When I was posting a description of my essay "A New Look At Intervention" to the Band of Bloggers Facebook page, I realized that in writing that essay, I had given too little attention to one aspect of the argument, and that was the way in which the responses to government intervention introduce fragility into the enterprises in question, increasing the likelihood of failure, as well as making it more difficult for these enterprises to adapt to changes that arise. Not only that, but I also realized that government action in general tends to create similar situations, promoting stagnation and inflexibility.

Before I begin describing the mechanism and consequences, allow me to make the point that this should come as no surprise, as the government has a very strong tendency to favor the status quo in most things economic, preserving the existing situation in preference to any possible changes. No, I do not mean to suggest the government does not meddle, does not later things. All I mean is that the government, because of certain innate tendencies, and pressures inherent in government management, fears dramatic changes and the possibility of blame, and so tries to retain the existing structures and most existing practices, making changes it considers important, but otherwise trying to retain the status quo as much as possible.

This whole topic can be examined in more detail in my posts "Bureaucratic Management", "The Bureaucratic Mind", "Bureaucracy Revisited", "The Inevitability of Bureaucratic Management in Government Enterprises", "Bureaucratic Management and Self-Policing", as well as "Environmentalism For The Economy?" and "Anti-Business Businesses". In each of those essays I discuss how the primary motive of government is to avoid blame. And the easiest way to avoid blame is to avoid doing anything. Admittedly, government officials must do something to explain their jobs, and many have certain aspirations or agendas. But beyond those goals, the government tries to avoid change, as change is inherently risky. For example, as I described in "Why"Negative" Economic Indicators Are A Good Thing", if a firm goes bankrupt, the government will risk being blamed for lost jobs, lost wages, declining production and so on. (Cf  "An Analogy From Past Inflation", "Two Perspectives", "Bad Economics Part 11", "Environmentalism For The Economy?") On the other hand, if they subsidize the firm, even if the subsidy prevents the creation of a firm which would employ twice as many, they get credit,as everyone sees the jobs they "saved" while no one can see the jobs that never were. And thus the government attempts to keep existing firms alive at all costs, a practice which is encouraged by, not just the inherent pressures of government, but also the owners of those existing firms, the unions who are associated with them, and the employees who work for them. ("Gun Control, The FDA and Regulating the Law Abiding") As few can see the harm done in propping up those firms (and even then many supposed conservatives continue to support "pro-growth" policies -- see "You Lose When You Think You Win", "Conservatives and the "Big Picture"", "Why Health Insurance Isn't Insurance and Related Topics", "The GOP Health Care Plan", "The Insurance Sham", "What We Deserve", "Who Is To Blame?", "What is Wrong with Us", "The Single Greatest Weakness", "Who Is Safer?", "Worker Safety", "Of Wheat and Doctors", "Katrina and BP" and "The Political Spectrum), it is an almost completely safe position.("What is Wrong with Us", "The Single Greatest Weakness", "The Difficulty of Principle", "Damn the Torpedoes!")

This is a topic we could discuss at much greater length, and one I have, but for now that description is more than enough for our purposes, especially as the stagnation we are about to discuss is of another nature entirely. In this case, all I want to emphasize is that the government has no philosophical opposition to preventing change, or freezing the economy in the current state of affairs. So even if they realize that their policies are inherently reactionary (in the sense of preventing change), they would not be upset to make that discovery. (Though, to be fair, there is a lot of evidence that government regulators do not think things through sufficiently to notice the stagnation brought about by their policies.)

And the evidence is strong that the regulators are not intentionally trying to freeze the economy when they enact other regulations. When they enact employee safety guidelines, or hiring policies, when they pass laws to protection personal information or to ensure that commercial transactions are fair, the evidence is that they intend nothing more than to achieve the objectives they state¹.

And yet, whether they intend it or not, the end result of their regulatory intervention, or rather one inevitable result -- as there are several outcomes to every regulatory act, most of them equally inevitable -- is the creation of a welter of makeshifts, ad hoc solutions, and work-arounds intended to avoid the worst effects of the government's regulations. And this fragile, confused agglomeration of evasions also produces, as a necessary outcome, a final outcome which is both fragile and rigid. A solution which cannot adjust to changes easily, to such a degree that significant change may cause the venture to fail completely.

Perhaps we should take a look at this in slightly more detail.

In general, with exchanges agreed upon voluntarily, there is a high degree of adaptability, as well as resilience. As I said in "A New Look At Intervention", those engaging in voluntary exchanges strive for simple, direct exchanges. The result of this preference is that when any one exchange becomes either too expensive, too time consuming, or simply no longer possible, it is relatively easy to substitute an alternative, be it another seller, a substitute product, an alternate method which substitutes labor for goods, or anything else which will allow the whole process to continue². This is not to say that change cannot be so significant that a private firm could not survive. It is also possible that a firm's chosen approach may be structured in such a way that modification is too difficult³. But, in general, the free market tends to produce streamlined sets of transactions, with little overhead and few extraneous connections. As a result of this, it is very easy to change in response to changes in the environment, at least it introduces no more impediments than are necessary. And, more significant, as both parties are still interested in the voluntary exchange (unless the environmental changes are such that the exchange no longer appeals to one or both, in which case the exchange will never take place, regardless of changes), they are inclined to make such changes, and make them rapidly. There may be some disagreement about which changes to make, but they both desire the exchange, so they are motivated to resolve these differences, making the necessary changes easy to make, and to make swiftly.

Which brings us to the opposite situation, where an exchange has become the subject of government regulation, and both parties have adopted various mechanisms to ameliorate the difficulties imposed by the regulations.Given such a situation, what will be the perspective of the parties involved? How will they react to the regulations? And what will be the subsequent results? Will the government impose yet more regulations? Will one or the other party desire different remedies? And, most important for this essay, what will the overall consequences of these responses be, especially when there is change in the economy?

First, let us repeat a point we have made before, most recently in "A New Look At Intervention", though also in "When Help Hurts", "He's Bad So He Must Be Wrong" and elsewhere, as it is still one that many fail to understand. I previously used minimum wage laws to demonstrate how a law supposed to favor one party to the exchange at the expense of the other in reality is harmful to both parties⁴.

To demonstrate how this is true, even when a law is believed by everyone to favor one party at the expense of another, even when both parties believe that as well, and even when both those who support and those who oppose the law agree is aimed at helping a specific beneficiary, let us look at an example that is universally see as existing to favor one party at the other's expense⁵. That would be laws designed to prevent businesses from using race as a factor in hiring employees6,7.

On first look such laws do seem designed pretty clearly to benefit one party. Whether they impose government fines, create a private right of action, or even grant government oversight in hiring decisions, the laws appear to be designed to ensure that members of select minorities, racial, cultural or religious, as well as other specific groups, such as women, veterans, the disabled and others, are not prevented from being employed due to their membership in that group. As it would, in theory, apply only to those who are both hiring and wish to discriminate, and as employees have an interest in being hired on their merits without being subject to discrimination, it seems that these laws, in the cases where they apply, do favor the potential employee at the expense of the employer.

But those assumptions ignore a large number of factors, as well as accepting the description offered by supporters without examining the mechanism by which the laws will be applied. For example, very few employers are honest enough in this age to say "I won't hire you because you're black." And once such laws exist, it is guaranteed no one in his right mind will. And so, the very action which is forbidden is also one which cannot be identified with direct evidence. And, on the other end of the equation, while an employee will never be told his race, religion, cultural group, sex or disability is the reason he was not hired, it is quite easy to come up with a reason for not hiring any applicant. And so, when someone is not hired, there is no simple way to determine whether he was rejected on the merits of his application or because of race. Even if his credentials are better than another who was hired, the argument can be made that his interview was poor, his references were inferior or some other intangible was not present. And so, the government must develop indirect means of "proving" racism, which has led to the statistical tests for racism, where companies are forced to present breakdowns of the various races they have hired, and then justify any deviations from the statistical averages of the population.

And this is where the system ends up hurting employees and employers. No, not just white male employees, though obviously they are hurt by the statistical models, but so is every other race. Think about it, if I have "enough" black males, but need black females or Hispanic males to meet those percentages, I am going to just as disinclined to hire a black male as a white male. The model is beneficial, in a way, for those who are hired to meet a quota, but the quota cut against those groups just as quickly when the numbers are filled, and so they begin to harm the same groups they once helped, meaning any given individual may be hurt or helped by the same law⁸.

Nor is this the only way in which the laws make it difficult for supposed beneficiaries. For example, as both the need to maintain quota percentages, and the threat of suits for racial discrimination, make the firing of minority employees legally risky, companies often refuse to hire any employees⁹ without a clear background of solid job performance, and a long work history¹⁰. As a result, minority preferences tend to benefit most the upper echelons of the minority community, professionals such as lawyers, doctors, engineer, professors and others, while actually reducing the number of entry level jobs and jobs for those lacking work history or skills. Combined with other bad ideas, such a mandatory benefits and minimum wage¹¹, this has helped to erode the number of entry level jobs, making it difficult for many to break into the job market, among both minorities and the majority.

But the harms done by such laws in general are not my subject here.I mentioned them only to make my point that the regulations are, far from favoring one group over another, are actually impediments to both. And so, having shown that, I will not bother pointing out the many other harms done by this, or any other example¹², and will instead move along to my central point, the ways in which people respond to such impediments, and the resulting changes to the enterprises those individuals own.

Let us look at the current example and see how just the few changes i mentioned would alter the firm.

A firm in a free market would usually employ a mix of employees. They would have a core of long term, well known, skilled employees, who have good work habits, possess the necessary skills, and whose general behaviors are well known. In addition, there are likely a body of part time or temporary employees, who can be brought on when needed for special projects, busy times or other occasions when the present staff is not adequate. And then there are a group of newcomers, those who have not yet shown their abilities, their work habits and the rest. Some of these would be replacement and expansion hires, workers with some job history and skills, hired to either replace those who quit, were fired or retired, or who were hired when the company expanded and needed additional staff. But the bulk of this group of newcomers are not such employees, but are those I described as entry level above, employees just starting in the field, either with no work history at all, or with work history in another field, but without skills for this job. There would be a smattering of other types, managers, consultants, specialists, those who are called in to resolve specific problems and so on. But for the most part we have the established core employees, the temporary and part time expansion staff, and the newcomers, mostly consisting of entry level staff.

It is easy to see how the discrimination laws would tend to change this. With it being so difficult to fire employees, it is likely the newcomers would be pared down dramatically. As the firm would be unable to fire those who do not work out, or at least would find it more difficult than they wish, they are likely to not hire entry level staff. Instead, they would probably choose to hire only those with established work histories, and many times even those who already possess the skills needed¹³. This means that, rather than retaining a pool of trainees, learning the skills in the manner the firm desires, providing support to the existing staff, and generally providing a body of workers from which we can choose the best to replace those who depart, the firm is likely to instead keep only the core employees, along with a somewhat larger pool of fill-in staff, and then hire established, skilled employees when someone leaves, or when expansion takes place. In many cases, these employees come from the fill-in staff, rather than coming from outside hires, but that can pose a problem, as an expansion can deplete the pool of fill-in employees, making the firm short handed for a long time if they have short term needs which would normally have been fulfilled by the fill-in staff.

And that thought actually serves as a good lead in to my main topic, the way such reactions make a firm both fragile and rigid.

Let us start with the example I just used. As the firm is worried about being unable to fire, they tend to want to hire only those with work histories and skills, and, so, rather than conducting countless interviews to try to find these ideal employees, it is likely the firm would plunder their temporary and part time staff. Of course, in some cases this may not be possible, as some may be working part time or temporary shifts because he is unable to work more hours or needs the flexibility. But, , even if they can hire all they need, this poses new problems. If there is an expansion, and staffing it exhausts most of the pool of fill-in staff, our firm will find itself in a dangerous situation. Replacing the fill-in staff is a task almost as daunting as hiring the full time staff. Of course, as these workers were hired to work irregular, short shifts, it is possible to not fire them, but only reduce their hours to almost nothing, effectively removing them without the risks of firing them. But still, even if there is somewhat less risk in hiring fill-ins than full time staff, they still need both work history and skills, making it a long and slow process to replace the fill-ins who shifted over to full time. And so, if after the expansion there should be a sudden need for staff, it is quite possible, due to the response to government regulations, our firm will find itself unable to both expand and then react to changing demands at the same time.

But let us look at this as it applies to specific cases. Suppose, for instance, the economy slumps and the firm needs to shut down at least one plant. The best choice, in most cases, would be to close the plant with the lowest profit margins. However, let us suppose that plant is in an area made up largely of black or Hispanic individuals. If that plant is shut down, not only will it likely throw off all the racial quotas the firm has worked so hard to balance, but it may also incite minority activists to protest the closure of those plants in those specific neighborhoods, and action making it even more likely any quota imbalances will draw government notice. And so, because of the government regulations, it is very difficult for the firm to take the most obvious steps in response to an economic downturn.

But the difficulties caused by regulations do not stop there. Even when the change is good, not bad, we encounter the same burdens, thanks to regulation. For instance, when a sudden surge in demand causes a need for new factories, new employees, and a general expansion, we run into the same issues.  As we have discussed, the need to avoid new employees that may prove difficult to fire would keep us from maintaining a pool of new employees, and, as a result, most of our expansion will come from our small supply of temporary and other part-time staff. As a result, when we need a large, rapid expansion, we will lack the resources to staff it immediately, and will need to quickly hire outside personnel. Unfortunately, this is almost impossible, given the many difficulties with hiring new staff¹⁴. And so, we will see companies trying to off-load the burden of expansion to others, either by subcontracting out functions, or by using outside staffing services, which increase costs, but eliminate many of the liability risks for the firm. In both cases, the costs of the expansion will rise, or the benefits shrink, making the entire process less profitable and expansion less likely unless there is a strong motivation. In short, again, response to change, even positive change, will be less common, and will generally tend to consist of following as closely as possible the present course, so as to avoid the risks of change.

Nor is hiring the only area where government regulation stops responses to change. Let us take a completely unrelated example.

Let us suppose you run a pharmaceutical company. You have a wonder drug that has just been approved to treat impotence, baldness and causes weight loss, it also cures cancer, AIDS and stops heart attacks, and can cure acne too. In short, it is the drug everyone wants. However, until yesterday, it was only approved for acne, and was only a small part of your production.

But now, with all these new uses, demand has shot up a thousandfold. Unfortunately, that creates a problem. Not with personnel, or facilities. You are luck enough to have been in the process of building factories to support a planned launch of new drug lines, so you have the staff and plant in place now. You also have already had the whole plant inspected and approved by all the relevant authorities. So everything looks good. Except your supply chain.

When you were developing this drug, you investigated two alternate formulations. They differ in a very small way, and all of your tests suggest that both variations have exactly the same effects, both positive and negative. In fact, as at the time you were unsure of which would prove to work best, you did the full internal testing process for both. But, when they both proved effective, you chose to avoid some cost and submit only one variant for FDA approval. Your assumption was, if it was approved, that would be good, as at the time it was the process which sued the cheapest components, and so would be best for the bottom line. And, if the FDA, in its fickle fashion, denied the drug approval, you could submit the other one and hope for the best.

But now that the drug is in much greater demand, the components which were cheapest are now produced in insufficient quantity to support the demand. And getting the production of those ingredients up to the needed levels would make them far too expensive for profitable production, not to mention the delay would put the drug out of production for months.

And so you want to immediately switch over to the other formulation. You have reams of paper showing the alternate version is identical, that it is different only in a very minor way. You have done, in effect, all the tests the FDA would, except without the government being involved. But, you can't do it.

Thanks to the FDA's interetsing way of doing things, you are stuck asking them to approve the change. And, while they might decide it is a minor change and let it go through rapidly, and save your company, they might also demand a full scale approval process, forcing you to stick with the original process, and either produce the drug in radically insufficient amounts, or at such great costs you will break even at best¹⁵. And before anyone argues that it is unlikely the FDA would force a full-scale test, I would respond that "unlikely" is a scarey word on which to hang your future. Would you drink something that was "unlikely" to be poison? It is bad enough that the government can ruin your future. That it does so in an unpredictable and arbitrary way is even worse.

The list could go on, but it is pretty easy to see how intervention causes companies to fail to respond to changes. First, by direct orders which make change impossible without government approval. This is the most obvious form of inflexibility, and the most damaging. Second, by imposing regulations which create huge administrative frameworks within the companies themselves, such as our massive HR departments, as these bureaucracies tend to function in a manner similar to government bureaucracy, with the same inefficiency and inflexibility. ("Bureaucratic Management and Self-Policing", "Bureaucracy Revisited", "Consolidation and Diffusion", "Somewhat Off-Topic Rants", "The Inevitability of Bureaucratic Management in Government Enterprises","Bureaucratic Management", "The Bureaucratic Mind", "The Inherent Disappointment of Authoritarianism")  Third, by apply arbitrary regulatory decisions which need to be considered before any action, and which makes any change potentially disallowed even before it is undertaken. This uncertainty makes it risky to prepare for any future course, as any preparations may be lost money due to bureaucratic decision.

There are others as well, but I think those three big categories cover the worst government intrusions. I know this is a problem which is small compared to some of the other harms of intervention, and which strikes different companies to different degrees, but it is still something we should consider, and something that will grow worse as government grows more intrusive.Most importantly, it is something we have rarely considered previously and so a cost which we have ignored. And by doing so we have underestimated the cost of big government, which has allowed it to grow without consideration of its real cost.

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1.  Sometimes conservatives allege that liberals are enacting various policies to bring full socialism/communism (I use the two interchangeably, as did Marx) to the US by gradual steps, but I think in many cases that is not a justifiable fear. (Though the right is not alone, it seems all of us have a tendency to assume politicians are prone to constant lying -- cf. "The Presumption of Dishonesty" and "Self-Serving Cynicism and Our Cultural Immaturity") Much as it may seem there is a liberal conspiracy to move us toward socialism, the truth is we move toward socialism because we have accepted that government is the answer to all our problems. As I wrote in "Inescapable Logic", once you accept a premise, the conclusions come of their own accord. And once we embrace big government, we end up with either Russian type socialism, with the state owning everything, or German style socialism, with the state just telling the owner how to conduct his every action. So, though it may seem the policies enacted are steering us in a specific direction, sadly they are most often honestly proposed by "pragmatic" politicians, seeking to "do something" to solve what they see as a problem. ("Impractical Pragmatists", "The Shortcomings of Pragmatism", "Pragmatism Revisited", "Pragmatism Revistied, Again", "Problematic Arguments", "Deadly Cynicism", "Defending Freedom?", "Selling Yourself Cheap", "A View From the Inside", "Doing Something", ""Doing Something" Revisited", "What We Deserve",  "Don't Blame the Politicians", "Who Is To Blame?", "What is Wrong with Us", "The Single Greatest Weakness", "The Difficulty of Principle", "Damn the Torpedoes!", "Volunteer Fireman, Barn Raisings and Government") It is simply the socialist era in which we live which give these policies their socialist cast. And, similarly, though I would love to believe politicians regulate with at least an eye toward the ability such regulations have to create the stagnation they desire, I think in truth they simply regulate in the same "practical" manner as I mentioned above, while the natural response citizens have to regulatory intrusions manages to produce that stagnation all on its own.

2. The free market has one other safeguard against dramatic change, which I mentioned in "Redundancy as a Protective Measure". As there exist many firms, conducting business in slightly different ways, many times when a change makes one vendor too costly or slow, another, which may have previously been unacceptable, is now ideal. This diversity makes it more likely that any given change will bring one firm or another into the limelight. Of course, as we will discuss later, government regulation makes this solution impossible as well, by imposing uniformity on firms in any number of ways. Without diversity in product, methods and every other conceivable aspect of a business, there might as well be only one firm, and change is more of a threat to the well being of the economy.

3. In many cases this may be not a failure to plan, but rather an inability to predict the future perfectly. Using manufacturing as an example, there are almost always a number of different ways to manufacture the same product, and many of these processes may be equally appealing. In many other cases, one process may be more desirable at present, but if the cost of inputs change, various other processes may become more appealing. As a consequence, many times processes are chosen based not on present costs, but on predictions about the probability of various future conditions. However, those predictions can be wrong, and in some cases that error will commit the producer to a process which makes adjustment to specific changes more difficult or impossible. Or, even more frequently, it is simply not possible to choose a process which allows for all likely future events. It may be necessary to choose between two equally likely events, and, if done wrong, it may commit an individual to a difficult situation. However, those are unusual circumstances. In most cases change can be handled by a private firm without causing it to fail. And even in those rare circumstances where that is not possible, the fact that failure can occur does not mean the free market is as inflexible as a system created in response to government intervention. It only means the free market is not perfect, and humans are capable or error. ("Government Quackery", "You Gotta Have Faith", "The Threat of Perfection", "Non Sequitur Allegations", "A Brief Thought on Patience")

4. To make this simple, for those who will not follow the links to past articles, minimum wage simply cannot raise wages above the market price. If enforced it will result in nothing but unemployment.  And as a result, it does not favor the employee, but instead either thwarts the wishes of employee and employer, or else does nothing. The reason is simple, and can be explained very briefly. If you are worth more than the minimum wage, you will be paid more than that, and so the law will do nothing. If you are worth less, then the employer will not be able to employ you as he would suffer a loss. And so, rather than raising wages, minimum wage laws simply ensures unemployment for those who are worth less than the wage (unless employed in an unregulated profession -- such as waiter -- or can find employment under the fiction of being an independent contractor). Worse, the laws also prevents those who want to work from exercising many options. If I know my work history and skills make me unappealing, but I both need to work and need to show I am reliable, or maybe need to gain some work skills, in a free market I would be able to break into the market by agreeing to take a salary below my market worth in exchange for being given a chance, and maybe for being givens some training I could not obtain otherwise. But minimum wage laws deny me that option, saying, in effect, I am not competent to make that decision for myself, and forcing me to be unemployed rather than accept a job paying a wage the government declares to be "too low." ("In Praise of Contracts ", "How the Government Corrupts Relationships", "The Inherent Disappointment of Authoritarianism",  "The Right Way", "The Most Misleading Word", "Luxury and Necessity", "Liberalism, Its Origins and Consequences - Chapter 2 - Saving You From Yourself ")

5. This is not the venue to discuss whether or not the law, if it worked -- rather than producing the harmful results I describe -- would be an appropriate response to past and present racial discrimination or not. I have addressed this before in my posts "The Danger Inherent in Banning "Bad Ideas"", "In Defense of Discrimination", "A Statute of Limitations for Race", "How to Handle Idiots", "Back Again", , "Best of the Web gets It Very, Very Wrong", "The Threat of Perfection", "Utopianism and Disaster"and "Private Versus Public Racism", and I have made it clear that I would favor a much less expansive government response, mostly limited to decreeing that race would be irrelevant in government decisions, while enacting no laws impairing an individual's right to contract or to freedom of association, even when conducting business. I will not go into the reasons here, as it is not relevant for this post, and would take too long in any case, but to spare those with only a small interest the need to wade through all those posts, I will say that I believe that social pressures alone, were our society once more to develop into a culture where such pressures could be applied ( "An Immature Society", "Culture and Government", "In Defense of Standards", "Addenda to "In Defense of Standards"","The Fascination with Change", "All Life in a Day, or, How Our Mistaken View of History Distorts Our Understanding of Events" "Shame and Behavior", "Our Rude Behavior", "Social Controls", "Bad Economics Part 9", "Changing Incentives", "How Fast Things Change"), would result eventually in the elimination of all but the most inveterate racists, and without violating any rights. But, again, that is a topic for a future post, so please save any arguments for those posts, where I will be happy to debate the topic.

6. We can ignore for the moment the specifics of the law in question. Whether we are discussing "equal opportunity" or "affirmative action", whether we are examining laws intended to apply only to government contractors, laws applying to all firms engaging in interstate commerce, laws applying to various enterprises requiring government licensing, statutes which create a private right to bring suit, or other laws entirely, the basics are very similar, as are the most common reactions by firms to whom the laws apply. In some examples we will delve  into specific details, as they will be relevant when determining what specific responses are likely, but in much of this essay we can treat the laws in a very general way.

7. Technically, I should say when firms recognize race in disallowed ways when hiring, as there are certainly ways one can recognize race when hiring of which the government approves. In fact, there are hiring decisions which recognize race that the government mandates, so I should probably be more specific here. Still, rather than waste space spelling this out every time I mention discrimination, let us just agree that any statement about discrimination applies only to disallowed discrimination.

8. The laws actually create a potential "no win" situation for those trying to meet quotas. If they go strictly by quotas, they will be fine in one respect, but they risk suits and fines in another, as if it can be proved they refused to hire a member of a minority group due to race, even if it was only to fill another quota for another minority, it is still deemed racial discrimination. (Of course, the fact is, all of the programs that impose quotas ARE racial discrimination, as they make race a determinant in hiring. Thus it is odd to hear people argue affirmative action is a means to end discrimination, as it is clearly its own form of discrimination.)

9. Obviously, with racial discrimination being such a concern, the fear over hiring minority employees who don't work out, and then being unable to fire them, cannot be resolved by refusing to hire minorities without sufficient work history. Instead, the employers tend to refuse to hire anyone without sufficient work history. Granted, non-minorities may be easier to fire, and so do not require such measures, or not to the same degree, but since it is not allowable to base such decisions on race, it is applied uniformly.

10. Similar practices are common in nations where laws make it hard to fire anyone. For example, during the riots in France a few years ago it was mentioned that unemployment was much higher among the young than the older segments of the population, the reason being that it was nearly impossible to fire anyone, and so employers wanted to hire only those with perfect work histories, lest they get stuck with a bad employee they not only cannot fire, but must keep at a wage well above his actual worth. (Which, now that I think about it is yet another example of law supposedly beneficial to one group doing them unexpected harm.)

11. There are countless factors making entry level jobs scarce. The ones I have mentioned such as minimum wage, unemployment insurance, medical benefits, worker's compensation and, as mentioned above, racial quotas, have the most obvious impact, but there are many more, many less obvious. For example, many states have declared, for example, "employment at will" means nothing of the kind, and if there is an employee handbook, then it is a de facto contract, and the employee may only be fired if he violates the terms of the handbook. This is, again, an impediment to hiring entry level workers, as they may not be fired if they don't work out, without justification from the handbook they must be retained, even if they are unsatisfactory. And the list goes on and on. For more thoughts on the topic, see "Bad Economics Part 14", "How Democrats Keep the Poor Poor", "Unfair Advantage and Foreign Trade", "Hope You Like Unpaid Internships", "The Endless Cycle of Intervention",  "Consequences", "Perverse Incentives", "When Help Hurts", "When Help Hurts II", "Subsidizing Irresponsibility and Poor Planning" and "Social Security is Not Insurance".

12. I wrote on this topic a few times, in  "The Danger Inherent in Banning "Bad Ideas"", "In Defense of Discrimination", "A Statute of Limitations for Race", "How to Handle Idiots" and "Back Again", so anyone looking for more details on this topic can read those posts. I will say that one of the most obvious types of harm, though one without any obvious economic consequences, is the ways in which preferential treatment tends to both exacerbate racial tensions and both destroy self esteem among minorities and reinforce negative stereotypes among members of the majority. The fact is, whether the left admits it or not (("It Is All In How You Say It", "Eurocentrism? Racism? Liberal Traits All", "The Racism of the Left", "The Costs of Understanding", "Tolerance, Agnostic Prostelytizing and Liberal Activism", "Non-Judgmental Ethics?"), the premise behind preferential treatment is that minorities cannot succeed on their own. Whether due to innate lack of abilities, poor environment, for a history of discrimination, they cannot overcome this impediment, and must be helped. The problem with this logic is that other groups also suffer from impediments and still succeed, making it seem the left is saying that certain minorities are inherently incapable and need special help. This does little to help minorities feel good about themselves, or the majority accept minorities as being equally competent. In addition, as affirmative action leaves it uncertain whether anyone succeeded on his merits or due to his race, it makes every minority worry that he does not deserve what he has, and everyone else to question whether a minority professional is there because he is capable or because he fits a quota. And finally, it means that every non-minority rejected for a position is prone to blame not his lack of skills, but the minorities who may have excluded him from a job due to quota needs. All of which is a recipe for ever growing racial tensions.

13. Many do not think of this, but just because someone has a good work history it does not mean they will be able to pick up the skills needed for a job. And so, even those with a good work history are a risk, making it safest to hire those with both work histories and at least some of the skills desired.

14. We are not only considering here the racial composition of the staff, but a whole slew of issues, from verifying citizenship to bonding, background checks and other liability issues, to establishing unemployment and worker's comp accounts, and so on. Granted, all are minor problems in themselves, but each adds a tiny burden and tiny cost. And as employees are not as easy to fire as many think, especially in certain states, references and work history become essential to hiring, making the gathering of reliable references crucial. Where once a rapid hiring process could ignore this, and plan to weed out the bad choices later, now it is often impossible to weed out any choices, and so the process is slowed to make sure no bad choices are made.

15. I am sure someone will ask why you would produce drugs at a loss, and it doesn't make sense in a free market. However, imagine a drug that cured cancer was discovered, but the manufacturer could not meet demand. Don't you think our property-unfriendly government might not seize that patent to give to other firms? And wouldn't it be in the interest of the patent owner to manufacture at a loss, just to keep his rights so he might reap some of the profits in the future? Sadly, such considerations do have to be included in our present political environment.

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POSTSCRIPT

I am sure readers in business will respond that this or that specific, or maybe all of them, are overblown. And I have heard that before, especially in response to my post "Somewhat Off-Topic Rants" (as well as "The Inevitability of Bureaucratic Management in Government Enterprises" and "How the Government Corrupts Relationships"). And that is actually a heartening response for me, as it means that the problems I describe are not universal. However, as I said in my final few paragraphs, this is a problem which is not universal, not yet, and effects various companies to different degrees.

For example, the corner grocer, or the three man architecture firm, will likely feel little of this. Some of the paperwork headache, maybe, if they hire a really bad employee with an employment lawyer on speed-dial, they will feel the madness of employment laws, but in general, the smaller firms have yet to feel the full burden of government. On the other end of the spectrum, firms which are government contractors, which work closely with government, such as universities, or which are in industries heavily touched by regulation, such as massive financial institutions, will feel the full weight of all these and more.

As a rule of thumb, one can tell how much government has touched a firm by the size of their Human Resources department. If they have none, then they have yet to feel much beyond proof of citizenship and unemployment insurance. If they have one for every four or five employees, as well as a "diversity coordinator" with a large staff, then they have felt every one of these burdens.

Currently, as I said above, these laws tend to be most burdensome on firms where the government has the most influence. It is bad PR to make a law mandating hiring quotas, not to mention having to pass constitutional muster, so instead they simply demand government contractors abide such restrictions as a requirement of the contract. And so, we tend to find these employment rules and other burdens more heavily concentrated in the government sector. (Though those firms which are subject to lots of regulation can also be easily "encouraged" to follow such rules "voluntarily", and so also seem to follow many of the same policies.)

But as time goes on, more and more of the economy begins to be touched by either regulation or government funding, and we will see more and more of our employers, even smaller employers, forced to adopt the HR practices of big government contractors. In addition, as states make it easier for lawyers to sue on grounds of discrimination, environmental harms, and other areas previously covered only by government regulators, we will see smaller firms farther removed from government adopting similar practices to avoid the liability risk.

And as this happens, more and more of our economy will become inflexible in the ways I described, unable to respond to changes without massive cost. In addition, as I described in "Somewhat Off-Topic Rants" and "The Inevitability of Bureaucratic Management in Government Enterprises", these firms will become more and more like government in their responses and their motivations, which will lead to ever declining efficiency. In short, as times goes on and government expands to touch more of our economy, that economy will slowly grind to a halt. And that is just from the inevitable side effects of regulations, without even considering the effects of the regulations themselves. When those are figured in, I doubt we will last long at all.

UPDATE (08/30/2010): I was looking through recent posts when I realized I completely forgot one relevant link in the article above, and perhaps one of the better examples of how government intrusion can cause inefficiency. That would be my post "The Inevitable Corruption of Protectionism". Admittedly, the post itself concentrates on corruption, and could, if one wished, by posed as an argument against my thesis here, but I think it is both relevant and, if we take in the big picture, does not contradict this post, only appears to do so. My thought being that, while corrupt individuals can buy success from the state, in the long run they still lose. Admittedly, they could probably not gain the same success on their own (though they might, there is no proof a successful buyer of favors would not succeed otherwise), but in the long run, given the overall inefficiency brought about by such corruption, the success they buy still gains them less than the cost of that success would have bought on a free market. Not to mention that they suffer in the eventual collapse of the economy as much as anyone. And, of course, they are also forced to live at the whim of government regulators, who could destroy them instantly without warning, making their success even less stable than that found in the free market. And so, though it superficially contradicts this post, I want to include "The Inevitable Corruption of Protectionism", as it is a perfect example of how big government poorly allocates resources.