The Economist: Over-Regulated America

February 21, 2012

By Michael Hendrix, Research Manager

According to The Economist, “The home of laissez-faire is being suffocated by excessive and badly written regulation.”  The point is not that America has an overwhelming amount of bad regulation, though the examples of such ill-guided red tape are numerous.  Rather, it is the cumulative effect of regulation that is chocking American free enterprise.

Dodd-Frank is a prime example.  It’s a complex bill layered on top of an already complicated industry.  ”At 848 pages, it is 23 times longer than Glass-Steagall, the reform that followed the Wall Street crash of 1929.  Worse, every other page demands that regulators fill in further detail.  Some of these clarifications are hundreds of pages long.”

Downloading the text of the Dodd-Frank bill yields a PDF file some 2,319 pages in length.  By way of comparison, our NCF Fellow Mark Perry produced a handy list of the top financial reform bills and their length:

  1. Federal Reserve Act (1913) – 31 pages.
  2. Glass-Steagall Act (1933) – 37 pages.
  3. Interstate Banking Efficiency Act (1994) – 61 pages.
  4. Gramm-Leach-Bliley Act (1999) – 145 pages.
  5. Sarbanes-Oxley Act (2002) – 66 pages.

The quantity and complexity of America’s regulatory regime not only adds a burden of cost onto the private sector but a broader sense of uncertainty (which itself is costly).  Back to the Dodd-Frank example, The Economist notes how only 93 of the 400 mandated rules have actually been issued, leaving the financial sector to comply with a law that will remain partially unknown for an equally unclear amount of time.

Dislodging America from its thicket of regulation is first a matter of reducing the number of rules.  Arcane procedures and entrenched interests means that this process won’t be easy, as The Economist shows in a follow-on article.  There’s also the danger that cuts will be imprecise and uninformed, like calling for field surgery with a machete.  This is why transparency will be vital.  Cutting regulation needn’t be as opaque as the process that made them.

Reducing red tape is a good first step.  But we must also take another look at the mindset behind the regulatory process.  Recent studies argue against the increasing specificity of rule-making in America.  Instead, if an area due for regulation is highly complex, the matching regulation ought to be decisively simple.  Dynamic, wealthy economies are necessarily complex — so the overall regulatory regime in such countries should be straightforward and highly adaptive to changing circumstances.

Put another way, a lean and simple regulatory regime is the perfect complement to a healthy economy.

Construction of First New Nuclear Reactor in More Than 30 Years Approved

February 9, 2012

By Greg Galdabini. This post was originally featured on the U.S. Chamber’s site.

For those of a certain age, the early 1980s trigger flashbacks to Reaganomics, The Preppy Handbook, Michael Jackson’s Thriller, and an adorable extraterrestrial known simply as E.T. It was also during that time when the last new nuclear energy plant was built in the United States.

But that could soon no longer be the case with today’s announcement by the Nuclear Regulatory Commission to approve a license for the construction of two new nuclear reactors at Georgia’s Power Plant Vogtle.

Supporters of greater U.S. energy independence and job creation applauded the decision. Karen Harbert, president and CEO of the U.S. Chamber’s Institute for 21st Century Energy, issued the following statement.

The approval of two new nuclear reactors at Plant Vogtle represents an enormous milestone in the effort to provide safe, reliable, and clean electricity to consumers. This important step allows full construction to begin on the first new reactors built in over 30 years and is the result of hard work by Southern Company and its partners, and the NRC. This first-ever approval of a reactor under this new licensing regime demonstrates the process works and goes a long way in reducing the risk for other new nuclear reactors to follow.

We firmly believe that energy is the foundation that fuels America’s economic recovery. The $14 billion investment in the new reactors at Plant Vogtle will create 5,000 new construction jobs and 800 permanent jobs—many of them highly skilled. In addition, these new reactors will help us meet increased demand for electricity by powering nearly half a million homes and businesses in Georgia with emissions free power.

In a time of excessive red tape and over-regulation, it is refreshing to see a project like this move forward. Unfortunately, opponents of nuclear power are still seeking to halt these and other new reactors from being built despite indisputable evidence supporting them. It is disappointing that the Chairman of the NRC saw fit to join them. Nevertheless, today’s decision is worth celebrating.

A 2010 report, Project No Project, released by the U.S. Chamber documents 351 energy projects nationwide that are being stalled, stopped, or outright killed nationwide due to “Not In My Back Yard” (NIMBY) activism, a broken permitting process, and a system that allows limitless challenges by opponents of development. Twenty-three nuclear energy projects are included in the report.

The authors of the report found that the successful construction of the 351 projects could produce a $1.1 trillion short-term boost to the economy and create 1.9 million jobs annually. Moreover, once constructed and operational, these facilities in the aggregate could generate $145 billion in annual economic benefits and involve 791,000 jobs.

Just last year, NCF hosted the CEO of the Southern Company, Thomas Fanning, to give a talk on the future of his company and of his sector.  Check out the full webcast to hear more.

Industrial Policy and Manufacturing: What’s the Big Idea?

December 5, 2011

By Michael Hendrix, Research Manager

The Aspen Institute is known for asking what I like to call “killer questions.”  Since Aspen is in the business of ideas, they know that questions have a way of focusing the mind on what we know and don’t know, spurring on that tumbling, teaming process of idea creation.  This time, Aspen’s manufacturing team (led by the esteemed Tom Duesterberg) asked in a recent event whether the U.S. needs a national manufacturing strategy.  To attempt a reply, they invited Douglas Holtz-Eakin, Ron Blackwell, and Clyde Prestowitz.

Considering the backgrounds of the individuals on stage, we in the audience got vastly differing accounts of America’s potential and what it takes to turn it into reality.  The one thing that all the panelists agreed on was that the real question was not whether America should have an industrial policy, but what form it should take.  Now, in saying this they were all taking liberties with the technical meaning of “industrial policy.”  Their point though was that even choosing to not support industry at all through the public sector was itself a policy stance.  And regardless of the policy, the end goal is the same: a healthy manufacturing sector in America.

For as differing as the panelists were, there was a lot to applaud.  In the eyes of Ron Blackwell of the AFL-CIO, competitiveness and growth are the key questions for our future. That means that America needs a pro-competition strategy rather than an explicit industrial policy.  Education and training programs are important for such an approach, as is rebuilding our national infrastructure.  This helps not just the manufacturing sector, but practically all other aspects of the economy as well.

Clyde Prestowitz, founder and president of the Economic Strategy Institute, saw a tremendous productive capacity in America that is being challenged by anti-competitive policies abroad and a domestic culture that sees manufacturing as passé.  How should a country, especially one as powerful as America, respond abroad?  As others in the Chamber here have pointed out, we “deserve the opportunity to compete—and succeed—on a level playing field.”  And while turning back the cultural tide is not an easy task, there’s much to be said for simply restoring the notion that we are a country that makes things and makes things happen.

Douglas Holtz-Eakin proved to be an insightful panelist who (in the nicest way) didn’t mince words.  He said that America was a terrible place to invest in.  Our fiscal challenges and burdensome tax structure are proving to be tremendous obstacles to investing in the future of manufacturing.  The good thing is that we know quite clearly what these hurdles are and what can be done to clear them.  The real challenge, as he illustrated later in the program regarding the space industry, is figuring out the right relationship between the public and private sector.  The private sector has the capacity in every way to lead with its investments; in turn, the two sectors must focus on coordination, cooperation, and communication (rather than control).

From here on, the panelists talked about America’s tax system, the shale gas boom, national laboratories, and more.  Though there was more disagreement to be had on the right way to keep America competitive, in a strange way the event itself was a part of gaining a sense of our national priorities.  Public policy matters for the future of manufacturing, and whatever policy decisions are made one thing is clear: the private sector must take the lead.

Where the Jobs Are and Aren’t

September 30, 2010

By Nick Schulz, DeWitt Wallace Fellow, American Enterprise Institute

Arnold Kling has an interesting post about whether or not corporations should threaten to exit jurisdictions and relocate to places with a more favorable tax and regulatory climate. It is often difficult for firms to relocate headquarters because the costs of moving are high and might outweigh the benefits. As Kling notes, however, the effect of imprudent tax and regulatory policies manifests itself in all sorts of ways. Kling writes:

Within the U.S., there is some evidence that economic activity has shifted away from business-hostile “blue” states to business-friendly “red” states. To the extent that this is true, it does not seem to have caused politicians in blue states to switch colors.

In other words, businesses may not relocate their HQs but they expand in different states. This point was hammered home during a two-day conference sponsored by the National Chamber Foundation in Ojai, California.  The speakers included Joel Kotkin of Chapman University, Delore Zimmerman of Praxis Strategy Group, Ross DeVol of the Milken Institute and Jonathan Williams of ALEC.

Kotkin pointed out that as innovative and growth-oriented as Silicon Valley has continued to be over the past decade, job growth in the Valley has flatlined. Firms keep their HQs there, but they grow rapidly in other states that are friendlier to scaling their enterprises.  And so Google, Intel, Cisco and other Valley firms locate new plants in states such as Arizona or Utah or Texas or Virginia or North Dakota.

The Enterprising States study has lots of data that’s worth mining on this dynamic, and the work of DeVol and Williams  is well worth consulting, too.  Many states are shooting themselves in the foot with policies that prompt wealth and job creators to expand in different jurisdictions.  

And economist Mark Perry notes  that several firms in California are expanding rapidly in other states due to labor and other regulations.

Stimulating Investment

July 23, 2010

By Nick Schulz, DeWitt Wallace Fellow, American Enterprise Institute

I continue to get remarkably positive feedback about the joint NCF-AEI conference on U.S. regulatory policy and free enterprise from a few weeks ago.  The discussion among scholars and those in the business community was particularly fruitful since it connected data-driven, academic research with testimony from men and women working to build new business opportunities. The themes explored that day have taken on a new urgency as the debate in Washington heats up about a new stimulus measure, expiring tax cuts, the potential for regulation of greenhouse gases by the EPA and more. 

One point that emerged clearly from that conference is that uncertainty about regulatory, tax, and other policies is harmful to investment and capital formation. My colleague Allan Meltzer of Carnegie Mellon University echoed this point in testimony on Capitol Hill this week. 

“Our current situation can be improved by reducing uncertainty and stimulating business investment,” he said before the House Financial Services Committee. “I emphasize investment because the United States must invest more to produce exports.  Past experience suggests that reducing the corporate tax rate is an effective stimulus to investment.  Arthur Okun, Chairman of President Lyndon Johnson’s Council of Economic Advisers and a main architect of the Kennedy-Johnson tax program, analyzed the components after he left office.  He concluded that the corporate tax cut was the most effective part of the program.  Later work confirmed his conclusion.” 

As the Kennedy-Johnson program suggests, there are (or at least should be) potential bi-partisan responses to the current economic picture. Republicans would be smart to take a page from those two Democrats’ playbook, as both parties look for sensible policies to move the country forward.

Is There a Confidence Crisis?

July 8, 2010

By Nick Schulz, DeWitt Wallace Fellow, American Enterprise Institute

The New Republic’s Jon Chait, citing the New York Times’ economist-columnist Paul Krugman, takes shots at the idea that hyperactive government activity has generated uncertainty in the marketplace and thus put downward pressure on investment and hiring (”The Nonexistent Confidence Crisis,” he calls it). Chait says there is not much business investment these days because “there’s not enough consumer demand. That’s the whole story.”

The whole story? I just got done moderating a panel sponsored by the National Chamber Foundation and the American Enterprise Institute on regulation and the economy. One of the participants was from a company called Blessey Marine Services, an inland waterway shipping company. He says without a doubt the uncertainty over healthcare regulation has played a big part in the firm’s recent decisions not to hire and invest. The logic is simple—since the firm doesn’t know how much healthcare reform will cost them, and since they self-insure all their employees, they are keeping a lot of dry powder. This was just one example he pointed to among many of the ways in which policy and regulatory uncertainty make risk-taking and investment more difficult.

A similar note was sounded by New York University’s Tom Cooley who in a recent article noted: “The Bureau of Economic Analysis reports that U.S. corporations are sitting on $1.6 trillion in cash reserves, a record amount, because they are reluctant to expand in the uncertain policy environment. Even looking at the companies in the Standard & Poor’s 500 index of blue chips–and stripping out financials, which are required by regulators to keep large cash reserves in order to cushion against risk–the cash-on-hand number is a whopping $1.1 trillion. Would a more transparent, business-friendly environment turn that cash into investment and jobs?”
It was clear from our discussion that the answer is yes. No one doubts aggregate demand is down; but there is no doubt that some kinds of government activity dampen animal spirits and entrepreneurship and encourage hoarding. Policymakers in both parties in Washington should take note.

How Americans View Government and the Regulation of Enterprise

May 14, 2010

By Nick Schulz, DeWitt Wallace Fellow, American Enterprise Institute

The financial crisis of 2008 and resultant economic problems have understandably shaken Americans’ confidence in business. Despite this, Americans are also quite wary of greater government regulation of enterprise, according to a new report from my colleague Karlyn Bowman at the American Enterprise Institute. 

When asked whether too much or too little regulation of business worries them more, 57% of Americans say too much. What’s more, half of Americans think government should regulate less than it already does, with 24% saying more and 23% saying the level of regulation is about right. Meanwhile 57% of Americans believe big government is a greater potential threat to the country’s future, compared with 26% who think big business is a greater threat.

What explains the support for free enterprise despite the economic troubles? As AEI President Arthur Brooks will outline in a new book he is releasing next week, the free enterprise system is at the core of American culture. Even when the economy is shaky, Americans have abiding confidence in free enterprise to improve lives and worry about harming that engine of progress. 

The National Chamber Foundation and AEI will be co-hosting an event in July on regulation where we plan to examine the surprising return of price regulation, among other recent developments. Please check back for details.

Government Size and Implications for Economic Growth

April 29, 2010

By Nick Schulz, DeWitt Wallace Fellow, American Enterprise Institute

The expansion of government under the policies of the Bush and Obama administrations is prompting many Americans to ask how much government is too much. No one denies needing government services of all kinds, but what are the trade-offs?  Can there be too much government? 

One way to answer that question is to examine the influence of the size of the government on economic growth.  In a new book to be published next month by the American Enterprise Institute, the Swedish economists Magnus Henrekson and Andreas Bergh survey the academic literature on the subject and find a negative correlation between the size of government and the rate of economic growth in rich countries (the book will be the subject of a discussion and debate in early May; details found here). 

What difference might it make?  If it is true that large government reduces economic growth, consider what the authors point out:  

“From one year to the next, the difference between annual economic growth at 2 percent or 2.5 percent is important enough, since it means several billions of dollars, more or less, in the hands of both households and politicians. From a longer perspective, the level of annual growth of GDP per capita is even more important: It ultimately determines which countries will grow rich and which will become or remain relatively poor… an annual growth rate of 2 percent means that the economic standard of living doubles in thirty-six years. But if the annual growth is instead 3 percent, a doubling of the standard of living takes a mere twenty-four years.”

One Way to Get Companies Hiring Again – Slash Corporate Tax Rates

March 8, 2010

By Nick Schulz, DeWitt Wallace Fellow, American Enterprise Institute

The jobs picture in the U.S. remains weak.  Unemployment numbers announced Friday held steady at near 10% while the rate including discouraged workers rose slightly to 16.8%. What is to be done?  One idea, discussed recently by my colleague Kevin Hassett is to cut the corporate income tax rate to get firms hiring again.  

In fact, there are good reasons to cut the rate regardless of the severity of the current economic crisis.  Look at the following chart:

The numbers are dramatic. The trend among developed countries over the last 30 years has been to lower corporate income tax rates.  These reductions make firms more competitive. The outlier has been the United States, which has seen its corporate tax rate remain steady for almost two decades. Policymakers should be thinking of lowering the rate to the OECD average of around 25% — or even lower to make the US even more competitive.

What If Regulation Helped Cause the Financial Crisis?

February 23, 2010

By Nick Schulz, DeWitt Wallace Fellow, American Enterprise Institute
In much of the analysis of the causes of the financial crisis a frequent claim is that too little regulation of banks and financial institutions was a primary culprit. But what if instead of too little regulation, faulty regulation played an important role?

That’s the view of Jeffrey Friedman and Wladimir Kraus, two scholars writing a book called Engineering the Perfect Storm: How Reasonable Regulations Caused the Financial Crisis” (University of Pennsylvania Press, forthcoming in 2011).

In a recent paper, Friedman and Kraus argue that regulatory rules were “designed to steer banks’ funds into ‘safe’ assets, such as AAA mortgage-backed bonds” or those of government-sponsored enterprises (GSE) such as Fannie Mae and Freddie Mac. And on one level, these rules were successful, as “93 percent of the banks’ mortgage-backed securities were either AAA rated or were issued by a GSE.”

But as we now know, the regulators’ views of the safety of these securities were wrong. And so the regulations themselves were problematic. Absent the regulations, they argue, “there is no reason for portfolios of American banks to have been so heavily concentrated in mortgage-backed bonds.”

The dominant conventional narrative of the financial crisis says that too little regulation, excessive executive compensation, or other alleged ills caused the crisis. But these scholars have much data and evidence on their side as they make a different argument. And they deserve a hearing as policymakers chart a path forward.