Small Steps Toward Deregulation

President Barack Obama speaks to a joint sessi...

Because of disappointment over the ’s rate of recovery which appeared to be confirmed by the March jobs numbers coming in at half the rate expected, the House is making efforts to roll back regulations that are said to be inhibiting the recovery.

The Journal explained that, although the jobless rate edged down in March from 8.3 percent to 8.2 percent, “that decline was due less to new hiring than people abandoning their job searches.” Indeed, according to the St. Louis Federal Reserve a record 88 million people are “not in the labor force,” up from 60 million in the early 1980s.

Regulations emanating from regulatory agencies have turned into a veritable waterfall under the administration, forcing the White House last summer to promise to “review hundreds of regulations that could get streamlined or scrapped in response to criticism from the GOP and business that burdensome rules are holding back the economy.”

Writing at , William Hoar noted that, even if such a review actually took place and then resulted in any kind of rollback of regulations, it would amount to no more than “a speed bump for the diktaks racing out of Washington.” In fact, the White House is a significant part of the problem. Congressman Tom Graves (R-GA) noted that since Obamacare became law it has grown from a 2000-page bill to more than 6,000 pages of regulations in the Federal Register.

Rep. Don Young (R-AK) got so exasperated with the regulations threatening to asphyxiate the economy that he announced plans to introduce legislation to abolish every federal regulation dating back to 1991. He said, “My bill is very simple. I [would] just [declare] null and void any regulations passed in the last 20 years. I picked 20 years because it crossed party lines and also we were prosperous at the time.”

More seriously, the REINS (Regulations from the Executive in Need of Scrutiny) Act passed the House, 241 to 184, in December, even though there was zero likelihood the would even consider it. If by some miracle the act would be signed into law, it would require all major regulations (having an economic impact of $100 million or more) to be passed by a majority in both the House and the before it became operative.

Another bill passed the House in December as well, the Regulatory Accountability Act (RAA), 253 to 167, which is likely to meet a similar fate in the Senate. RAA would require agencies attempting to enact another rule to follow certain explicit steps, overseen by the courts, before such a rule would take effect. House Judiciary Committee Chairman Lamar Smith (R-TX) wrote in the Daily Caller:

Federal regulations cost our economy $1.75 trillion each year. And the administration seeks to add billions more. By its own admission, the Obama administrations agenda includes over 200 “major rules”…

Uncertainty about the cost of these upcoming regulations discourages employers from hiring new employees and expanding their businesses…

 

Regulations vs. Small Businesses and Jobs

According to a recent Gallup poll, nearly one in four small business owners say that complying with government regulations “is the most important problem facing them today.” John Mackey, a co-founder of Whole Foods Market, wrote in the Wall Street Journal,

Many government regulations in education, health care and energy prevent entrepreneurship and from revolutionizing and re-energizing these very important parts of our economy…Currently thousands of new regulations are added each year and virtually none ever disappear[s].

Underlying each of these efforts to roll back leviathan is the assumption that more regulations mean fewer jobs. That is the basic assumption of the (CEI) in its annual publication “Ten Thousand Commandments.”

In its summary to its latest study, CEI decries the on-budget deficits of $1.5 trillion but notes that that is only part of the cost of government borne by the taxpayer: “The government’s reach extends well beyond the taxes that Washington collects, and economic regulations cost hundreds of billions—perhaps trillions—of dollars every year over and above the…official federal outlays…” When added together, direct and indirect costs to the economy and the taxpayer amount to over $5 trillion every year, or more than 35 percent of the entire economy.

But what impact do such gigantic numbers have on the average small business owner, long accepted as the prime driver of employment? In September, 2010, a husband-and-wife team of economics professors, Nicole and Mark Crain, at Lafayette College in Easton, Pennsylvania, answered that question:

Small businesses, defined as firms employing fewer than 20 employees, bear the largest burden of federal regulations. As of 2008, small businesses face an annual regulatory cost of $10,585 per employee (emphasis added), which is 36 percent higher than [costs] facing large firms.

According to the Crains, 89 percent of all firms in the country employ fewer than 20 employees while large firms (over 500 employees) represent only 0.3 percent. Because a heavy disproportionate share of those regulations fall on the small business owner, it “causes inefficiencies…and adversely affects [their] competitiveness…These effects, of course, have negative consequences for the U.S. labor market…”

Their study shows that the impact of “environmental” regulations is four times higher on small businesses than on large firms, while tax compliance costs are three times higher on small businesses.

The inevitable impact of such onerous regulations is strangling the small business owner. Accounting and consulting giant Grant Thornton published its “Wake-Up Call for America” in November, 2009, noting the “precipitous decline in the number of publicly listed companies” on the country’s stock exchanges. Companies are failing and are being de-listed but they are not being replaced by new ones:

Since 1991, the number of U.S. exchange-listed-companies is down by…a startling 53%…

360 new listings per year—a number we’ve not approached since 2000—are required merely to maintain a steady number of listed companies in the U.S. In fact, we have averaged fewer than 166 IPOs (Initial Public Offerings) per year since 2001, with only 54 in 2008…

520 new listings per year are required to grow the U.S. listed markets at 3% per annum—roughly in line with GDP growth.

 

A Crisis of Capital

Stacks of money

In simple terms, regulations are strangling the US economy—putting the heavy boot of government on the oxygen hose of small business. Because of those regulations, owners are unwilling or unable to “go to market” for the capital needed to expand their businesses. Capital is the oxygen of the competitive capitalist system and government regulations are starving it.

As Grant Thornton’s study noted,

Today, capital formation in the U.S. is on life support. Small IPOs from all sources—venture capital, private equity and private enterprise—are all nearly extinct and have been for a decade…

The lack of new listings is not a problem that is narrowly confined. Rather, it is a severe dysfunction that affects the macro economy of the U.S.—with grave consequences for current and future generations.

If someone intended to destroy the capitalist system deliberately, he wouldn’t have to do much better than to starve small businesses by denying them capital. Grant Thornton put it succinctly: “We believe that this decline has cost the U.S. economy many millions of jobs…”

That’s why the other bill that passed the House and the Senate and reluctantly signed into law by President Obama in early April, the JOBS (Jumpstart Our Business Start-up) Act, was so important and yet missed by so many people. As previously noted by Light from the Right,

Simply put, the JOBS Act will make it slightly less difficult for small successful private companies to “go public” and raise capital through a public offering of their stock. It expands slightly the number of companies who otherwise would decide that the costs of complying with the regulations under Sarbanes-Oxley and other laws passed after the Enron implosion were simply too great. It provides an “on-ramp” to these companies so that the full impact of those regulations isn’t felt until they reach a certain threshold of financial success, or five years, whichever occurs first.

The JOBS Act resulted from efforts by the IPO Task Force formed in March, 2011, following an Access to Capital Conference by the U.S. Treasury Department to “gather insights from capital markets participants and solicit recommendations for how to restore access to capital for small companies…through the IPO market.” The Task Force consisted solely of professionals working in the IPO market—no government regulators—including venture capitalists, experienced CEO’s of successful small companies that had been able to raise capital through an IPO despite the obstacles, public investors, securities lawyers and investment bankers. Based largely upon input from the Grant Thornton study, the task force successfully pushed through the JOBS bill. From that report, the task force’s arguments were persuasive:

During the last 15 years, the number of emerging, high-growth companies entering the capital markets through IPOs has plummeted…transcending economic cycles and hobbling U.S. job creation…

A sequence of regulatory actions…has driven up the costs for emerging growth companies looking to go public [in order to raise capital].

The effect of the JOBS Act is likely to be muted but at least it’s a step in the right direction. Given a little oxygen the economy will start to recover just like it did following the Second World .

 

Misunderstanding the Marshall Plan

Map of Cold-War era Europe showing countries t...

Prospects for the economy following VE Day and VJ Day in the summer of 1945 were dim. Most economists were predicting a massive depression as millions of servicemen and women would be returning to essentially a war-time economy with few prospects for jobs in what was left of the private sector. Prospects for Europe and Japan were even more dismal. Economies there had been devastated by the war with millions dead or missing, and those surviving having little capital to restart the economy.

Mainline historians still celebrate the Marshall Plan as the key driver for Europe’s remarkable resurgence. Named for Secretary of State George C. Marshall, the plan funneled a total of $25 billion (about 10 percent of the United States gross domestic product at the time) into rebuilding efforts. By the time the Marshall Plan ended economic recovery was so strong that output exceeded pre-war levels in every one of the original twenty OEEC (Organization for European Economic Cooperation) countries which included Germany, France, Belgium, and the Netherlands. On the surface it appeared that this insertion of capital into the devastated economies was just what was needed. Belgian economic historian Herman Van der Wee called the Marshall Plan “a great success”:

It gave a new impetus to reconstruction in Western Europe and made a decisive contribution to the renewal of the transport system, the modernization of industrial and agricultural equipment, the resumption of normal production, the raising of productivity, and the facilitating of intra-European trade.

Two economists with the National Bureau of Economic Research (NBER), Bradford De Long and Barry Eichengreen prepared an analysis of the impact the Marshall Plan had on Europe’s recovery in October, 1991 and concluded that

The post-World War II reconstruction of the economies and politics of Western Europe was an extraordinary success. Growth was fast…conflicts [resolved]…world trade [was] booming.

What wasn’t so clear, however, was exactly how much impact this package of foreign aid had on Europe’s recovery. They examined the assumption that the Marshall Plan played a “key role” in the recovery and found that its role was, in fact, rather minor:

Our central conclusion is that the Marshall Plan did matter. But it did not matter in the way that the “folk wisdom” of international relations assumes…Marshall Plan aid was simply not large enough to significantly stimulate Western European growth by accelerating the replacement and expansion of its capital stock. Nor did the Marshall Plan matter by financing the reconstruction of devastated infrastructure [because] reconstruction was largely complete before the program came on stream.

The Marshall Plan did play a role in alleviating resource shortages. But this channel was not strong enough to justify the regard in which the program is held. By 1948 and the beginning of Marshall Plan aid bottlenecks were scarce, and markets were good at alleviating their impact. (emphasis added)

Professor Thomas Woods, author of “The Politically Incorrect Guide to American History,” claimed that the Marshall Plan in fact “worked no better than any other government giveaway program” adding that

France, Germany and Italy began their economic recoveries before any Marshall Plan aid was distributed. Austria and Greece…began to recover only as [Marshall Plan aid] was being phased out…

West Germany’s postwar economic recovery was so explosive, in fact, that the Germans actually coined a word—Wirtschaftwunder—to describe it. Marshall Plan propagandists have attempted to take credit for the West German economic miracle. But the Wirtschaftwunder was the result not of Marshall Plan giveaways but of the market reforms that the Germans introduced. (emphasis added)

Economist Tyler Cowen confirmed Woods’ conclusion: “In nearly every country occupied by Germany during the war…rapid economic growth occurred only after…controls were lifted and sound economic policy established.” Woods added that “prosperity follows from the rule of law, respect for private property and the other institutional mechanisms on which the market order rests.”

 

Recovery at Home

And it was that “respect for private property and other mechanisms” that allowed the American economy to explode as well following the end of hostilities. Two major pieces of legislation passed during the 80th Congress in 1946. That election represented a massive redirection towards a market economy with Republicans handing Roosevelt Democrats a crushing defeat, taking back 55 seats from the previous House of Representatives.

The first important piece of legislation ended the Office of Price Administration (OPA) which had been established by Executive Order (EO) in 1941. By that EO the OPA was given the power to freeze prices on all goods (except agricultural commodities), and ration supplies of tires, automobiles, shoes, nylon, sugar, gasoline, fuel oil, coffee, meats and processed goods. Almost 90 percent of the prices of retail good products were fixed by government mandate.

Price fixing always results in shortages as such intervention in the market distorts supply and demand, causing producers to limit production of items that no longer are profitable to produce. When the OPA was abolished, the market was allowed to “breathe” once again, and producers began providing items demanded by the people.

The second piece of legislation instrumental in helping the markets recover was passage of the Taft-Hartley Act. The Act was passed in the summer of 1947 following numerous labor strikes called by unions in 1946 which involved more than five million union workers. The Act

prohibited jurisdictional strikes, wildcat strikes, solidarity or political strikes, secondary boycotts, secondary and mass picketing, closed shops, and monetary donations by unions to federal political campaigns. It also required union officers to sign non-communist affidavits with the government.

Union shops were heavily restricted, and states were allowed to pass right-to-work laws that outlawed closed union shops. Furthermore, the executive branch of the Federal government could obtain legal strikebreaking injunctions if an impending or current strike imperiled the national health or safety, a test that has been interpreted broadly by the courts.

This was another breath of fresh air for the economy. Now workers could be hired at wages reflective of demand in the marketplace and not by arbitrary union rules and wage-fixing.

And the capital that had been stored up during the war years, primarily because goods demanded weren’t available for sale due to OPA intervention, was now unleashed into the market. Soldiers had sent their checks back home to their wives, many of whom also worked in the war effort. The wages were saved until the end of the war.

Housing boomed. New suburban communities like Levittown, Long Island, flourished. They consisted of row after row of prefabricated houses constructed from one set of plans. Automakers who had diverted their facilities to the war effort responded to the demand for new vehicles. Gasoline was cheap which led to the development of drive-in restaurants with curb-side service, drive-in movie theaters, and the motel. And the Baby Boom began. The birth rate in 1946 was 20 percent higher than in 1940

The government itself shrank by cancelling war contracts, and its spending dropped from $84 billion in 1945 to under $30 billion in 1946. It began running surpluses which were used to retire wartime debts. 10 million Americans poured back into the civilian economy, demanding satisfaction for items long restricted or unavailable altogether: The Singer Company went back to making sewing machines instead of machine guns, silk was being used for stockings instead of parachutes.

Predictions of economic depression and catastrophe were proved wrong. In August 1945 the Office of War Mobilization and Reconversion forecast that 8 million would be unemployed after the war. Business Week magazine predicted that unemployment would reach 9 million. Other estimates were even higher. Unemployment never came close to those levels, staying at about 4 percent in the three years following the end of the war. Net civilian employment grew by 4 million between 1945 and 1947 as household spending, business investment and exports all expanded.

 

Unleashing the Airlines

If further proof that regulations stifle the economy which limits job growth and that deregulation allows it to breathe is required, one need only look at the airline industry in the mid ‘80s. Prior to that time the Civil Aeronautics Board (CAB) controlled virtually every aspect of air travel: entry of new competition, pricing of tickets, determination of routes, even down to the size of sandwiches served on board.

Because of these restrictions and limitations prices were high and traffic was low. In the early 1970s “load factors” averaged 50 percent, which meant that on average planes flew half empty. With the determined efforts of a college professor, Alfred Kahn, chairman of the CAB, he put himself out of business by abolishing the agency on December 31st, 1984. As previously noted by Light from the Right,

So effective was the CAB in protecting the interests of existing airlines from new competitors that not a single startup airline had entered the field in decades. Prior to Kahn, the CAB so tightly regulated the airlines that they had to get permission to change airfares or expand or modify their flight schedules and destinations…

In other words the CAB successfully prevented the free market from providing the services that customers wanted and were willing to pay for.

When Kahn retired himself from the CAB he wrote: “The verdict of the great majority of economists would, I believe, be that deregulation has been a success…”

Today the airline industry flies three times as many passengers as it did under the CAB, while employing twice as many people as it did before. Pricing in some cases is 20 percent of usual fares in the ‘80s, with more routes to more places than ever before. Grant the point that many airlines are still struggling to make a profit and many regulations, particularly concerning ground terminals, infrastructure improvement and air traffic control, remain in place. And the TSA hasn’t made life easier. On balance, however, airline travel is more affordable to more people than ever before, thanks to getting the CAB out of the way.

Any movement away from the regulatory state that allows the free market to operate will have positive effects, from creating new businesses and allowing successful ones to expand with new infusions of capital, to creating new employment opportunities for some of those 88 million currently “not in the labor force.” Given a chance, everyone who wants to work will find work to do, provided government gets out of the way, removes its boot from the economy’s oxygen hose, and returns to its proper role under the Constitution.

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