Out of Control Federal Regulations Stifle Economy by Gary D. Halbert

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
September 16, 2014

IN THIS ISSUE:

1.  Soaring Regulations Are Holding Back the Economy

2.  Regulatory Burden Hurts as Much as Higher Taxes

3.  What Happened to “Cost-Benefit” Analysis of Regulations?

4.  High & Rapidly Rising Cost of Federal Regulations

5.  Fed Meeting Today/Tomorrow – When to Raise Rates?

6.  Potomac Fund Management WEBINAR on Thursday

Overview

Today we focus on the costs to consumers of out-of-control federal regulations. While government regulations have increased for decades, the issuance of such new laws has exploded in recent years under the Obama administration. This regulatory maze is taking a serious toll on the economy, as I will discuss below.

Most Americans are unaware that the government issued over 3,600 new regulations in fiscal year 2013 alone! Likewise, most of us have no idea that this rising regulatory burden costs the economy up to $2 trillion each year. This is regulatory overkill, and it’s no wonder then that this economic recovery is so weak. That’s our main topic today.

The Fed Open Market Committee is meeting today and tomorrow, and the focus is on whether the Fed will hint at when it might implement the first interest rate hike in almost eight years. The latest FOMC policy statement will be released tomorrow afternoon, and I will report on it in my blog on Thursday. If you have not subscribed to my free weekly blog, click here.

Soaring Regulations Are Holding Back the Economy

There’s a widely-held belief in Washington that as the population grows, so should the size of government. Politicians on both sides of the aisle seem to agree, even if many refuse to admit it. There is another theory in Washington which holds that government regulations should also increase as the population increases. I would argue that both of these assumptions are wrong.

As the size and scope of government have expanded, regulators have come to play a much larger role in our day-to-day lives. The advent of the “administrative state” has created a web of regulations covering everything from design standards for the products we use to new rules that require hotels and restaurants to accommodate miniature horses as service animals. All too often, common sense is replaced with exacting statutes and regulations that dictate very specific forms of compliance.

Federal agencies continue to churn out regulations of all kinds at a breathtaking pace. Did you know that during the 2013 fiscal year alone, Washington issued more than 3,600 new regulations? It’s true. Vital sectors of the economy remain mired in endless paperwork and increasing regulations, all of which is very costly as we will learn below.

Regulatory Burden Hurts as Much as Higher Taxes

While not widely reported, increasing regulations can be just as damaging to the economy as raising taxes. Eliminating excessive regulations and unnecessary compliance costs cannot be overlooked when addressing the issue of stimulating economic growth. While some amount of government regulation is required to insure safety, excessive regulation can stunt economic growth.

Tax reform that offers better incentives for economic growth will yield little if businesses are strangled by red tape and regulation. In this sense, regulatory reform serves to amplify tax reform by creating a marketplace more conducive to economic growth.

Unfortunately, the increasing regulatory burden has yet to be addressed in Washington, and most believe that it won’t be reformed as long as President Obama is in office. The president’s signature accomplishment, Obamacare, alone continues to expand a huge new regulatory maze that will only increase over the next several years or longer.

Elsewhere, technologies that promise significant benefits to consumers and the economy in general have yet to be deployed due to regulatory barriers and uncertainties. And the administration and the EPA are moving forward with tough new restrictions on carbon emissions that could cost consumers billions of dollars with little to show in terms of benefits.

Perhaps the most staggering statistic lies in the chart below which shows that since 2008, more small businesses are shutting down than are starting up. The American economy is less entrepreneurial now than at any point in the last three decades. That’s the conclusion of a new study out from the Brookings Institution, which looks at the rates of new business creation and destruction since 1978.

 Federal Regulations

According to the Census Bureau, more than 170,000 small businesses in the US were closed between 2008 and 2010 during the Great Recession alone. This trend has continued since 2011.

What Happened to “Cost-Benefit” Analysis of Regulations?

If the fundamental role of regulations is to improve the safety and well-being of society, then regulatory policy must be guided by practices that ensure the benefits of regulation are greater than the costs they impose. Economists rely on cost-benefit analysis for such comparisons, and federal agencies are supposed to incorporate this same analysis into the regulatory process. However, with poor data and variables that may be difficult to quantify, regulatory analysis is often left wanting.

Despite the current regulatory burden and its potential to hamper economic activity, little headway has been made to streamline the regulatory process. The slightest hint of regulatory reform is equated to a “regulatory rollback,” and any reform is viewed by the media as a threat to health or safety and thus is often abandoned.

However, such claims begin with the assumption that the existing regulatory regime is efficient and cannot be improved – a position that is difficult to justify. Many of the most onerous regulations still on the books were developed under the old “command and control” view of regulation. Federal agencies developed detailed regulations that have since proven to be costly and not necessarily the most efficient way to meet regulatory objectives.

And it is not just federal regulation. American consumers and businesses face just as many challenges from state and local regulations, with oftentimes inexplicable results. For example, in recent years, we have seen a rash of shutdowns of lemonade and cupcake stands run by children. In fact, the Illinois General Assembly has passed legislation to address concerns about “home kitchen operations,” with the following requirements:

1. Monthly gross sales cannot exceed $1,000 (how to enforce this is unknown).

2. The food is not potentially hazardous baked food as defined in Section 4 of this Act.

3. A notice must be provided to the purchaser that the product was produced in a home kitchen.

While many Americans just accept the growing regulatory maze, there are real economic costs to this zeal for regulation. Regulators thwart innovation and competition in the marketplace. Breakthrough technologies face an uphill battle because their products do not fit squarely into existing regulatory regimes. For example, Uber’s challenge to local taxi cab monopolies and Airbnb’s threat to traditional lodging bookings have sparked huge regulatory battles across the country.

While innovative products and services such as these and others clearly provide consumer benefits, the regulatory minefield they face is daunting. Regulators are trying to force them to comply with outdated modes of regulation, while their regulated competitors are trying to use the regulatory system against them.

The administrative state and its onerous regulations have transformed markets and economic activity in America. Regulators have become a virtual silent partner to businesses seeking to comply with a wide array of regulations covering virtually every aspect of commerce. If policymakers are truly concerned about the stagnant economy, then it’s time to seriously address the growing regulatory burden.

High & Rapidly Rising Cost of Federal Regulations

Each year, there are various estimates on the cost to consumers of federal regulations by private sources. One widely-followed source is the National Association of Manufacturers (NAM) which issues such an estimate annually. Even the government’s own Small Business Administration issues such a report annually.

Yet before NAM even had a chance to release its latest important report, left-wing groups decided to attack the report’s numbers. These liberal groups disliked an earlier report from the US Small Business Administration that found regulatory costs to be $1.75 trillion annually, and they decided to strike pre-emptively against NAM’s latest report.

We don’t need politically-motivated attacks like this anymore. For over a decade, the Office of Management and Budget (OMB) has given Congress “cost/benefit” reports on all pertinent regulatory legislation it considers, but often to no avail. Congress frequently passes laws that the OMB and independent groups consider unfavorable.

The fact is that the largest government on earth has no internal control when it comes to issuing new regulations. The latest estimate of the annual regulatory costs to consumers from the National Association of Manufacturers turns out to be $2.03 trillion annually. They break costs up into four main categories (in billions of dollars):

  • Economic: $1,448 ($1.448 trillion)
  • Environmental: $330
  • Occupational Safety/Heath & Homeland Security: $92
  • Tax Compliance: $159

So whether you believe the NAM’s latest estimate of $2.03 trillion annually or the estimate published by the Small Business Administration of $1.75 trillion, we’re talking about a huge sum of money in the form of extra cost to consumers and the economy each and every year!

 Federal Regulations

Looked at another way, the federal budget is approaching $4 trillion. So we’re talking about annual regulatory costs that equal almost HALF of the federal budget! While the regulatory burden has grown for decades, it may now have reached the point where it assures that we have a stagnant economy.

Unfortunately, this burden rarely makes the news, so it is likely to continue to grow.

Fed Meeting Today/Tomorrow – When to Raise Rates?

The Fed Open Market Committee (FOMC) is meeting today and tomorrow. It is widely expected that the Committee will vote tomorrow to wind-down its monthly QE bond buying program by the end of October. Since last December when the Fed was buying $85 billion a month in Treasuries and mortgage securities, it has “tapered” monthly purchases to $25 billion as of July.

Of course, it is possible that the FOMC could vote tomorrow to reduce its QE purchases by another $10 billion a month to $15 billion until its next meeting on October 28-29, and then end the program altogether by the end of the year. So it will be interesting to see what they decide to do when the policy statement is released tomorrow.

Why the Fed’s decision on when to end QE is interesting is because the markets are now much more focused on when the Fed will raise interest rates for the first time than on the exact month the QE bond purchases will end. As I have written often in recent months, the Fed’s official policy statements following FOMC meetings this year have included a consistent message: that the first interest rate rise would not occur until a “considerable time” after QE bond purchases come to a halt. Specifically, the language has said:

The Committee continues to anticipate, based on its assessment of these factors,
that it likely will be appropriate to maintain the current target range for the
federal funds rate for a considerable time after the asset purchase program ends.

[Emphasis added mine.]

The speculation going into this week’s policy meeting is whether the FOMC decides to drop the two words: considerable time from the policy statement. A growing number of Fed watchers seem to feel that Chair Janet Yellen is anxious to get the first interest rate rise in almost eight years out of the way sooner rather than later.

As I have opined in recent weeks, I see no evidence that Ms. Yellen is any big rush to raise interest rates. In March of this year, she volunteered that she would not expect the first interest rate increase until around six months after QE purchases end – which wouldn’t be until around the middle of next year. But a chorus of financial writers seems to be convinced that she wants to raise rates sooner. While no one can be sure, there is nothing to suggest she is in a hurry.

So, it will be interesting to see what the FOMC policy statement says tomorrow. I’ll keep you posted in my blog on Thursday. If you haven’t subscribed to my blog, it’s free and you can sign up by clicking here.

Potomac Fund Management

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