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Excessive Regulation Is A Huge Tax On The US Economy

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
October 10, 2017

1. The US Economy Lost 33,000 Jobs in September

2. House Passes $4.1 Trillion Budget – Matches Record High

3. America’s Onerous & Rising Regulatory Burden

4. Special Report: The Growth Potential of Deregulation

5. Excessive Regulation Robs US of Economic Growth

Overview

President Trump’s Council of Economic Advisors released a new report last week which examines the effect of excess regulations on the economy. As you may know, President Obama issued or promulgated more new regulations than either President George Bush or President Bill Clinton.

Most importantly, the new report from the Council of Economic Advisors declared that excess regulations are a “tax” on the economy, costing the US 0.8% of GDP, or about $1.5 trillion on average per year since 1980. In more recent years, as the number of excessive regulations has exploded, the cost to the economy is at least $2 trillion per year, and some sources believe it is now in excess of $4 trillion per year.

If that is true, and I believe it is, our current GDP of apprx. $18.6 trillion could be $22.6 trillion or higher if it were not for excessive regulation. The new report from the Council of Economic Advisors (CEA) is aimed at pointing out how excessive regulations have soared in recent years and concludes that deregulation will stimulate US economic growth.

Donald Trump campaigned heavily on a promise to rollback excessive regulations, and he has already delivered on that commitment. Since taking office, Trump has largely followed through, either withdrawing or delaying more than 800 proposed regulations in just his first five months, according to the Associated Press.

He has also issued a moratorium on new regulations, and a number of executive orders designed to hinder the regulatory rule-making process. The president also promised to eliminate two existing regulations for every one he initiates.

Before we get to the new CEA report, let’s take a quick look at last Friday’s surprise unemployment report for September which saw the first monthly net loss of jobs in more than seven years. While the job losses last month were attributed to the hurricanes, they may take longer than expected to recover.

I will also have some comments on the fact that the Republican-controlled US House of Representatives last week passed a record-matching federal budget of $4.1 trillion for fiscal year 2018. The Senate may pass an even larger budget this week. So much for getting our deficits under control while the GOP controls both branches of government and the White House! Let’s get started.

The US Economy Lost 33,000 Jobs in September

The US economy lost 33,000 jobs in September largely due to the impact of hurricanes Harvey and Irma, the Labor Department reported Friday. It was the first monthly employment decline in seven years. Economists had expected employment to take a temporary hit from the storms, but the pre-report consensus was for a gain of about 75,000 non-farm jobs, down from 169,000 in August.

The headline unemployment rate was not negatively affected by the hurricanes and dropped from 4.4% in August to 4.2% last month, the lowest level since December 2000. Average wages edged up by 12 cents to $26.55 an hour, while the average work week remained unchanged at 34.4 hours.

While the weaker than expected jobs number (-33,000) looks bad, there is broad agreement that it is likely temporary, especially as hurricane rebuilding gets into full-swing. The drop in jobs came in large part from restaurants, down 115,000, which is entirely consistent with the storms as a cause.

Other than the jobs number, the rest of the data in Friday’s report looked relatively strong. As noted above, average wages were up last month and gained 2.9% over the last 12 months, the highest year-over-year gain since June 2009. The under-employment rate dropped from 8.6% to 8.3%, the lowest level since June 2007.

So despite the hurricanes, the broad trends still look strong.

House Passes $4.1 Trillion Budget – Matches the Record High

The House of Representatives passed a $4.1 trillion budget Thursday along party lines, 219-206. A total of 18 Republicans voted against the resolution, as did all the Democrats. The latest budget equaled the previous record $4.1 trillion budget requested by President Obama for FY2017.

The House budget legislation primes the GOP for a tax-code rewrite, assuming the Senate can also pass a budget this week and the two can be reconciled soon into a version President Trump will sign.

Upon passage of the record-matching budget, House Speaker Paul Ryan urged: We need to pass this budget so we can help bring more jobs, fairer taxes and bigger paychecks for people across this country.”

The Senate is not expected to accept the $200 billion in required federal spending cuts from the House budget; but the House plan requires a tax proposal that doesn't add to the deficit. The Senate’s budget proposal is expected to allow $1.5 trillion to be added to the deficit over the next decade.

America’s Onerous & Rising Regulatory Burden

As noted above, President Trump’s Council of Economic Advisers (CEA) released a new report last week focused on the costs of increased government regulation. Most significantly, the new CEA report declares that excessive regulations are a “tax” on the economy and estimates that the US economy could be at least 25% larger without such hindrances.

Certainly not every regulation is a bad one or is preventing sustainable and balanced economic growth. But many do, as the report makes clear. The report also points out that over 500 new ‘economically significant’ regulations were created over the last eight years alone.   

With that said, let’s take a look at the Summary and Introduction of the Council of Economic Advisers’ new report on deregulation. This portion will show us just how out-of-control federal regulations have become since 1980.

“The Growth Potential of Deregulation
October 2, 2017

Summary

Excessive regulation is a tax on the economy, costing the U.S. an average of 0.8 percent of GDP growth per year since 1980. This taxation by regulation has increased sharply in recent years, with approximately 500 new economically significant regulations created over the last eight years alone. Through a thorough review of the literature, the Council of Economic Advisers (CEA) finds that deregulation will stimulate U.S. GDP growth.

Introduction

Government regulatory action often originates with the best of intentions. Indeed, society is better off with regulations that prevent toxic waste dumping, outlaw child labor, and protect endangered species, for example. Over the past few decades there has been a proliferation of regulation, ranging from the severe to the silly, including diktats over dogwalkers’ licenses and children’s lemonade stands.

While regulation does often serve the public interest, excessive regulations can be defined as redundant or poorly-designed and create unnecessary costs with few economic benefits. Limiting excessive regulations ensures the continued benefits of regulation while decreasing the costly effects of regulation as a whole.

Regulations serve as an additional tax on the U.S. economy, often making beneficial economic transactions more expensive or preventing them outright. Economic theory teaches that when a good is taxed, there is less of it. Regulations have the same effect. In some cases, this is desired – regulating excessive highway speeds serves as a tax on unsafe driving.

However, in other cases this can have unintended effects. For example, rent control regulations tax property owners and serve as a disincentive to upgrade apartments and improve the housing stock. Minimum wage regulations tax employers and discourage them from hiring workers. Regulations mandating minimum health insurance benefits act as a tax on premiums, preventing some from affording any health care coverage at all.

While it is often difficult to disentangle the isolated effects of taxes and regulation on firm relocation decisions, they jointly contribute to the outsourcing of U.S. jobs. Specifically, environmental regulations have been found to have adverse effects on trade, employment, and the location of industry (Dechezleprêtre and Misato Sato 2017).

Though each well-intended rule aims to enhance social welfare, it is crucial to separate the intention of a given regulation from its actual impact on the economy. The restrictions imposed by excessive regulations create unnecessary costs that are borne by families and business owners alike and lower U.S. GDP growth.

This report reviews the economic literature on regulation. Section I discusses the extent and proliferation of U.S. Federal regulations. Section II discusses the costs of these regulations. Section III discusses the positive impact of deregulation on Americans’ personal prosperity and on overall economic growth.

I. The Extent of Existing Regulations

There are several useful methods for evaluating the extent of U.S. regulations, including measures developed by the Organization for Economic Cooperation and Development (OECD), the number of pages or instances of regulation in Federal regulation documents, and the number of economically significant actions proposed by  overnment agencies. All of these metrics show that U.S. regulations have increased over time.

First, OECD calculations place the United States as 27th out of 35 countries in product market regulation behind France, Chile, and the Czech Republic (Koske et al. 2015; see Figure 1). This measures a country’s success at setting product market regulation that encourages competition and ensures a level playing field among firms.

Product Market Regulations in 2013

Second, several metrics for gauging government regulatory activity indicate an increase since 1975. This includes the number of pages in the Federal Register and in the Code of Federal Regulations (CFR). The Federal Register reflects the flow of new regulations, while the CFR reflects the stock of existing regulations. While the number of pages is not a perfect proxy for the extent of regulation, it provides a straightforward indicator of the restraints facing U.S. consumers and businesses. Figure 2 shows the flow of new yearly regulations in the Federal Register from 1976 to 2016. In 2016, there were approximately 45,000 more pages in the Federal Register than 40 years prior, an increase of about 90 percent.

Flow of New Regulation

Given that creation of new regulations has outpaced the elimination of old ones, the existing stock of regulations on the books has increased over time. Figure 3 depicts the growth of the CFR, which increased 160 percent from 1975 to 2016.

Stock of Existing Regulation

Due to measurement issues in using the Federal Register and CFR, the Mercatus Center at George Mason University publishes a data set that parses the CFR and counts the prevalence of the words “shall,” “must,” “may not,” “required,” and “prohibited.” The frequency of these words acts as a proxy for restrictions. From 1975 to 2016, the number of restrictions measured using this dataset increased 107 percent, reflecting similar growth in regulation to the growth estimated using the Federal Register and slightly below the growth estimated using the CFR (see Figure 4).

Count of Restrictive Words

Third, the number of “economically significant” rules issued by Federal agencies serves as an indicator of the current regulatory burden. Executive Order (EO) 12866 defines “economically significant” rules as those estimated to have an annual effect of $100 million or more. Under the Obama Administration, the government promulgated 494 new rules deemed “economically significant,” and under the W. Bush Administration, the government issued 358 such rules. Under the Clinton Administration, those agencies issued 361 such rules (see Figure 5).

Economically Significant Rules

END QUOTE

** To read the rest of the Council of Economic Advisers report on deregulation, go here.

Excessive Regulation Robs US of Economic Growth

The discussion and charts above illustrate just how out-of-control federal regulations have become over the last several decades. As noted earlier, such regulations cost us at least $2 trillion in economic growth each year, and some sources such as the Mercatus Center believe the cost is twice that large.

The Council of Economic Advisors report concluded that excess regulations cost the economy almost 1% of GDP each year. That may not sound like much, but when GDP is growing by less than 2%, that extra almost 1% can make a huge difference!

Let’s hope that President Trump continues to eliminate unnecessary and onerous regulations that stifle small businesses which create over half of all new jobs. I’m optimistic he will.

Wishing you all the best,

Gary D. Halbert

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Read Gary’s blog and join the conversation at garydhalbert.com.

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