to restrict manufacturers’ First Amendment rights to advertise benefits in spite of the confirming results of studies. In other words, FDA adamantly refused to take the welfare of consumers as their ultimate criterion of action.

In the cigarette case, FDA demands the right to force tobacco manufacturers to injure themselves by defaming their own legal product, not merely with warning text but now with inflammatory graphic warnings. The FDA asserts a sovereign right to abrogate the rights of individual and corporate U.S. citizens in order to attain a lowered aggregate statistical rate of cigarette smoking. Here, FDA is so obsessed with consumer welfare that they claim to be able to achieve better consumer outcomes than consumers themselves can.

Yet U.S. labor law asserts the individual worker’s right to consume the same legal product – cigarettes – that FDA claims the right to abrogate individual rights in order to discourage. Meanwhile, producers’ rights to produce and promote their own legal products are abrogated. Producers are told they have no right to avoid employing labor made less productive by consumption of the same cigarettes that FDA is moving heaven and earth to discourage.

The composite implications of these cases are roughly as follows: Producers have no rights at all except the right to go broke. Consumers have only the right to take what the government gives them, under the theory that government knows what is good for them better than they do. Workers have the right to do anything they damn please but not the power to do the only thing they really want to do, which is find and hold a job – because government has made jobs so expensive to create that producers have no incentive to offer them.

Finally, government has the right to do anything and everything, without limit. The only issues to be settled are which branch of government exercises that unlimited power and under what competing legal theory.

In markets, the assembling of dispersed information produces a tendency toward truth, owing to the continual incentive to earn profits by correcting error. In government, the only incentive is to accumulate and preserve power. Truth is an obstacle to this process. Orwell’s vision of totalitarianism as the end of truth is unfolding before our eyes.