The price of paternalism

Several weeks ago, I visited my sister Susan and her 11year-old daughter, JoAnna, in California. One day, JoAnna asked Susan if she could have $5 so she could “hang out” with her girl friends at the local mall.  Before Susan could say answer, I suggested that JoAnna try to earn her spending money. “It will be more enjoyable when you spend money you earned, rather than money someone else handed to you,” I told her.

JoAnna took my advice, and we started to brainstorm ways that she could make some money.

One of the most time-tested routes for a teenage girl to make a few bucks is to babysit. After some investigation, however, we found it almost impossible to be a babysitter. Nowadays, babysitters need to be certified in first aid and CPR. The cost of a one-day class to get such a certificate is about $90, and the certificate is only good for two years. 

Instead, JoAnna decided to sell homemade cookies. She loves baking and she is very good at it. Both Susan and I invested in purchasing raw materials. JoAnna baked all the cookies on her own using Grandma’s recipe. She also enlisted three of her friends to help her to knock on the doors and sell the cookies.

On her first try, she sold $5 worth of cookies. What she didn’t expect was each of her friends took $1 as compensation for their sales and marketing effort.  With only $2 left, JoAnna was discouraged. I gave her some basic business lessons on concepts such as “cost of goods sold,” “break even” and the differences between revenue and profit. Of course, I also offered some advice on negotiation.

Based on my advice, before her second cookie adventure, JoAnna developed a spreadsheet listing the cost of raw materials and her labor. By allocating the cost to each cookie, she drew the conclusion that for $1 worth of cookie sold, 70 cents should go to JoAnna to cover the cost of goods sold, her labor and her profit margin. The remaining 30 cents can be divided among her friends for their sales and marketing effort.

My sister told me the second cookie adventure was a great success. JoAnna made $5. She is already planning for round three and has invested her previous earnings in advertising.

As I observe JoAnna’s little free enterprise through trial and triumph, I am very proud of her. I’m also increasingly worried. What if the local health official knocks on her door one day to declare that her kitchen doesn’t meet their hygiene standard? What if the local official or some parents declare that cookies are not healthy for their kids and demand that JoAnna includes a piece of fruit with each cookie she sells? What if somebody chokes on a piece of cookie or someone is allergic to chocolate chips and decided to sue her?

My worries are not baseless. We live in an increasingly paternalistic society where the government makes a lot of decisions for us in the name of consumer protection. Nowadays, you cannot start any business without acquiring liability insurance first because anyone can sue you for anything.

There are several direct consequences of this government overreaching: one, we price the teenagers out of the labor market and consequently, many of them fail to develop a good work ethic and work habit from their youth.  Second, it is so costly to comply with all these regulations that it is simply too expensive to start a new business.

Only large organizations can afford to employ an army of professionals to sniff through thousands of pages of regulations and can afford either to comply with them or find loopholes. Large corporations will not foot the bills of compliance out the kindness of their hearts; all compliance cost are transferred into the prices of the goods and services that consumers purchase.

In the end, all of us pay the price.