Deregulation and Jobs

Deregulation is often deemed dangerous - if there's too little government, the argument goes, shady businesses hurt Americans - but regulations come with their own ailments.






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Publication: The New American
Author: Adelmann, Bob
Date published: June 4, 2012

Because of disappointment over the economy'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, owing to their complexity and onerous requirements on businesses.

For example, it took 7 million manhours to build the Empire Slate Building. 6.3 million man-hours to build 225,000 Toyota C army s. and 5. 5 million man-hours to build every iPhone ever made. But it is estimated that it will take 10.5 million manhours to comply with the Dodd-Frank Act. and its compliance rules haven't even been completely written yet. And that's just one small piece of the regulatory maze facing business in this country.

April's report from the Bureau of Labor Statistics was confirmed by the ADP National Report, which has shown a decrease in the rate of job growth since December of nearly 22 percent.

The Wall Street 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 workingage people are "not in the labor force." up from 60 million in the early 1 98Os.

In addition, the Congressional Budget Office said that "the United States is experiencing the longest streich of high unemployment since lhe Great Depression ... and CBO projects that the current rate of unemployment is likely to stay above 8 percent until 2014." The CBO included in its report the reasons why unemployment is so high, along with its recommendation on how to solve it: People aren't spending enough, and so they must be given government money so they can spend more! This is what the CBO said:

Slack demand for goods and services is the primary reason for the persistently high levels of unemployment observed today....

Target people most likely to spend the additional [government] income - generally, people with lower incomes.

And then came the disclaimer that such "stimulus" probably wouldn't work:

Such policies could be implemented using mechanisms ranging from federal block grants to direct federal operation. But they would probably not have a significant effect on unemployment over the next two years because of the difficulties of scaling them up in that span of time.

Rolling in Regulations

The CBO said nothing about the veritable waterfall of regulations emanating from innumerable regulatory agencies as the likely cause of the sticky unemployment. Writing at THE NEW AMERICAN, William P. Hoar noted that the White House reluctantly agreed last summer 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."

Hoar added that, even if such a review actually look place and then resulted in any kind of rollback of regulations, il would amount to no more than "a speed bump for the diktats racing out of Washington." In fact, the White House is a significant pan of the problem. Congressman Tom Graves (RGa.) noted that since ObamaCare became law. its size has grown from a 2,000-page bill io more than 6.(XK) pages of regulations in the Federal Register.

Rep. Don Young (R-Alaska) got so exasperated with the regulations threatening Io 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. 1 |\vouldl just J 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."

While Young's plans never materiali/ed, the REINS (Regulations from the Kxecutive in Need of Scrutiny) Act did pass the House. 241 to 184. in December, even though there was zero likelihood the Senate would even consider i!. If by some miracle the act would be signed into law. it would require all major regulations issued by the executive branch (having an economic impact of SlOO million or more) to be approved by a majority in both the House and the Senate before they became operative - since government agencies, such as the EPA and Department of Education, now simply promulgate rules with no congressional oversight.

Another bill that passed (he House in December, the Regulatory Accountability Act (RAA), 253 to 167. is likely to meet a similar fate in the Senate. RAA would require agencies attempting to enact a rule to follow certain explicit steps, overseen by the courts, before such a rule would take effect. House Judiciary Committee Chairman Lamar Smith (R-Texas) wrote in the online 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 Obatna administration's agenda includes over 200 "major rules."...

Uncertainty about the cost of these upcoming regulations discourages employers from hiring new employees and expanding their businesses. According to a recent Gallup poll, nearly one in four small business owners say that complying with government regulations "is the most importan! problem facing them today." John Mackey. a co-founder of Whole Foods Market, agreed, writing in the IVii// Street Journal last November:

Many government regulations in education, health care and energy prevent e p Ire preneurs hi ? and innovation 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 disappears].

Underlying each of the efforts tu roll back leviathan is the assumption that more regulations mean fewer jobs. That is also the basic assumption of the Competitive Enterprise Institute (CEI) in its annual publication "Ten Thousand Commandments." In its summary to its latesi study, CEI decries the on -budget deficits of S 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 COM s lo the economy and the taxpayer amount to over $5 trillion every year, or more than one-third of the entire economy.

Help or Hurt?

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 husbandand-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, which is 36 percent higher than [costs! facing large firms. [Emphasis added.]

According to ihe 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 such a heavy disproportionate share of those regulations falls 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 reguiatÓons 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 the strangling of the small business owner. Accounting and consulting giant Grant Thornton published its "Wake-Up Call for America" in November 2009, noting that "changes to market structure over the lasi 10 years have had a severe negative impact on the number of publicly listed, companies in the United Slates." resulting in a "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 ... astartling 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 y/c per annum - roughly in line with GDP growth.

Those "changes to market structure" referred to by Grant Thornton were imposed by regulations such as the Sarbanes-Oxley Act and the Dodd-Frank law, and they are strangling the U.S. economy - putting the heavy boot of government regulation on the oxygen hose of srnail business. Because of those reguiations, 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 Thomton's study noted.

Today, capital formation in the U.S. is on life support. Sniail 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 noi 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 couldn't do it much more efficiently than to starve small businesses by denying them capital. Grant Thornton put it succinctly: These onerous regulations have "cost the U.S. economy many millions of jobs."

That's why another bill, the JOBS (Jumpstart Our Business Start-up) Act, which passed the House and the Senate and was reluctantly signed into law by President Obama in early April, was so important and yet missed by so many people. A relatively weak measure compared to what really needs to be done, the JOBS Act, as noted in THE NEWAMERICAM,

will make it slightly iess 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-ranip" to these companies so that the full i m pac t of those regulations isn't felt until they reach a certain threshold of financial success, or five years, whichever occurs first.

This is the first positive sign that Washington has finally recognized that small businesses are in serious trouble due to o ver- reg u lati o n and, as a result, are simply unwilling or unable to grow and hire.

The JOBS Act resulted from efforts by the IPO Task Force, formed in March 20 1 1 . following an Access to Capital Conference by the U.S. Treasury Departinem to "gather insights from capital markets participants and solicit recommendations for how to restore access, to capital for small companies ... through [he IPO market." The Task Force consisted solely of professionals working in the IPO market - no government regulators were in attendance - including venture capitalist, experienced CEOs of successful small companies who 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 Gran! 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, lhe 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 War. when a sharp reduciion in government spending and controls sparked an economic boom that defied conventional wisdom.

Jobs War

At ihe time, must economists were predicting a massive depression as millions of servicemen and women returned home to look for work in an economy that was winding down from the war effort. Estimates were that the private sector was too small and loo weak to employ immediately the flood of veterans. Prospects for the U.S. economy following VE Day and VJ Day in the summer of 1945 seemed dim.

And prospects for Europe and Japan appeared even more dismal. Economies there had been devastated by the war, with millions dead or missing, and those surviving had little capital to resian their economies.

Mainline historians still celebrate the Marshall Plan as the key driver for Europe's remarkable resurgence, but evidence tells a different story. Named for Secretary of State George C. Marshall, the plan funneled a total of $25 billion (about IO percent of the United States' gross domestic product at the time) into rebuilding Europe. By the lime the Marshall Plan ended, economic recovery was so strong that outpLi! exceeded pre-war levels in every one of the original 20 OEEC (Organi/ation for European Economic Cooperation) countries, which included Germany, France, Belgium. Italy, and the Netherlands. On lhe surface it appeared that this insertion of capital into the devastated economies was just what was needed.

However, when two economists with the National Bureau of Economic Research (NBER). Bradford De Long and Barry Ekhengreen. prepared an analysis of the impact !he Marshall Plan had on Europe's recovery in October 1991 and examined the assumption that the Marshall Pian had played a major role in Europe's recovery, they discovered that its role was. in fact, minimal:

Our central conclusion is that the Marshall Plan did matter. But it did not matter in ihe way that the "folk wisdom" of international relations assumes....

The Marshall Plan did play a role in alleviating resource .shortages. Bui ... by 1948 and the beginning ofMarsluill Plan aid bottlenecks were scarce, und markers were good at alleviating iheir impact. [Emphasis added.]

Professor Thomas Woods, author of The Politically Incorrect Guide m American History, claimed that the Marshall Plan in faci "worked no better than any other government giveaway program" adding.

France, Germany and Italy began iheir 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 - Wirtschattwunder - 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 marker reforms ihai the Germans introduced. [Emphasis added.)

Economist Tyier 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 thai "prosperity follows from the rule of law. respect for private property and the other institutional mechanisms on which the market order rests."

And it was that "respect for private property and other mechanisms" that allowed the American economy to explode as well, thanks to two major pieces of deregulatory legislation that were passed during the 80th Congress in 1946. That Congress represented a massive redirection toward a market economy, with Republicans handing Roosevelt Democrats a crushing defeat, taking back 55 seals from the previous House of Representatives.

The first piece of legislation ended the Office of Price Administration (OPA). which had been established by executive order in 1941. Under that executive order 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 because such intervention in the market distorts supply and demand, causing producers to limit production of items that no longer are profitable. 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 the passage of the Taft- Hart ley Act. That act reined in the labor unions, which had enjoyed enormous growth due to favorable powers given to the National Labor Relations Board during the Roosevelt administration. Now unions were prohibited from calling wildcat strikes and boycotts and from implementing picketing and demanding union shops, as well as donating union workers' dues to federal political campaigns. In addition, states were allowed io pass right-to-work laws. This was another breath of fresh air for the economy. Now workers could be hired at wages reflective of demand in the marketplate and noi by arbitrary union rules and wage-fixing.

And the capila! 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 cheeks 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. Automakers who had diverted toeir 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 1 946. Ii began running surpluses, which were used 10 retire wartime debts. Ten 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 us£d for stockings instead of parachutes.

Predictions of economic depression and catastrophe were proved wrong. In August 1 945. lhc Office of War Mobilization and Reconversion forecast that eight million would be unemployed after the war. Business Week magazine predicted that unemployment would reach nine million. Other estimates were even higher. Unemployment never came close to those levels, staying at about four percent in the three years following the end of the war. Net civilian employment grew by four million between 1945 and 1947 as household spending, business investment, and exports all expanded.

If further proof is required that excessive government spending and regulations stifle the economy and limit job growth, one need only look at the airline industry in the mid '80s. Prior to that lime, 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 the average, planes flew half empty. With deregulation in 1978 came the end of the Civil Aeronautics Board and the beginning of affordable flight. Said former CAB chairman Alfred Kahn as he reflected on his efforts to deregulate the airlines: "The verdict of the great majority of economists would, I believe, be that deregulation has been a success.''

Not everyone agrees. The Economic Policy Institute (EPI), a liberal, pro-labor think tank, concluded a study of the alleged negative impact regulations have on the free market:

The lessons of the Great Recession and of decades of government regulation point in the opposite direction. An emphasis on deregulation can contribute to enormous economic dislocation, and this review of the studies of regulations in place finds little evidence of significant negative effects on employment. Overall, the picture that emerges from this review is a positive one. For decades, regulations have generally and consistently struck a reasonable balance, with their benefits to health, safety, and well-being far exceeding their costs.

Were the gains enjoyed by airline deregulation worth the cost of EPI's "enormous" economic dislocations'.' Writing for Kusine s s Week magazine in January 2010 Juslice Stephen Breyer, one of the liberals on today's Supreme Court, thinks so:

What does the industry's history tell us? Was this effort worthwhile? Certainly it shows that every major reform brings about new, sometimes unforeseen, problems. No one foresaw the industry's spectacular growth, with the number of air passengers increasing from 207.5 million in 1974 to 721.1 million last year. As a result, no one foresaw the extent to which new bottlenecks would develop: a flight-choked Northeast corridor, overcrowded airports, delays, and terrorist risks consequently making air travel increasingly difficult. Nor did anyone foresee the extent to which change might unfairly harm workers in the industry. Still, fares have come down. Airline revenue per passenger mile has declined from an inflationadjusted 33.3 cents in 1974, to 13 cents in the first half of 2010. In 1974 the cheapest round-trip New York-Los Angeles flight fin inflation-adjusted dollars) that regulators would allow: 51,442. Today one can fly that same route for $268. That is why the number of travelers has gone way up.

So we sit in crowded planes, munch potato chips, flare up when the loudspeaker announces yet another flight delay. But how many now will vote to go back to the "good old days" of paying high, regulated prices for better service? Even among business travelers, who wants to pay "full fare for the briefcase?"

It should give EPl considerable comfort to know that today the airline industry not only flies three times as many passengers as it did under the CAB, with mure routes to more places, at much lower cost, but it also employs twice as many people as it did before. So much for "enormous economic dislocation."

Any movement away from the regulatory slate thai allows the free market to operale wii! have substantial net 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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