The power of modular bureaucracy

The news story du jour is to muse about why small businesses are not hiring.  Talk of tax credits, in my view, totally misses the point.

Nostradoofus essentially answered this question some time ago:  the problem is not cost, but red tape, both government and private.

The non-salary costs of hiring employees (chiefly health insurance, worker’s comp, liability insurance, legal work and tax filings) have grown far more complex and unpredictable in the past 15 years, yet are almost entirely outside the control of both employer and employee.

The problem is not so much the expense, but the trend toward ever greater UNCERTAINTY and COMPLEXITY of employing workers — the thousand small details that constantly change and that are outside the employer’s control.

This problem falls disproportionately on small business, which lacks the scale to employ specialized human resources staff to handle the complexity and unpredictable change.  Small business also lacks the financial depth to handle unpredictable changes in cost.

Repeat:  the costs themselves are not the problem.  Health insurance and pensions, for example, are both good and necessary. The problem is the UNCERTAINTY of those costs, and the COMPLEXITY of compliance.

This trend also helps explain offshoring.

To bring the problem into better focus, consider the fact that most small businesses have 0 or 1 employees.  As a result, to move the unemployment needle significantly would require that we convince a lot of solo businesspeople to hire their first employee.  This, in turn, would require convincing each of those prospective employers to do all of the following.

  • File weekly, monthly and quarterly employment tax reports with at least 3 different taxing agencies.
  • Expose themselves to huge penalties if they file anything incorrectly.
  • Educate themselves about insurance (liability, worker’s comp, medical) and pensions.
  • Shop for insurance at least once a year.
  • Take on “single unknowns” like unpredictable growth in health insurance costs.
  • Take on the “double unknown” of unpredictable liability exposure to employees.

Balanced against this commitment of hundreds of hours a year and a totally unpredictable financial commitment, the prospective employer has a simple alternative:  bid the work out on  If the employer can engage someone outside the US, they eliminate all tax filings, insurance and pensions, and almost all legal liability.  They just send cash by PayPal when the job is done.

From the perspective of the harried, overworked solo businessperson, this simplification is much more compelling than any mere cost advantage from offshoring.  Other things equal (cost and quality), offshoring is by far the better deal for the small business, because it is so much simpler.

The only policy solution here is for the US to get serious about streamlining its sclerotic employment system.  For example, one of the best arguments for nationalized health care and pensions is that they are simple and modular.  You just pay into them and get the services.  This allows both worker and employer to focus their attention on other things.

Independent modules, by their nature, offer lower performance than purpose-optimized solutions.  Viewed in isolation, modules are suboptimal.  But what they lack in efficiency, they more than make up for in simplicity and maintainability.  This is as true with government and bureaucracy as it is with software development.

It would be irrational to argue that optimization is always more important than simplicity, just as it would be irrational to argue we should write all software in assembly language, just because it will run faster.

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One Response to “The power of modular bureaucracy”

  1. Nostradoofus» Blog Archive » How to create 5m jobs overnight Says:

    [...] that is a problem with worker’s comp law, not with insurance or employment law.  A properly modular bureaucracy would solve that problem [...]