The CEO Who Got Fined For Hiring Too Many People

Peter Schiff, the CEO of Euro Pacific Capital, testified before the House Subcommittee on Regulatory Affairs, Stimulus Oversight, and Government Spending on September 13.  He was there to speak on the subject of job creation, but Schiff also knows a few things about how the government can destroy jobs.  In his remarks before the subcommittee, which he also published in full at Forbes, he explained how he was fined for hiring too many people:

Regulations have substantially increased the costs and risks associated with job creation.  Employers are subjected to all sorts of onerous regulations, taxes, and legal liability. The act of becoming an employer should be made as easy as possible. Instead we have made it more difficult. In fact, among small business owners, limiting the number of employees is generally a goal. This is not a consequence of the market, but of a rational desire on the part of business owners to limit their cost and legal liabilities. They would prefer to hire workers, but these added burdens make it preferable to seek out alternatives.

In my own business, securities regulations have prohibited me from hiring brokers for more than three years. I was even fined fifteen thousand dollar expressly for hiring too many brokers in 2008. In the process I incurred more than $500,000 in legal bills to mitigate a more severe regulatory outcome as a result of hiring too many workers. I have also been prohibited from opening up additional offices. I had a major expansion plan that would have resulted in my creating hundreds of additional jobs. Regulations have forced me to put those jobs on hold.

In addition, the added cost of security regulations have forced me to create an offshore brokerage firm to handle foreign accounts that are now too expensive to handle from the United States.  Revenue and jobs that would have been created in the U.S. are now being created abroad instead. In addition, I am moving several asset management jobs from Newport Beach, California to Singapore.

(Emphasis mine.)  Noting that an increasingly hostile business environment in the United States will naturally lead him to move capital, jobs, and tax revenue abroad, Schiff offered suggestions for an alternative approach:

To encourage real and lasting job growth the best thing the government can do is to make it as easy as possible for business to hire and employ people. This means cutting down on workplace regulations. It also means eliminating the punitive aspects of employment law that cause employers to think twice about hiring. To be blunt, the easier employees are to fire, the higher the likelihood they will be hired.

Schiff’s detailed proposals for promoting job growth are not timid: he suggested replacing all corporate and personal taxes with a national sales tax, abolishing the federal minimum wage, repealing mandated employment benefits like overtime pay and leave time, and shutting down extended unemployment benefits.  He also thinks interest rates are too low, and should be “raised to bring on a badly needed restructuring of our economy,” which he admits would be painful at first, but would “lay the foundation upon which a real recovery can be built.”

That’s some pretty strong medicine, but it’s worth pondering in the context of endless political promises to “pivot to job creation.”  If we really value job creation as a top priority, we should be willing to consider doing away with factors that impede job creation, no matter how traditionally accepted they might be.  For example, here’s how Schiff addresses the federal minimum wage:

Minimum wages have never raised the wages of anyone and simply draw an arbitrary line that separates the employable from the unemployable. Just like prices, wages are determined by supply and demand. The demand for workers is a function of how much productivity a worker can produce. Setting the wage at $7.25 simply means that only those workers who can produce goods and services that create more than $7.25 (plus all additional payroll associated costs) per hour are eligible for jobs. Those who can’t, become permanently unemployable. The artificial limits encourage employers to look to minimize hires and to automate wherever possible.

In other words, as with every other form of price control, decreeing that labor must be purchased for at least $7.25 does not make all labor suddenly become worth $7.25.  Why is it considered “normal” to force taxpayers to pay almost five million dollars per job to create 3500 “green” jobs, but relaxing the minimum wage law is unthinkable?

In a similar vein, Schiff offers tough and provocative talk about mandatory workplace benefits:

Employment is a voluntary relationship between two parties. The more room the parties have to negotiate and agree on their own terms, the more likely a job will be created. Rules imposed from the top create inefficiencies that limit employment opportunities. Employee benefits are a cost of employment, and high value employees have all the bargaining power they need to extract benefits from employers. They are free to search for the best benefits they can get just as they search for the best wages.

Companies that do not offer benefits will lose employees to companies that do. Just as employees are free to leave companies at will, so too should employers be free to terminate an employee without fear of costly repercussions. Individuals should not gain rights because they are employees, and individuals should not lose rights because they become employers.

What do Americans value more: job creation, or all the social “benefits” built into the federally-mandated cost of labor?  Schiff’s overall point is that people respond to incentives.  When labor is artificially transformed into an expensive and risky resource, employers purchase less of it.  Politicians who talk about jobs as their “highest” priority really mean that jobs are somewhere in their top 20 priorities, and might crack the top 10, if their poll numbers drop low enough.

No amount of political grandstanding or short-term “stimulus” spending can re-program large numbers of human beings away from rational economic behavior.  The high-minded intentions behind government regulation are often quite at variance from the behavior it actually encourages, or discourages, among those who don’t make business decisions based on the moral postures struck by politicians.

It’s also a cold truth, often forgotten during heated moments of class warfare, that job creators have a variety of options for responding to perverse incentives.  Americans too often discuss employment from within a very narrow box… but escaping that box is not impossible.  Just ask the CEO who started sending jobs overseas, when the U.S. government fined him for hiring too many people.