WASHINGTON, DC - SEPTEMBER 08: Members of the House Financial Services Committee hold a news... [+]
By Ed Pozzuoli
With rates of U.S. unemployment still stuck in the nosebleed range of 8%+, and economic growth limp, copious amounts of ink are being spilled by politicians and academics offering ways out of our economic slump. Not surprisingly, most of the solutions involve tax and entitlement reform.
About both, it should be stressed that reform is very necessary. Entitlements are a growing cost born by the economically productive, and every dollar collected and spent by the federal government paying for the past promises of politicians is a dollar that can’t be used to hire new employees or grow a small business into tomorrow’s Microsoft or Intel.
As for taxes, it can’t be stressed enough that they’re a price. When you raise the price of work you get less of it, and as production declines so do the number of jobs. Sooner rather than later we must reduce the federal spending burden and simplify the tax code. The costs of covering our debt with an antiquated and complex tax code are staggering.
Still, all this admittedly necessary commentary ignores what is arguably a greater weight on job creation at the moment: our growing regulatory state. The numbers here are frightening.
According to the Competitive Enterprise Institute’s Wayne Crews, regulation’s “hidden cost” has ballooned to $1.8 trillion on an annual basis. Think about that for a moment: the price of various rules and barriers to production foisted on job-creating businesses is over half as much as our extraordinarily bloated federal government each year. This is both incredibly wasteful and economically ruinous.
In 2011 alone, regulators largely operating free of Congressional oversight issued 3,807 new rules. With the economy still struggling to re-enter the fast lane one might assume that the regulatory burden would have been lightened in 2012. You would assume incorrectly. So far, 2,298 new rules have been added, and Crews notes that we’re “on a trajectory to beat 2011 rather handily.”
If so, it would be naïve for anyone to assume that our jobless rate is set to decline anytime soon. Quite the opposite would be the more realistic assumption, and for obvious reasons.
To put it very plainly, regulations inhibit. As opposed to fostering profit motivated production that attracts new investment that funds job-creating expansion, regulations distract businesses of all sizes from their core mission.
Thinking about it broadly, in the United States there are locales known for finance (New York), energy production (Houston), and technology (Silicon Valley), but none are known for their regulatory prowess! Regulating prowess is axiomatic, as regulations can only subtract from economic growth. With regulations, limited human and financial capital are being wasted on achieving compliance with profit-sapping rules, as opposed to all forms of capital being directed to their highest, most productive, and profitable use.
Even worse, regulations quite simply don’t work. If this is doubted, consider the banking sector. Though regulators from the Federal Reserve, Comptroller of the Currency, the SEC and myriad state and city agencies are all charged with overseeing banks, all were caught completely flat-footed by the troubles that hit the finance industry like a sledgehammer in 2008.
Better yet, it was investors as “market sleuths” the likes of John Paulson, Michael Burry, and Meredith Whitney who ultimately discovered that banks were in serious trouble. The profit motive always brings out the best in us.
As for the disaster that was Bernie Madoff, the now imprisoned financier tricked regulators for years while operating a Ponzi scheme right under their noses. Ultimately, market forces required Madoff to turn himself in, but not until then, and not before the assumption that regulators were actually doing their jobs cost investors billions. Indeed, the presence of immense regulations only served to provide investors with a false sense of security.
The screaming irony here is that despite the utter failure of existing regulations, the federal government, rather than acknowledging that regulators lack the ability to see into the future, continues to write more rules meant to empower the very bureaucrats who are always the last to reach every crime scene. Even worse, the new rules in the form of Dodd-Frank, though they’ll surely weigh on profits as even more precious talent and resources are devoted to compliance, will ultimately prove a capital repellent that restrains job growth.
At some point we must stand athwart the growing regulatory blob and yell stop! Simply put, the regulations aren’t working, yet they’re a huge cost burden that shrinks the very profits that attract job-creating investment.
After that, we must reacquaint ourselves with the wisdom of the grand old thinkers of centuries’ past. As political economist John Stuart Mill once wrote, “The only insecurity which is altogether paralyzing to the active energies of producers, is that arising from the government, or from persons invested with its authority.”
Thinking about Mill’s logic and how it applies to our economy today, it’s apparent that we’ve accepted suffocating government regulation under the naïve belief that more rules are the path to economic security. In truth, with regulations we get neither security nor growth, and with unemployment still way too high, the current regulatory state of affairs is unacceptable.
