Dem Rep: Regulations are totally awesome for job creation, or something

Dem Rep: Regulations are totally awesome for job creation, or something
posted at 10:45 am on October 11, 2011 by Ed Morrissey

Minnesota elected Keith Ellison to Congress, so it falls to Minnesota bloggers like Gary Gross, Scott Johnson, and myself to point out his many absurdities — including Ellison’s economics. The Congressman makes an argument that would shame even the Obama administration by claiming that expanding government regulation stokes job creation. Hey, businesses have to hire compliance officers, don’t they?

Rep. Keith Ellison (D-Minn.) tells MSNBC regulations create jobs because a business will have to hire people to help them comply with the new requirement.

“I think the answer is no,” Ellison said when asked if he believes regulations kill jobs. “And here is why: When we talked about increasing fuel efficiency standards, the industry responded, and they need engineers and designers and manufacturers, and they need actually more people to help respond to the new requirement.”

“I believe if the government says, look, we have got to reduce our carbon footprint, you will kick into gear a whole number of people that know how to do that or have ideas about that, and that will be a job engine. I understand what you mean, because if anything adds a cost to a business, you could assume that that will diminish that business’s ability to hire. But I don’t think that’s actually right. I think what businesses want is customers and what — if they are selling product, if they have a product to sell they will do well even if they have some new regulations to meet,” the Congressman said.

It’s almost impossible to overcome the economic incompetence in this statement, but we’ll give it a try. First, unlike government, business employment usually gets divided up into direct and indirect labor. Direct labor produces the goods or services that the company sells, while indirect labor doesn’t. The trick for successful businesses is to keep indirect labor low, since it takes away from the profit of the company and/or raises the cost of the products or services. Compliance efforts are always indirect labor, and the more that is needed, the more prices have to rise to cover their cost. As prices rise, consumers lose buying power, which means that production and delivery will tail off, and less direct labor will be required. Capital gets used less efficiently, which means less capital for economic expansion and job creation. In fact, that’s exactly what we’re seeing now, and have been for the last two-plus years of the Obama “recovery.”

But that’s not the only problem in Ellinomics. Compliance costs do not scale well, which means smaller companies pay a higher cost per unit to meet the demand of existing and especially new regulation. Larger businesses can adapt more quickly and efficiently. That’s why the big players in markets welcome government interventions in most cases, because it eliminates competition. The smaller businesses either fail due to lack of competitive standing or they end up selling the business to the larger players. That not only eliminates smaller businesses, it also eliminates jobs, since acquisitions allow larger companies to realize savings through their economies of scale.

Investors Business Daily wonders why we haven’t seen a jobs explosion, if Ellinomics is true:

[I]f regulations were job-creation engines, the economy should be in danger of overheating right about now. Obama has overseen the fastest growth in new federal rules ever, imposing 75 new major regulations in his first 26 months in office at a cost of more than $40 billion, according to the Heritage Foundation.

Ellinomics has the same basic flaw as Obamanomics, which is that it makes virtues out of the vice of government intervention and assumes a world which doesn’t exist in reality. In fantasy, though, Ellinomics has a great explanation from Gary Oldman in The Fifth Element, which rightly derides the villain’s reliance on a version of the broken-windows fallacy: