The Coming Regulatory Recession?

by John Berlau on January 31, 2013 · 0 comments

in Deregulate to Stimulate, Economy, Regulation

This originally appeared here.  I wish to thank John for allowing me to publish his work.  RK

Yesterday, the Bureau of Economic Analysis of the U.S. Department of Commerce reported the stunning news the U.S. economy actually contracted by 0.1 percent in the fourth quarter of 2012. The immediate response by many politicians and the establishment media was to blame spending cuts, or the threat of them, rather than even look at the dramatic increase in regulation over the last few years.

The Washington Post sent a news bulletin shortly thereafter that blamed the problem on “cuts in government spending, fewer exports and sluggish growth in company stockpiles.” The “cuts in government spending” part is wrong on its face. According to the U.S. Treasury Department (and hat tip to John Nolte of Breitbart.com), government expenditures actually increased by more than 10 percent from the previous quarter.

The Associated Press story The Post linked to in the bulletin did not repeat the error and was technically accurate in noting reduced defense spending. But a more likely cause of the economy contracting was the very real threat — and realization — of the “regulatory cliff.” If there’s one thing worse than uncertainty, it is the certainty thousands of pages of new regulatory policies will go into effect. It’s far more likely the contraction was caused by entrepreneurs and investors seeing this future of shackling regulations and pulling back their investment in response.

President Obama’s reelection made it highly unlikely job creators would get any substantial relief from costly new provisions of the Affordable Care Act or the Dodd-Frank banking overhaul that hits many community banks and non-financial businesses. As Adam J. White noted recently in The Weekly Standard, “The Obama administration’s first three years of major rules, costing up to $26.7 billion, were five times more burdensome than the Bush administration’s first three years ($5.3 billion) and three and a half times more burdensome than the Clinton administration’s ($7.6 billion).” White adds that these “major rules” were only a fraction of the 3,500 total regulations Obama has issued so far, and the cost figures did not even included the opportunity costs for the economy in his blocking of the Keystone XL pipeline.

In addition, government entities that faced bipartisan criticism for being out of control, such as the EPA and Department of Labor, now had free rein. Indeed, a torrent of new regulations that had been on hold for more than a year suddenly were released — in President Obama’s post-election Unified Regulatory Agenda and elsewhere. National Journal reported just after the election that “federal agencies are sitting on a pile of major health, environmental and financial regulations that lobbyists, congressional staffers and former administration officials say are being held back to avoid providing ammunition to Mitt Romney and other Republican critics.”

As my Competitive Enterprise Institute colleague Ryan Young has put it: “Now that this ammunition will no longer have electoral consequences, the EPA can move ahead on delayed rules on everything from greenhouse gas emissions to ozone standards. Rules from the health care bill and the Dodd-Frank financial regulation bill also likely will make themselves known in the weeks to come.”

In addition to the domestic rules, the Basel III international banking accord that was scheduled to go into effect this year threatened to severely constrict banks of all sizes from making loans even to high-quality borrowers. Under the regime, banks would have been forced to hold two to three times as much capital against most mortgages and small business loans.

The good news is slow growth — or even negative growth — can be dramatically reversed if the regulatory onslaught is reversed or at least significantly reduced. For instance, the first quarter of 2013 may be better because Basel III was delayed and somewhat revised to allow banks to hold different types of capital. To get growth going again, President Obama and Congress’ first priority should be to reduce or reverse the “regulatory cliff.”

ADDENDUM: Julia Seymour of the Media Research Center’s Business and Media Institute demonstrates how the network news shows downplayed the contraction, while pushing the supposed “spending cuts” as a cause when they did finally get to the figures.