The government of the United States spent the year debating major new undertakings, ranging from health care to climate change to energy development to tax reform. Yet a far more fundamental shift, in the form of a rapid and pervasive expansion of government power over the private sector of the economy, has been going on in stealth. Shifting economic power from individual decision-makers to the national government characterizes virtually every policy proposal being debated in Congress.

Take tax policy. A 131-page document issued by the Treasury goes way beyond recommending the extension of some of the expiring Bush administration tax cuts. For example, the fine print contains more than a dozen ways of discouraging American firms from doing business and investing overseas. Supposedly minor technical changes also would have a severe impact.

For example, eliminating LIFO (last in-first out) inventory accounting would raise business taxes over $60 billion in one decade. The Treasury also wants to revive four corporate environmental taxes that were eliminated in 1969. There’s no relation between the tax burden these four taxes would impose on a company and the pollution that company generates. This bears an uneasy resemblance to Willie Sutton, who robbed banks because that was where the money was.

Inevitably a variety of technical tax provisions will increase the paperwork burden on business. The penalties for failing to file information returns (such as Form 1099) promptly and accurately, for example, will rise in a very complicated, three-tiered fashion.

On the expenditure side, the typical stimulus project increases the power of government in private business decision-making. The bailout of the automobile industry is really an inefficient method of financing union pension and health plans. The stockholders got zapped and the bondholders poorly treated. The taxpayers are left holding the bag, especially considering the restrictions on importing the really fuel-efficient cars General Motors produces overseas. Apparently, the new General Motors factory for building compact cars was chosen on the basis of “carbon footprint” and “community impact.”

It is hard to keep a straight face when analyzing the Cash for Clunkers program. For example, owners of the biggest old “clunkers” got a $3,500 credit for trading in an old vehicle for a new one with an improvement of just one mile per gallon. Surely, it would have saved energy if the Treasury had just mailed the $3,500 checks directly to Detroit!

Of course, the Obama administration is making some reductions in federal spending. It is reportedly imposing a 9 percent reduction in the budget for the division in the Labor Department that polices fraud and other illegalities on the part of labor unions. As noted below, a simultaneous expansion of business-oriented antitrust enforcement is taking place.

The Business of America is Government

Turning to regulation, one of Ralph Nader’s biggest disappointments during his heyday as a “consumer advocate” was the failure of his proposal for a new Consumer Protection Agency. He should be a bit happier now: The administration’s financial regulatory plan creates a powerful new Consumer Financial Protection Agency (CFPA).

This new free-wheeling agency would take authority now divided between the Securities and Exchange Commission (SEC) and the Federal Reserve System. In a change guaranteed to cause confusion, the CFPA would share authority with the Federal Trade Commission. The new regulatory agency would also have a mandate to give consumers more economic education. Educators find that especially scary.

Moreover, the agency will have its own money pot, independent of the normal congressional appropriations process. It will be financed directly by fees assessed on “entities and transactions” across the financial sector.

The Treasury’s financial plan contains many other expansions of government power over business. The Federal Reserve System would have new authority to oversee any large financial entity whose failure the Fed thinks could generate “systemic risk.” The Treasury would head a new Financial Services Oversight Council to “resolve” the inevitable jurisdictional disputes among federal agencies. A new Office of National Insurance is to be established in the Treasury to monitor “all aspects of the insurance industry,” a sector of the economy traditionally under the province of state governments.

The SEC will require the registration of all advisers to hedge funds and other private pools of capital with assets over a given threshold. It also will have the power to inspect the books of the advisers and to ensure compliance by their clients. In addition, the power of the SEC will be expanded by legislative proposals to give it a more active role in guiding the compensation committees of all public companies.

Further, the Federal Deposit Insurance Corporation will have new authority to take over and shut down financial institutions (not just banks) whose failure is deemed to pose “systemic risk.”

Viewed in their totality, these technical financial changes would represent a historic expansion of government. Sadly, there is little comfort in the Treasury’s warning in its 88 pages of detailed proposals: “More can and should be done in the future.” Comparisons with the New Deal of the 1930s are too timid. Shades of Alexander Hamilton!

Business-Climate Change

The complicated climate change bill that recently passed the House of Representatives would dramatically expand government power over the economy. Again, the fine print deserves far more attention than it has received. For example, buried in the 1,201 pages of detail is a provision authorizing the Department of Transportation to require automotive manufacturers to produce vehicles that can run on methanol (wood alcohol), a fuel not widely available.

Other provisions, as expected, have little to do with the subject of global warming. For example, contractors on some energy projects must pay employees at least the locally “prevailing wage.” This well-known code means, in practice, paying higher union wage scales, thus letting unions set wages even for non-union firms.

Many federal departments are trying to climb aboard the economic stimulus bandwagon. The Department of Justice wants to help out by showing that antitrust should be a “frontline issue” in the response to the problems facing the economy. Apparently, business is not getting sued often enough. Incredibly, one new assistant attorney general views antitrust enforcers as “key members of the government’s economic recovery team.”

When we step back and try to add up all the tax, spending, and regulatory actions and proposals of the new Obama administration, the result is clear: a cumulative squeeze on private decision-making and a more slowly growing economy in the years ahead.

In the process, private businesses will be discouraged by a host of government policies from making major new investments, especially long-term investments with payoffs far in the future. The likelihood of higher taxes and greater inflation resulting from the huge budget deficits that are likely to arise in the next several decades, abetted by lax monetary policies, are the key negative factors. The American public is likely to have a long wait until the national unemployment rate gets back down to the 7.6 percent that was reported when President Obama took office in January 2009.

One fundamental point deserves to be stressed. For the next several years, in the inevitable tension in public policymaking between economic prosperity and income redistribution, the American people can expect income equalization to get the government’s priority over improvements in people’s living standards. The average American, at best, will receive a more equal slice of an income pie that will be far smaller than the public expects.

Government possesses far more mechanisms that influence actions in the private sector than most people realize. The typical business firm faces an impressive array of government powers.

Government as Paymaster. The oldest policy tool available to government is to hire people and put them on its payroll. Government employees represent such diverse professions as teachers, foresters, and revenue agents. Payrolls provide a cadre of public officials whose actions can then be controlled in terms of their influence on the rest of society. This is the tip of the iceberg because small proportions of government resources are devoted to compensation of its employees.

At first blush, direct government hiring seems to have little impact on the economy, but often government sets the standards in the United States. The now prevailing eight-hour day began in the federal government. In specific personnel categories, such as secretaries and teachers, government hiring patterns influence the entire labor market.

Government Purchases. Substantial portions of government budgets are devoted to ordering goods and services produced in the private sector. Products purchased range from high-tech space-exploration vehicles to standard off-the-shelf pens and pencils. The importance of the government market is obvious to key defense-oriented industries such as aerospace, electronics, ordnance, and shipbuilding. In addition, public-sector buyers—from national, state, county, and municipal agencies—purchase items from virtually every industry. Government procurement can be the difference between a good year and a mediocre year for many companies. Thus many businesses have a strong incentive to influence government.

At the national level military contracts to private industry are the major category of purchases from business. State and local government agencies, in contrast, contract mainly for roads and school buildings and various categories of office supplies. The procurement process is an important way in which government influences private-sector actions. The public sector’s methods of doing business are very different from standard commercial operations. Moreover, for the companies that produce primarily for military and space markets, the government is virtually a monopoly buyer. It exerts powerful control over the contractors’ internal operations by forcing them to act in many ways like a government agency and also to be “socially responsible.” Requirements imposed by government on private industry range from hiring and training minority groups to adopting federally set wage and hour standards.

Transfer Payments. A third policy tool available to government is to provide money to individuals—what economists call transfer payments and what the public at large refers to less euphemistically as handouts. The key example is the monthly Social Security check sent to senior citizens. Here the impacts are more indirect than in the case of government procurement. Such expenditures strongly influence the amount of consumption by the recipients and thus affect the size and composition of consumer markets.

Government spending for transfer payments, most of which are labeled entitlements, has become so massive in recent years that trends in that category can be a significant factor in the entire economic outlook.

Raising Demand

Government Subsidies. Government subsidizes private activity in many ways. By absorbing a portion of the cost of production, subsidies raise the demand for the subsidized products in relation to other items. Generous subsidies are provided to many sectors of the economy—and sometimes are referred to pejoratively as business welfare: agriculture (farm price supports), fishing (financing for new vessels), nuclear energy (government payments for developing new products), transportation (aid to urban mass transit), housing (low-rent public housing), and mining (special tax benefits). Subsidies are also received by a variety of special clienteles, such as minority enterprises.

Subsidies often contain a regulatory component. For example, government subsidies to shipbuilders can be vital in decisions to build ships in domestic yards rather than overseas. But to qualify for federal subsidies, the ships must incorporate specific national-defense and safety features spelled out by the government. These added features raise both acquisition and operating costs.

In many ways government is a competitor for funds or influence. Thus the Tennessee Valley Authority competes with private utilities, the Government Printing Office with commercial publishers (especially mapmakers such as Rand McNally), and the U.S. Postal Service with private parcel delivery services (United Parcel Service and Federal Express, most notably). Government enterprises also compete with private enterprises in the large markets represented by the government’s own purchases. This competition between the public and private sectors is more visible at state and local levels, in such areas as health, recreation, trash collection, and security services.

Government Loans. The government also acts as a banker, lending money to private firms and individuals as well as to many other categories of borrowers. The gamut of federal lending extends to exporters (Export-Import Bank), farmers (Farmers Home Administration), real-estate developers (Federal Housing Administration), and small enterprises (Small Business Administration). Sometimes low-interest government loans merely substitute for available private funds. But, more frequently, the government credit is provided for projects whose expected returns are so low that private markets will not finance them. Government loans are anything but the proverbial free lunch.

Government as Underwriter. Even without spending its own money, government can strongly influence private economic activity. One way the public sector does that is by use of its credit power. The method used most frequently is the guarantee of private loans, as in the dramatic case of Chrysler and the less well-known but more frequent guarantees of new ship construction and exports. Because much of the risk is shifted from the private lender to the government, borrowers who are not considered creditworthy by normal commercial standards are given access to funds. Also, the government fosters the creation of quasi-government credit corporations, such as in the agricultural and housing credit areas (the farm credit banks and the federal home loan banks). The use of the government’s credit alters the flow of funds in the economy and thus strongly influences who gains access to resources.

Because they do not seem to require (at least initially) the direct expenditure of government money, loan guarantees have been proliferating, as have other uses of the government’s credit. As seen in the bailouts of insured but failed savings-and-loan associations, the government’s contingent liability can at times be converted to direct expenditure—and in very substantial amounts.

Government Regulation. A major area of government involvement in business is the use of the regulatory power. The alphabet soup of regulatory agencies has become well known: CFTC, CPSC, EEOC, EPA, FAA, FDA, FEC, FERC, FMC, FTC, ITC, MSHA, NLRB, NRC, NTSB, OSHA, SEC, TSA, and on and on. Regulations range from broad-gauged requirements for pollution control to rules on the sales of lemons in a given month, from wide-ranging rules on worker health and safety to specialized restrictions on transactions in futures markets. Aside from the limited use of government personnel to design and enforce regulations, the bulk of the costs generated is “off budget” because the expenses incurred are mainly for compliance by private companies and individuals being regulated. Such outlays do not show up in the government’s budget; thus regulation has become especially popular. The cumulative effects of regulation on business performance—and on consumers—are pervasive. The concern about terrorism has generated a new wave of regulation.

Taxation. The government tax collector does more than share profits with individuals and with the owners of companies. Tax considerations are a major influence on business decision-making. The liberality of depreciation provisions and the level of marginal tax rates affect the threshold for making new investments. In contrast to these across-the-board provisions, many sections of the internal revenue code are aimed at promoting—or inhibiting—specific sectors of business (such as real estate, new energy sources, and overseas activities).

Government regularly employs its tax power to provide incentives for designated private activities. Using the carrot of tax incentives, governments often foster what they consider to be greater social responsibility on the part of business. In the United States specific internal-revenue provisions include tax credits for hiring certain categories of people (minority groups) and tax deferrals for income from exports. The latter is an example of the complex interaction between tax policy and other government activities.

At times there is a direct link between taxes and controls. For a company’s retirement contributions to qualify as a federal tax deduction, a pension program must meet detailed requirements spelled out in regulations issued under the Employee Retirement Income Security Act (ERISA).

Government as Business Partner. In addition to affecting business practices through policy or legislative mandates, governments sometimes manipulate the private sector directly by entering into partnerships with business enterprises. The involvement of government in the ownership of business is common in less-developed countries or in nations with a history of public control of business. In a few cases, the federal government has purchased equity positions in small defense contractors that lack adequate financial resources to meet the military’s needs.

As businesses become more global in their operations by expanding into foreign markets, they often establish joint ventures and other associations with their host governments. For instance, McDonald’s became the first U.S. firm to penetrate the Russian economy when it opened a restaurant in Moscow in 1990. The restaurant, located near the Kremlin, is a joint venture with the Moscow City Council.

Fed’s Influence over Interest Rates

Monetary Policy. The conduct of monetary policy by central banks such as the Federal Reserve System is a prime example of government actions that profoundly affect business but are not normally considered an aspect of business-government relations. The Federal Reserve strongly influences interest rates, the flows of money and credit, inflation rates, and the overall level of business activity in the economy. The Fed is a creature of the Congress and, although technically independent of the executive branch, often responds to presidential leadership. The power of the Federal Reserve System via its purchases and sales of treasury securities and its setting of discount rates and bank-reserve requirements greatly affects the economic and financial environment in which companies operate.

The cost and availability of credit can be key influences on the performance and at times the very existence of business firms. A company’s board of directors may spend almost as much time discussing the outlook for the prime rate as the finance committee’s report. During wartime and under other emergency conditions, governments often augment indirect monetary (and fiscal) instruments with direct controls over wages, prices, and the use of materials.

Moral Suasion. From time to time, national leaders call on the people to take actions on a voluntary basis. Especially when an activist president occupies the White House, the U.S. government tries to persuade (or “jawbone”) the private sector to support it on specific issues. Several presidents have called on business to do such “patriotic” things as limit wage and price increases or eliminate discrimination in the workplace. Such displays of presidential leadership can be compelling because of the vast array of government powers—the proverbial stick in the closet—available to reinforce the “request” for voluntary action.

In 1990, following the Iraqi invasion of Kuwait, President George H. W. Bush jawboned the oil companies not to raise prices too much. The large producers promptly complied. Ironically, the result was to squeeze the high-cost smaller dealers who found it more difficult to absorb the higher cost of crude oil as established in world markets.

In that same year, Health and Human Services Secretary Louis Sullivan criticized R. J. Reynolds for marketing a new brand of cigarettes aimed at African-American consumers. As an African-American physician, he possessed a great deal of moral authority. Within 24 hours, RJR canceled plans to test market the new product. A year later some members of Congress objected vociferously to the plan of Japan’s Fanuc Ltd. to buy 40 percent of a Connecticut machine-tool builder that helps make nuclear weapons. Although the legal authority to reject foreign purchases of American companies on national security grounds had lapsed, Fanuc backed off.

In 1993 then-Senator Paul Simon of Illinois (now deceased) warned producers of television programs and TV networks to take aggressive action to curb violence on television or face congressional intervention. In response to earlier Senate hearings, the networks had already agreed to issue warnings to audiences prior to showing programs with substantial amounts of violence. In late 1996, after further public criticism, the major television networks established a voluntary system of describing the content of various categories of programs.

More recently, in 1998, the Department of Defense requested aerospace giant Lockheed Martin not to acquire Northrop Grumman, another large aerospace company (the Department of Justice also indicated its potential opposition). Even though the shareholders of both companies had approved the merger, these important defense contractors yielded to the wishes of their major customer.

Ralph Nader has noted that business, too, has its power, and that is true. Actions by multibillion-dollar corporations can have strong positive or negative effects on a community or an entire region of a country. Yet the contrast between government and business power is striking. The largest company cannot tax you; the smallest unit of government can. The most profitable corporation cannot throw you in jail; the smallest municipality can.

Not that he advocates a large role for government, but he brings to bear a special wisdom in examining such controversial questions from a truly scholarly viewpoint. That rare trait is especially helpful in reaching those who now hold different viewpoints.

For years, economists have written about discouraged workers who drop out of the work force because they do not believe suitable jobs are available for them. Now government has created a new category—the discouraged employer, discouraged by the host of government impediments to hiring people. Currently, there are more than eight million people out of work in the United States. Yet overtime worked, per employee, is at an all-time peak.

Why are so many employers willing to pay the penalty of time-and-a-half for overtime rather than hire another person? Sadly, the answer is because the government discourages the employment of people by making hiring more difficult and more costly. Put yourself in the shoes of an employer: to increase your work force, you have to go through such complicated processes as those of the Equal Employment Opportunity Commission (EEOC), the affirmative action program, and the Americans With Disabilities Act. But, in contrast, employers do not get sued if they just ask people to work overtime.

Employers are also better off hiring only if they are absolutely certain that the new employee will work out. That is so because if the company makes a mistake and then has to fire someone, it will face wrongful termination suits and if those dismissed are women, minorities, or over 40—EEOC litigation is likely. For most new hires, employers have to obtain unemployment insurance, workers’ compensation, coverage under the Employees’ Retirement Income Security Act (ERISA), set up federal, state, and local tax withholdings, and provide family leave coverage.

If that is not bad enough, employers have to deal with two new uncertainties. One is the proposed Comprehensive Occupational Safety and Health Administration Reform Act (COSHRA) endorsed by the Clinton administration. The second uncertainty is the threat of an employer mandate under the various health-care reform proposals.

Many of these government requirements—affirmative action, personal leave, and the Clinton health plan—take effect when the company hires its 50th worker. The result is that many small businesses deliberately keep their work forces down to 49 employees or less.

Of course, each government regulation has its own justification. But when all the expenses of compliance are aggregated, the overall economic effect is great. In addition to the direct costs which are estimated to come to hundreds of billions of dollars a year, regulatory activities reduce production, innovation, and competitiveness. For example, much of the government’s social legislation has been written in a way that is oblivious to its negative impact on employment. If that undesirable side effect accompanied only one or two of these programs, perhaps it could be soft-pedaled. However, because the harm to employment is so pervasive and cumulative, it cannot be ignored.

Civil Rights Act

Of the numerous laws and regulations that discourage or slow down job creation, the most conspicuous example is the Civil Rights Act, including the affirmative action program. This law lengthens the amount of time that many jobs stay vacant. Any employer subject to affirmative action requirements who simply goes out and hires people does so at his or her peril. In order to reduce—but not eliminate—the likelihood of being sued, prospective employers must go through a lengthy and expensive process that includes advertising in specified types of media. The advertised position must stay open long enough to provide those interested with an adequate opportunity to respond.

Precise measures of the total costs imposed by civil rights laws and regulations are illusive. Nevertheless, Peter Brimelow and Leslie Spencer came up with an aggregate estimate of $236 billion a year or approximately 4 percent of the gross domestic product. Because the Brimelow- Spencer estimate is so dramatically large, it is useful to examine its individual elements. For example, the direct compliance expenses of private business necessary to respond to civil rights rules are estimated at a smaller but still substantial amount—$5-8 billion a year. Educational institutions spend $11 billion annually for the purpose. These direct costs are clearly very substantial. However, the truly huge costs imposed by these regulations—the remaining $220 billion plus—are indirect, such as the opportunities forgone because of the diversion of management time, energy, and resources.

Wrongful Termination Liability

If civil rights laws are an extremely conspicuous aspect of government’s impact on the employment process, judicial narrowing of employers’ right to fire is among the least publicized. Yet the repercussion of the resultant rise in wrongful-termination liability is very substantial. High costs have resulted from the tendency of state courts around the country to change traditional employment law and to take a more permissive attitude toward plaintiffs’ actions.

As recently as a decade ago, courts in all but 13 states continued to recognize the long- standing common-law doctrine that allowed private employers to fire “at will” workers not protected by collective bargaining agreements or specific statutes. In recent years, a virtual landslide of cases has brought the law closer to the requirement that an employee can be fired only for cause. Courts have also been allowing plaintiffs to collect punitive damages as well as lost wages when they can prove wrongful conduct on the part of the employer. Rand Corporation researcher James N. Dertouzos sums up his findings: “In a nutshell, the efforts of the state judiciaries to protect workers’ job security are altering employers’ hiring and firing practices. And one of the results is less hiring.”

Dertouzos and his colleague Lynn Karoly note that, due to the substantial costs associated with wrongful termination lawsuits, firms have responded by treating labor as a more expensive input to production. They estimate that, in the adjustment process, aggregate employment drops by 2 percent or more.

Family Leave Act

The Family and Medical Leave Act of 1993 is the most recent example of government- imposed costs on the employment process. It is fascinating to recall the debates on the bill as it wended its way through the Congress. Proponents kept asking, “How could anyone object to this obviously desirable measure which doesn’t cost anything?” Just as soon as the bill became law, the public was “reminded” that employers are required to maintain health insurance coverage for employees on leave.

The General Accounting Office estimates this cost alone at $674 million a year. One area of uncertainty is the ability of employers to recover the cost of the premiums they pay to employees who do not return from the leaves of absence mandated by the new law. Nor does this estimate cover the money involved in hiring and training temporary workers, who may be both more expensive and less productive than the employees on leave.

Research supports the thesis that the costs of mandated benefits such as employee leave are ultimately borne by the employees themselves. The result of the government’s “generosity”: the increased cost of the employee leave mandate was shifted to the women’s wages, or to their husbands’ if they had insurance. Similar effects have been shown from the passage of the 1978 Federal Pregnancy Discrimination Act, which extended comprehensive maternity coverage to insured women throughout the United States. The enactment of this government “freebie” results in lower employment, lower wages, and higher hours worked.

Mandated Health Care

The largest prospective government mandate on employment is health care. At this point, nobody knows what specific type of health “reform” will be enacted by the Congress, or even if such a bill will become law in the near future. The statisticians debate over how many millions of jobs the proposed Clinton health-care mandate would kill. It is intriguing to consider the notion of government officials blithely proceeding knowing that their proposals will eliminate a million or more private jobs.

Not surprisingly, low-wage industries (such as restaurants) would be hit especially hard by such mandates. The cost of the Administration’s proposal—and of most suggested variations—is likely to be the same for a highly paid worker as for an employee with a more modest wage scale.

The short-term effects of imposing a health-care mandate on employers differ from the long- run effects in important respects. In the short run, the great bulk of thecosts (80 percent in the basic Clinton plan) is paid by employers, which should reduce their demand for labor. In the longer run, those costs are largely shifted back to workers in the form of lower real wages and reduced nonmedical benefits. As a result, the effect on the supply of labor is likely also to be negative.

Minimum Wage Legislation

Without doubt, of all the governmental regulations affecting employment, the statutory minimum wage has been the focus of the greatest amount of professional attention. With a few, albeit conspicuous, exceptions, the great mass of the research has concluded that increases in the compulsory minimum wage cause a rise in unemployment. The segment of the work force most affected is those at or near the minimum wage. This is a group consisting primarily of teenagers and others with low skills who thereby lose the opportunity to gain their initial work experience.

On the basis of analyzing a great number of studies, the Minimum Wage Study Commission concluded in 1981 that a 10 percent increase in the minimum wage generates a 1-3 percent increase in the unemployment among those holding minimum wage jobs, mainly teenagers. A smaller adverse effect was noted for 20-24 year olds, mostly because a smaller percentage of that age group earns the minimum wage. Confidence in the commission’s estimates is enhanced by the fact that a recent study replicated the 1981 findings using panel data from all 50 states over a period of 15 years.

Several economists have demonstrated that the benefits of the minimum wage—to those receiving it—are offset by reductions in other benefits. A study of the 1967 rise in the statutory minimum wage showed that workers gained 32 cents an hour in money income, but lost 41 cents an hour in training benefits, for a net loss of 9 cents an hour in total compensation.

Studies of retail establishments in New York found that many stores responded to increases in the minimum wage by reducing commission payments, eliminating bonuses, and cutting paid vacations and sick leave. One researcher estimated that, for every 1 percent increase in the minimum wage, restaurants reduced shift premiums by 3.6 percent, severance pay by 7 percent, and sick pay by more than 3 percent.

Other Regulation of Employment

In many other ways, government imposes costs on the job creation process.

Disability Insurance. An analysis of Social Security disability insurance beneficiaries showed that they rarely return to work. Once initial eligibility is established, the program resembles an early retirement system. In recent years, fewer than one-half of one percent of the beneficiaries successfully complete a trial work period—and thus stop receiving their monthly Social Security check. It is not surprising that the more generous the benefits, the less willing are the recipients to seek employment.

OSHA. While the disability benefits reduce the supply of labor, the rules and activities of the Occupational Safety and Health Administration (OSHA) operate to reduce the demand for labor. That feat is accomplished by increasing the indirect costs of maintaining a company work force. Virtually every serious study of OSHA concludes that, although the costs are substantial, the benefits, if any, are modest.

At the present time, Congress is considering an ambitious extension of OSHA, the proposed Comprehensive Occupational Safety and Health Reform Act. This bill would amend the existing OSHA statute to require each employer of 11 or more (an estimated 1.6 million firms) to undertake two new initiatives. The first is to create a joint labor-management safety and health committee which is granted broad authority to influence workplace safety and health programs. The second is to establish and implement a detailed written safety and health program.

In addition, OSHA inspectors would no longer have to go to court in order to get the authority to order an immediate shutdown if they considered a business operation unsafe. Each inspector would have discretion to do so. Also, the pending bill would preclude any consideration of economic impact in setting job safety or health standards.

The Employment Policy Foundation has estimated that this package of changes in employment regulation would cost the American economy nearly $62 billion a year, including over $8 billion for litigation.

Workers’ Compensation. Another expensive burden on the employment process, and one whose cost is rising very rapidly, is workers’ compensation. In real terms, the cost of workers’ compensation more than doubled from 1977 to 1991. During the same period, lost work time due to injuries and illnesses rose far more modestly, from about 60 days per 100 workers per year to approximately 70 days per 100 workers. Even taking into account the rise in unit medical costs, the workers’ compensation program is an increasingly generous one—and extremely costly to employers.

Some legislation affecting jobs is so recent that it is premature to attempt to estimate the specific impacts on labor costs and on labor supply or demand. An example is the Americans With Disabilities Act (ADA), which took effect on July 26, 1992, in the case of employers with 25 or more workers (and on July 26, 1994, in the case of employers with 15 or more workers). The officials charged with carrying out the statute explain that it will take extended litigation to determine the full scope of the vague and often sweeping provisions of the law, which covers an estimated 43 million Americans. However, early experience indicates that the costs will be substantial. The Equal Employment Opportunity Commission is now receiving about 1,000 ADA claims each month—on top of its already heavy caseload dealing with other discrimination claims.

Conclusion

An important and overlooked factor in the continued high level of unemployment is the rising load of regulation, mandates, and payroll taxes that government is imposing on business and other employers. The direct cost of meeting employment mandates imposed by the federal government has been rising twice as fast as wages and salaries.

The indirect costs of employment regulations—many of which are both substantial and hidden— share a common characteristic: they make adding workers to the payroll more expensive. At least initially, they also create a substantial gap between the cost to the employer and the benefit to the employee.

In the words of University of Chicago law professor Richard A. Epstein, “Public discourse proceeds as if employment laws are unrelated to wage levels, job creation, or labor output . . .”

There is specific evidence to support the close—and inverse—relationship between onerous government regulation and the willingness to hire. For example, the Schonstedt Instrument Company of Reston, Virginia, a profitable, high-tech firm, deliberately keeps its work force below 50 employees. It does so in order to avoid having to file Form EEO-1 every year. An excerpt from a letter from the company’s president makes the point effectively: “. . . a friend went over 50 employees on a government contract. He gave me his EEO file . . . it weighs more than 8 pounds . . . I have kept my employment under 50.”

With rising regulation, rising employer mandates, and rising payroll taxes, the time has come to reverse that trend and to undo the serious damage that government is inflicting on the job front and on economic activity generally.

Reducing the now overwhelming amount of detailed regulation of defense production will save taxpayers substantial amounts of money in many ways, especially by decreasing the vast amount of paperwork. Perhaps of greater long-term impact will be the restoration of the private enterprise orientation of the companies that produce weapons and equipment for the military establishment. That would enable these companies to demonstrate the initiative and innovativeness that make private enterprise so much more effective than government arsenals.