Unravelling The Economic Mess

The problem with the economy is that there is too much government. Politicians and other government employees such as regulators direct resources where they want them to go. This is not necessarily the optimal use of those resources for several reasons. One, government people make decisions based on political gain, not on whether the customer is satisfied. Two, top-down decisions are based on less information than decisions made by the people who are closer to the actual transaction.  The people who own or manage those resources should be making the decisions based on what they think is the best use of those resources.

Take, for example, a casual dining establishment in a large city that offers delivery of meals. They compete on the usual factors: price, quality, and especially convenience. A customer can pay $20-$30 and get a satisfactory dinner delivered to her apartment door. Throw a few bucks for a tip, and the trade-off for the delivery more than offsets having to cook something.

For this transaction to occur, restaurant operators have to figure out how they are going to make a living. They need to buy the ingredients, find an establishment, pay rent, power, taxes, and other expenses. All these expenses are distorted by zoning regulations, green and safety mandates, taxes, etc. These distortions may have been enacted with the best of intentions, but are they worth it?

One way operators can keep labor costs low is by hiring people off-the-books, meaning they pay employees cash instead of adding them to their official payrolls. These employees can now be paid less than minimum wage and not pay taxes. Employer and employee like this arrangement because it benefits both parties. The employee could be an illegal immigrant or a family member. Operators can increase the convenience of their deliveries by hiring more employees for lower pay than fewer employees for higher pay.

So, what is the problem in this arrangement? The problem is that government rules forced employees and employers into making decisions that are illegal under today’s regime at all levels of government.  Nonetheless, both parties benefits.  Minimum wage laws force employers to pay more and employees to get less after taxes. Why not cut out the middleman, government in this case, and have the employer pay the employee a lower amount per hour yet the employee still makes more per hour?  This is just one example.  Can you think of others?

Here is an example of a candlemaker.

Chesapeake Bay Candle, known for scented and textured candles that sell for $9.99 at Kohl’s and Target, has set up three factories in Asia over the past 16 years.

Why Asia and not the U.S.? Read about all the hurdles the founders and senior management faced. Pointer from Tyler Cowen.


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