If the UN Wants to be Useful: Build Villas for Dictators

Egypt is prosecuting Mubarak in a hospital bed inside a cage. He faces the death penalty. An international court has indicted Kaddafi.  If his Libyan enemies get their hands on him first, he will be killed. Pinochet was hounded to the end of his life despite a grant of immunity after he turned over power following a democratic election.

What signals do these three cases send out? They tell dictators to fight on, to the bitter end if necessary.  In the meantime, NATO warplanes must be deployed, national treasure lost, and thousands of innocent civilians killed. In many cases, the dictator will prevail and continue in office. Nothing has been gained. The costs have been high.

If the UN wanted to make itself useful, it should have a protection program for dictators who negotiate to leave office. The compound should be heavily guarded, have all the latest luxuries, and the staff must be attentive and deferential. A deserted island might do the trick or a scenic down-on-its-luck country may want the business.

Those countries that want to extract revenge from fallen dictators would find this a tough proposition to accept. They are already rid of their dictator. Why should they help other countries get rid of theirs? But from a cost-benefit perspective, the UN-sponsored retirement community makes a lot of sense. This is one case where we need an “international community” to persuade reluctant members to do what is best.

I can imagine such a dictator-retirement community. Robert Mugabe takes a leisurely stroll, chatting with Mohammar Kaddafi and Bahsar Assad as Raul and Fidel Castro nap on  chaise lounges at the pool. Their mistresses would be welcome as well. What a sight!

A “Serious” Jobs Program: Germany’s Haartz IV (Will Obama Repeat the Elder Bush’s Mistake?)

I am taken aback, to say the least, that I have yet to see a “serious” jobs program offered for our widely proclaimed “jobs crisis.”  We hear mainly Keynesian rhetoric and the wrong policy proposals: Keynesians warn we must increase aggregate demand so that there are more jobs to make the products in greater demand. Also we must continue unemployment insurance to bolster aggregate demand, and, by the way, the unemployed spend every penny, so we get a larger multiplier. On the other side, we get good advice: Economic growth creates jobs; so we must craft a pro-growth fiscal policy which in the long run will create jobs. This position is correct but it offers long-term rather than short term solutions.

Economics 101 texts provide an alternate view of unemployment that has been  overlooked in the current debate. It began with the natural rate of unemployment work of Milton Friedman and Edmund Phelps. They suggested we consider employment and unemployment as yet another of our economic decisions. In the job market, we have people looking for jobs (even those currently employed look for better jobs) and we have jobs being offered. The labor market matches people to jobs via a search process in which employers and job searchers do not have perfect information.

How quickly people find jobs depends on costs and benefits, just like any other economic decision. A longer search might land me a better job than the choices I have right now.  If my spouse is working, the costs of continuing to search are lower. If I have generous unemployment benefits, the costs of remaining unemployed are lower.

This brings me to unemployment benefits and unemployment. In the current debate, the extension of unemployment benefits is perversely presented as a “pro jobs” program. In reality, it is an anti-jobs program. Empirical studies have shown that the unemployed are most likely to accept jobs on the eve of the expiration of unemployment benefits. If policy makers want the unemployment rate to drop, they should not extend unemployment benefits.

A case in point is Germany after 2005, when Germany began to reduce benefits associated with the state of unemployment. In Germany, the unemployment rate fell from 11 percent to slightly over six percent, while unemployment rates were rising elsewhere.

In Germany, the so-called Haartz IV program that was passed in  2004 called for the reduction of unemployment benefits for the long-term unemployed for whom unemployment benefits and “social help” had become an entitlement. Since 2004, unemployment benefits have fallen gradually and new types of jobs have been created that lower the costs of employment to German employers. In 2011, additional adjustments to Haartz IV were made to ensure that people who worked earned more than those who did not. The Haartz IV legislation was passed despite fierce opposition from the SPD, but it is largely credited for the new German miracle – a growing economy located in the heart of Europe with falling unemployment during an anemic world economic recovery.

The U.S. is about to begin its own Haartz IV experiment. Extended unemployment benefits are set to expire, earlier in some states than others. We can therefore capture the effects of expiring unemployment benefits at different times and in different places.  If the search theory of unemployment is correct, we should see a falling unemployment rate first in those states in which unemployment benefits expire first.

The Haartz IV program in Germany also de facto reduced minimum wages. It introduced different types of jobs, one of them called “mini jobs,” that, in effect, set aside minimum wage standards. Employers were encouraged to hire by the offer of low-wage employees.

Currently, the majority of forecasters foresee a high rate of unemployment rate in the United States on Election Day. If the administration wishes to see it lower, they can do two things: First, make sure that unemployment benefit eligibility is not further extended. Second, they must lower the minimum wage, especially for youths.

The unemployment rate measures whether people have jobs or not. It does not measure the quality of jobs. In Germany, the main reason for the falling unemployment rate is the fact that people, who earlier would not have taken jobs below their expectations, now do. The same will be true for the United States. All we will see will be a falling unemployment rate.

George H.W. Bush was bullied by Congress into extending unemployment benefits in the run up to his reelection campaign against Bill Clinton. Although the unemployment rate was dropping on election day, it was still too high. It gave Clinton the opening to claim, almost comically,  “the worst economy since the Great Depression.”

An Amazing Statistic: America’s License Raj

We righteously lecture India, Russia, and other wayward countries on their restrictive licenses. We complain to Russian oil authorities that they have too many “license windows” for approving oil projects. The late Angus Maddison identified “License Raj” as the main reason for India’s economic backwardness. International economic organizations compile statistics that count how many days it takes to get licenses to establish a new business.

Lo and behold, I now learn that the United States is among the worst offenders. America’s license Raj is more hidden because most licensing takes place at the state level. In 1950, five percent of American workers required a license in their work. Now between thirty and thirty-eight percent do. In the U.K. only 13 percent of workers require licenses.

Licenses usually claim to protect public health and safety. Some do such as the licensing of doctors, dentists, and tattoo artists. Licenses for other professions, such as florists, handymen, tour guides, second-hand book sellers, and interior designers, do not. Apparently cat groomers and dog walkers will soon require licenses in many states.

Most licenses are the result of interest group pressure on state legislatures. They are quiet about the real reason for the license – to restrict supply and raise incomes. Yet interest groups couch the need for a license, citing health and safety, no matter how ridiculous. Florida interior designers argue that unlicensed designers might use fabrics that spread disease and cause 88,000 deaths per year. The Louisiana Board of Embalmers and Funeral Directors got a cease and desist order against a maker of simple wooden coffins on the grounds that they might leak.

Empirical studies show that licenses raise the incomes of licensees by about fifteen percent, which is about the same effect that unions have on wages. Licenses protect the licensee from competition by making it difficult to enter the profession. Barbers, hair stylists, and manicurists must study hundreds of hours at their own expenses and pass stiff exams to enter the profession.

Why should be worry about licenses? They raise prices to the consumer. They reduce labor mobility and increase unemployment. Licensed workers cannot move from a state where they have no job to a state with jobs because they must requalify for the license.

We tend to focus on the costs of regulation and licensing at the federal level. State licensing falls below our radar screen. Licensing reduces the number of jobs during a period when we desperately need job growth.

It is more difficult to challenge hundreds of thousands of restrictive licensing standards in the 50 states than national regulation. In each state, vested interests can work behind the scenes to keep the license protection alive.

Source: “Rules for Fools,” The Economist, May 14, 2011.