One of my favorite topics is the need for faster economic growth in order to create more jobs and better paying jobs and also to bring in more tax revenue to help shrink our rapidly accumulating national debt.
My last post discusses vivid evidence from the economist John Taylor that slow productivity growth is one of the main culprits holding back our economy. He suggests several ways of speeding up productivity growth, one of which is regulatory reform.
Two previous posts, here and here, show the increasing size of the regulatory burden as well as how it could be eased significantly for main street banks, for example, by simplifying the Dodd-Frank Act.
A recent study from the Mercatus Center at George Mason University gives a good overall summary of the economic costs of excessive regulation. In particular:
Deterring growth. By distorting the investment choices that lead to innovation, regulation has caused a considerable drag on the economy, amounting to an average reduction of 0.8% in the annual growth rate of the US GDP. This has resulted in an economy which is $4 trillion smaller in 2012 than it could have been without such regulatory accumulation.
Increasing prices. Increases in the total volume of regulations are strongly associated with higher prices. This affects lower-income households harder than higher-income households.
Distortion of labor market. Regulation adds to costs, increasing prices for regulated goods and services and therefore reducing the amounts being bought and sold. As production declines, so does the demand for workers engaged in production. In addition, more regulation leads to a shift of workers from production to regulatory compliance, reducing overall economic efficiency.
Decline in competition. Existing firms benefit from regulation because it deters new market entrants, thereby reducing the number of small firms, which are responsible for most new hiring.
Conclusion. Federal regulations have accumulated over many decades, resulting in a system of duplicative, obsolete, conflicting and even contradictory rules. The consequences to the workers, consumers and job creators who drive economic growth and prosperity are considerable.
I have written several posts recently, here and here, about the need for faster economic growth in the U.S. and how to achieve it. Part of the problem is the huge size of the federal bureaucracy and the enormous and rapidly growing number of rules which they issue each year. The magnitude of this problem is clearly shown in the above chart included in the latest annual report of the Competitive Enterprise Institute. According to the CEI:
Federal regulatory cost reached $1.885 trillion in 2015, which averages out to $15,000 per U.S. household for just one year. This exceeds the $1.82 trillion which the IRS is expected to collect in both individual and corporate income taxes in 2015.
In 2015, 114 laws were enacted by Congress while 3,410 rules were issued by agencies, 30 rules for each law enacted.
Some 60 federal departments, agencies and commissions have 3,297 regulations in development at various stages in the pipeline.
The 2015 Federal Register contains 80,260 pages, the third highest page count in history.
The George W. Bush administration averaged 62 major (having an economic impact exceeding $100 million) regulations annually, while the Obama administration has averaged 81 major regulations annually over seven years.
“Whenever one quarter of the Members of the U.S. House of Representatives or the U.S. Senate transmit to the President their written declaration of opposition to a proposed federal regulation, it shall require a majority vote of both the House and Senate to adopt that regulation.”
Another intriguing approach to attacking regulatory overkill is given by Charles Murray in his new book, “By the People, rebuilding liberty without permission.” The point is that there are measures which can be taken to address this particular aspect of our slow growth problem.
One of the biggest problems facing the U.S. today is the slow growth of our economy, averaging just 2.1% per year since the end of the Great Recession seven years ago, well below the 3.5% average from 1950 – 2000. My last post introduced an excellent Wall Street Journal Op Ed by the Hoover Institution economist John Cochrane. He says that “the U.S. economy needs a dramatic legal and regulatory simplification.” In particular:
Tax reform. Instead of arguing over tax rates, what’s really needed is deep tax reform, cleaning out the insane complexity and cronyism.
Social programs. Rather than arguing over whether to increase or cut spending, what’s needed is a thorough overhaul of the programs’ pernicious incentives. For example, Social Security disability (almost 9 million beneficiaries in March 2016) needs to remove its disincentives to work, move or change careers.
Education spending. Rather than arguing about the level of public spending, America needs the better schools that come from increased choice and competition.
Over-regulation. Most of all the country needs a dramatic legal and regulatory simplification. Middle-aged America is living in a hoarder’s house of a legal system, including state and local impediments such as excessive occupational licensing.
Growth-oriented policies will be resisted. Growth comes from productivity which comes from new technology and new companies. These displace the profits of old companies, and the hefty pay and settled lives of their managers and workers.
The presidential frontrunners are not championing economic growth. But the House of Representatives, under Speaker Paul Ryan, is doing exactly this. Perhaps economic policy leadership can be transferred from the Presidency to Congress.
After two disappointing presidencies our economy is lagging far behind where it could and should be. This is the reason for the rise of Bernie Sanders and Donald Trump. Regardless of the outcome of the 2016 presidential election, there is hope for better days ahead!
The Republican presidential candidates have been releasing tax plans and they have been analyzed by the nonpartisan Tax Foundation. It turns out that most of these plans lose revenue over a ten-year period even on a so-called dynamic scoring basis where the stimulatory effects of the plan are taken into effect. Such callous disregard for the huge annual deficits we are now running, and our huge accumulated national debt, is totally unacceptable especially from the political party which bills itself as being fiscally responsible. The left-leaning New York Times points this out yesterday in its lead editorial, “Why the Republican Tax Plans Won’t Work.” According to the NYT:
Tax Revenues will need to increase by 40% over the next 10 years just to keep federal spending even with inflation and population growth.
Further additional revenues will be needed to pay for health care for the elderly, transportation systems, climate change and likely increased interest payments on the national debt.
Thus taxes will have to go up and can only be imposed realistically on the wealthy who have had the biggest income gains in recent years.
Democratic presidential candidates do propose tax cuts but only for low- and middle-income Americans.
Democrats are calling for new taxes on financial transactions.
Democrats also propose to raise wages, support higher minimum wages, support unions and expand profit-sharing and employee ownership.
This is the program the Democrats will be pushing if they win the presidency next year. It has some attractive features but the likely overall outcome will be increased deficit spending, a rapidly increasing debt and a continued stagnant economy.
Meaningful tax and regulatory reform will both be needed to get the economy growing faster than the 2% average of the past six years. Any credible tax reform program simply must be at least revenue neutral so that, combined with spending restraint, it will put our national debt on a downward path.
The Federal Reserve Bank plays an important role in our economy by trying to keep inflation low and stable but also by trying to make recessions less severe by increasing the money supply when the unemployment rate is high. My last post, “What the Federal Reserve Can and Can’t Do” emphasizes that, as Ben Bernanke says, “the Fed has little or no control over long term fundamentals,” such as economic growth which depends on increases in productivity which, in turn, are heavily influenced by fiscal and regulatory policy. The American Enterprise Institute’s Peter Wallison explains very clearly in “The slow economic recovery explained,” why, for example, the Dodd-Frank Act of 2010 is having a harmful effect on economic growth:
Regulatory burdens imposed by Dodd-Frank have been particularly harsh for community banks, with $10 billion or less in assets; 98.5 % of U.S. banks fall into this category. Since Dodd-Frank was enacted in 2010, community banks’ share of banking assets has shrunk by 12%.
According to the Small Business Administration, there were approximately 23 million small businesses (with fewer than 500 employees) in 2012, compared to 18,500 firms with more than 500 employees. Large businesses have access to capital markets whereas small businesses rely on local banks for their credit needs.
Regulatory costs affect small banks more than large banks because the costs are fixed, independent of size of the institution. When the Consumer Financial Protection Bureau sends out voluminous regulations on mortgage lending, for example, then extensive legal fees, compliance officers and technology retooling must be paid for up front.
A recent report from Goldman Sachs, “The Two-Speed Economy,” shows that large firms have grown faster than usual after 2010 while small firms have grown much slower than usual (see chart above).
Conclusion. Monetary policy alone, as conducted by the Federal Reserve, cannot return our economy to good health. This can only be accomplished by increasing productivity which is aided by smart fiscal and regulatory policy. Dodd-Frank is an example of regulatory policy which is hurting economic growth by having a harmful effect on main street banks.
I have just been reading a fascinating new book by Charles Murray, “By the People: rebuilding liberty without permission,” describing how the U.S. regulatory agencies were created and the many abuses they impose upon us. As Mr. Murray explains, a Regulatory Agency first promulgates substantive rules of conduct. A complaint that an Agency rule has been violated is then prosecuted by the Agency and adjudicated by the Agency. If the Agency ultimately finds a violation, then and only then, the affected private party can appeal to an independent judicial court. But an Agency decision, even before the court, possesses a very strong presumption of correctness on matters both of fact and law.
“If the enabling legislation is silent or ambiguous, Congress has in effect left a gap in the statute for the Agency to fill. If the Agency in filling that gap has interpreted the statute in a ‘reasonable’ manner, the court will give effect to that judgment, deferring to the Agency.”
Mr. Murray proposes a new standard that “All regulations that are arbitrary, capricious or an abuse of discretion are automatically eligible for civil disobedience.” To this end a private legal-aid foundation should be set up to provide legal assistance to ordinary Americans who are being victimized by the regulatory state. It would be funded by what Mr. Murray refers to as the Madison Fund. A $100 million endowment from a wealthy individual would be sufficient to get it started.
Its purpose would be:
To defend people who are innocent of the regulatory charges against them.
To defend people who are technically guilty of violating regulations that should not exist, by drawing out the litigation as long as possible, making enforcement of the regulations more expensive to the regulatory agency than they’re worth and reimbursing fines that are levied.
To generate as much publicity as possible, both to raise public awareness of the government’s harassment of ordinary people and to bring the pressure of public opinion to bear on the problem.
The goal is to achieve a “No Harm, No Foul” regulatory regime. A good analogy is to force regulators to use the same strategy as used by state troopers on interstate highways. A majority of drivers are engaged in civil disobedience just about all the time. But normal practice is to stop only those people who are driving significantly faster than the flow of traffic or are driving erratically.
As Mr. Murray concludes, “We’re all biased, but only people within government have the power to impose their biases on their fellow citizens with the force of law.”