by Archie M. Richards, Jr., CFP^®
August 23, 2004

During a recent speech of mine, an elderly gentleman said that a very large U.S. bank was buying a medium-sized bank, causing 15,000 people to be laid off. He was distressed that the government wasn't preventing the layoffs.

It's difficult to deal with this issue without seeming indifferent to thousands of peoples being laid off. But this being an election year, I'll give it a try.

For decades, the French and German governments have prevented most layoffs by law. As a result, unemployment in those nations is higher than in the United States.

Why the unexpected result? Because of negative feedback. For example, if you place a microphone close to the speaker, the sound from the speaker may feed back to the microphone, producing a loud screech.

Here's the feedback when the government prevents layoffs: Companies hire fewer employees in the first place.

Government is force. Force is fine when applied to government's basic functions, namely, national defense, protection of private property, enforcement of contracts, and preventing people from directly harming others. But when government tries to solve other problems, the long-run feedback from the use of force is almost always negative. With all good intentions, people react in ways that make the original problem worse.

No company, for example, would do anything that would cause it to go bankrupt. When layoffs are made illegal, companies refuse to hire people to try things that are new and uncertain. If the venture fails - and many do - the company would be stuck with employees it can't support. Therefore, companies don't hire people to try things that are new and uncertain. The result is high unemployment and low economic growth.

As companies grow, they often become more bureaucratic and inefficient. Mergers and corporate buyouts enable the inefficiencies to be squeezed out, cutting the cost of production. Americans can buy what they need more cheaply. The people thus unemployed often get hired by smaller companies, which tend to be more efficient than big ones. Small companies are also more prone to engage in ventures that are new and uncertain.

Almost everyone wins. The people who were laid off are hired by small companies. (Their pay may be less at first.) The economy grows more rapidly. The unemployment rate stays low, and consumers get more for their money.

Since the U.S. government doesn't interfere with the economy as much as the French and German governments, the overall rate of unemployment in the U.S. is lower.

About a dozen years ago, IBM laid off or gave early retirement to about 100,000 people. Had the government prevented this, the company would probably have gone bankrupt, causing 400,000 people to lose their jobs, not 100,000. Most of this is too complicated for politicians to explain in 20-second sound bites. Instead, they express sympathy for those who are laid off and enact policies to try to prevent it. But the policies are self-defeating. They cause lower economic growth and higher unemployment.

The actual, long-term results of big-government policies are generally opposite to the intended results. The less government intervention, the less negative feedback.

Here are a few ditties about government:

• The U.S. Department of Agriculture dictates how large the holes should be in Swiss cheese. This expenditure hole should be plugged.

• The federal death tax brings in about $22 billion in revenues. To comply with the law and reduce its effects, Americans spend about $22 billion. What a waste! The tax should be repealed permanently.

• Because of gerrymandering and other measures favoring incumbents, 99 percent of the members of the U.S. House who want to be reelected are reelected. Power corrupts. 99-percent power corrupts a lot.

• A politician who lives long enough is called an elder statesman. I call him ready for retirement.

• Some people complain that since John Kerry has skipped so many votes and committee meetings, he hasn't earned his senatorial pay. I disagree. If a legislator skips all votes and committee meetings, his pay should be doubled.

• "The IRS" spells "theirs."