Why Government Decisions Matter

There’s an annoyingly common belief that taxes and regulations have no effect on what a business can and cannot do. The standard argument for increased taxes and heavy regulations on businesses is based on a premise that raising said taxes or changing regulations won’t change the business. For example, Sen. Dick Durbin (D-IL) was behind recent legislation that capped the amount that banks can charge retailers for processing debit card transactions–then, nonsensically, he flipped out on the Senate floor when banks started charging consumers for the transactions instead, as if banks ought to be able to provide their services for free.[1] One wonders where Sen. Durbin thinks Bank of America gets the money to pay their 288,000 employees (not to mention the irresponsibility of a Senator publicly calling for a run on the nation’s second-largest bank).

In some people’s heads, it seems like every business, every business owner, every CEO has millions of dollars of pure profit coming in daily, and that it can’t cost much to run a business, so this is all just going into that CEO’s bank account. So many people, when they think about business owners, picture Scrooge McDuck swimming in a pile of gold coins.[2]

The thing is, this belief comes from these media and cartoon sources, and not from reality. Businesses and CEOs live in the margin. Let’s look at numbers rather than cartoons. If a corporation takes in $50 million in a given year, and pays its workforce of a few hundred people a healthy $30 million (including payroll taxes), and spends $20 million on materials, manufacturing, and distribution of its product… this $50 million dollar company makes zero profit that year.

If that’s our starting point, then check out the effects of a new regulation on this big, evil corporation that provides millions of dollars in payroll to hundreds of workers. If the government creates a new regulation that costs this company $500K a year to comply with, the company will have to find $500K worth of expenses to cut, or raise their prices to compensate. There was no profit margin to work with.

Pay no attention to the fact that it’s a $50 million dollar company. It doesn’t matter. Here’s the real effects. This means:

  1. a few people laid off, or
  2. everyone in the company losing some benefit, or
  3. trimming overhead (i.e. salaried employees now have to work unpaid overtime, etc), or
  4. raising prices (which means inflation, which means everyone in the world is poorer).

None of these options is going to lead to increased hiring or productivity.

Or, say the company was profitable. Say they were $1 million in the black. Now, the new regulation means their planned million-dollar construction project will have to wait, or they will have to cancel plans to expand your department and hire 10 more people, or whatever they were going to do.

Now imagine that we’re not talking about one company, but about a regulation that affects every business in America–say, the Affordable Care Act. Conservatives think it’s a bad idea not because we don’t want to take care of sick people, but because we understand its effect on the rest of the economy. This new regulation and others are partly responsible for our current high unemployment and the oft-referred-to $2 trillion or so that businesses are afraid to spend at the moment.

It’s important to keep these things in mind when listening to people complain that nobody is hiring or building, and that the government ought to regulate more to make things work better. That’s like opening your fridge to cool off the kitchen. Sounds like a good idea, but it will actually make things hotter overall. [3]

But back to the hypothetical company. There’s another possible outcome. Maybe the new cost imposed means there’s simply less profit going to the shareholders. People say, so what? They’re just the rich fat cats not doing any work. Thing is, that’s not true. For one thing, shareholders often means you and me. Anyone with a 401K holds stock in dozens or hundreds or thousands of companies.

And even when we’re talking about the rich company owners, what’s happening is that they are getting properly rewarded for funding and creating productivity. That’s a good thing. Remember productivity? Productivity is critical. The more the economy produces, the more jobs are available, the cheaper goods become, the more able we all are–rich and poor–to get the things we want. You’re not going to move someone in poverty to the middle class by giving them welfare–but you might if you give them access to a job and allow them to acquire real wealth themselves. It’s productivity that does that for people. We’re going to help the poor more by growing the economy than by handing out checks.

If we want more productivity, the last thing we want to do is remove incentives to be productive. Our system ought to reward the things that move society forward. It’s good when there are incentives to innovate, to be more efficient, to lower prices and get your product to more people.

And we’re absolutely not going to create more productivity or make people wealthier by making business more expensive. Conservatives understand that it matters when the government steps in and creates new, expensive regulations and taxes. That’s never going to make business easier or get more people working. How much the government allows a company to keep obviously and directly affects that company’s ability to hire you and me. Government decisions change everything from how many employees a company can hire, to how much it costs to swipe your debit card when you buy a Big Mac. Government decisions matter.


[1] http://www.politico.com/news/stories/1011/65038.html
[2] Vaguely annoyed that I drafted this Scrooge McDuck swimming in gold coins reference a couple of weeks before it was in the recent Family Guy gag.
[3] Then you’re just running a motor in the middle of the room and making it hotter. The fridge moves heat from the inside of the box to the radiator on the back–that’s all. It doesn’t move it outside, and it certainly doesn’t create cold by magic–just like the government can’t create wealth by magic. It can just move things around.

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  1. #1 by Tim Mallette on October 10, 2011 - 10:19 pm

    I appreciate your sound understanding of thermodynamics involved in the refrigerator reference.

  1. Why Debit Card Fees Aren’t Going Away « Basic Conservative

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