Mr. Trump: America’s Economic Problem Is Regulation, Not Trade

Even when Donald Trump seems to get something right, he’s mostly wrong. At least when it comes to economics. Many Americans are suffering financially. Yet he hates trade, even though Americans have grown rich as a trading nation. And he says virtually nothing about regulation, which has done so much to harm U.S. competitiveness.

No surprise, the Obama administration is busy writing new rules to turn America into its vision of a good society, irrespective of the impact on liberty or prosperity. Last year Uncle Sam spent $62 billion to run the rest of our lives. Observed Patrick McLaughlin and Oliver Sherouse of the Mercatus Center at George Mason University: “Over the last 20 years the regulatory budget has more than doubled in real terms while the number of total restrictions has grown by about 220,000 — a 25 percent increase.”

It is important to point out who really is to blame for creating today’s economic problems and imposing widespread financial hardship.

The busiest bureaucracies measured in terms of pages of rules produced are the EPA, IRS, Coast Guard, Occupational Safety and Health Administration, and Federal Communications Commission. These five collectively accounted “for more than 314,000 restrictions, nearly a third of the overall total,” wrote McLaughlin and Sherouse. The EPA alone was responsible for almost half of those, or 14 percent of the federal government’s total output. Noted the two Mercatus scholars, over the last two decades “the EPA added more restrictions than any other agency has written over its entire existence, despite being much younger than many other agencies.”

The problem is not only the expense of enforcement. Far greater is the cost of the impact on the economy. The government actually doesn’t spend much to write many regulations and sometimes the more draconian rules are easier to enforce. However, the more extreme the content, the greater the impact on the rest of us.

Clyde Wayne Crews of the Competitive Enterprise Institute has devoted much of his working life to assessing the impact of regulation. In his working paper last year entitled “Tip of the Costberg,” he figured the total price of regulation to be $1.88 trillion. At $399 billion economic regulation had the biggest impact, closely followed by environmental controls, which cost $386 billion. Tax compliance finished third at $316 billion, followed by health care at “only” $190 billion. Communications, labor, financial, transportation, and others added smaller amounts.

However, these figures almost certainly are too low. Crews argued:

Too often, regulatory impacts don’t get measured. But further, the disruption of market processes and the derailment of wealth, safety and health creating processes themselves are for the most part wholly neglected. We can say, circa 2015, according to back of the envelope surveys, roundups and placeholders, with gaps big enough to fit the beltway through, that up to $1.882 trillion annually — and in many categories perhaps considerably more — is a defensible assessment of the annual impact on the economy of regulation and intervention.

The effect varies by state. McLaughlin and Sherouse produced a major study earlier this year entitled “The Impact of Federal Regulation on the 50 States.” State rules also matter, but the authors focused on the differential impact of federal mandates. Much depended on the particular mix of industries.

Worst off was Louisiana, followed by Alaska, Wyoming, Indiana, Kentucky, and Texas. At the other extreme, New Hampshire came out best, followed by the District of Columbia, Rhode Island, Massachusetts, Vermont, Oregon, and Maryland. For instance, Louisiana suffered because of its reliance on chemical products and manufacturing and oil and gas extraction. In contrast, New Hampshire disproportionately relied upon real estate and retail trade.

Regulatory costs play out in many ways. One aspect is what an individual or company spends to comply with government dictates. Far harder to measure is what does not occur as a result of arbitrary and expensive rules. What products are not launched, what enterprises are not started, what jobs are not created? Indeed, Crews pointed to several areas where costs are rarely adequately figured, including lost liberty, “economic regulatory impacts and consequences,” lost benefits from existing practices, expense of poor regulatory controls, and lost jobs.

It should surprise no one that these beneficiaries sometimes support regulation as means to protect themselves from competition.

Bailey and Thomas concluded that a ten percent increase in regulatory intensity reduced the number of companies created by .5 percent. In contrast, since incumbent firms often benefit, there is no corresponding increase in the number of business failures. To the contrary, there was modest statistical support for the conclusion that large enterprises were less likely to die as regulation increased.

Increased rule-making had an even greater negative impact on employment. The two economists figured that a ten percent hike in regulatory activity cut hiring by .9 percent. The impact was greatest on small companies. Losses occur over time. In reviewing effects in later years, explained Bailey and Thomas: “Regulation leads to a statistically significant reduction in hiring and firm births for firms overall and for small firms and a reduction in the deaths of large firms.”

Cutting, reducing, and simplifying government rule-making would have a correspondingly positive impact on business and job creation. Regulation increased by a quarter between 1998 and 2011, reducing the number of new companies by 1.2 percent and new jobs by 2.2 percent. “That result implies that returning to the level of regulation in effect in 1998 would lead to the creation of 30 new firms and the hiring of 530 new employees every year for an average industry,” argued Bailey and Thomas.

Of course, regulations theoretically are promulgated because they yield benefits. Not just benefits, but net benefits after considering costs. However, agencies have an incentive to inflate the value of what they are doing. That means exaggerating problems and “social costs,” overstating alleged benefits, and discounting compliance costs. Explained Crews:

Common practice in assessing regulation emphasizes not so much the magnitude of costs, but whether or not benefits sufficiently outweigh or offset those costs. But since benefits come in both objective and subjective flavors, where agencies freely offset costs of a regulation with benefits to create an agency-determined “net benefit,” rarely will any regulation fail to qualify in the agencies’ eyes. Like taxes, regulatory costs are a consequence of a government program; yet they are held to a different standard than other heavily documented government spending. For regulation, casual offsets are more than just permissible, they foster a tendency to disregard costs altogether.

All sorts of complexities loom. Is it a benefit if government corrects consumers’ “irrational” preferences — say for traditional but less efficient light bulbs? Does it matter if those paying and benefiting are different groups? Moreover, what of potentially superior alternatives foreclosed? Noted Crews:

There are problems with priestly agency attitudes, the costs of closing doors, distortions of industry structure (like antitrust, telecommunications, electricity grid or cybersecurity regulation) and interference with normal market trajectories and pricing experimentation. Such regulation can prevent superior pro-consumer, competitive responses to alleged bad behavior.

Indeed, much “regulation” in a free economy is private. Insurance companies set standards. Underwriters Laboratory tests products. A well-functioning tort system imposes accountability. So does market demand, which rewards and punishes based on the quality and effectiveness of goods and services. Also, contra Donald Trump, international trade disciplines industries, like autos, which short-change consumers. Government does best setting broad, framework rules, especially for basic objectives like security, safety, and health. How to achieve more practical ends — ensure that pharmaceuticals and medical devices are “effective” — is far better left up to the marketplace. Indeed, as Richard Williams of Mercatus observed last year, “New technologies are poised to launch a health care revolution, improving care and cutting costs,” but the FDA’s “obsolete regulatory framework… threatens to slow or derail important components of that revolution.”

Overall how much have we lost from excessive, unnecessary regulation? A lot, according to economists John W. Dawson and John J. Seater. They considered the cumulative impact of losing a couple percent of economic growth year in and year out from 1949 through 2005: “That reduction in the growth rate has led to an accumulated reduction in GDP of about $38.8 trillion as of the end of 2011. That is, GDP at the end of 2011 would have been $53.9 trillion instead of $15.1 trillion if regulation had remained at its 1949 level.” Imagine a nearly four-fold increase in per capita income and wealth.

Grant all the difficulties with this sort of analysis. Acknowledge that some of those regulations were necessary and in other cases better alternatives still would have imposed serious if not so excessive costs. The negative impact on living standards remains obvious.

Increased regulation also contributes to increased inequality. Free, unfettered markets are most likely to benefit the 99 percent. In a January study McLaughlin and Laura Stanley of Mercatus reviewed the impact of regulation on equality. Unsurprising was their conclusion that such rules “skew income toward politically connected producers and away from individual who lack the resources necessary to navigate the legal and regulatory framework.” The researchers found not only that limiting market entry increases the Gini coefficient, which measures income inequality, but that “an increase of one standard deviation in the number of procedures required to start a new business” results in “a 5.6 increase in the share of income going to the top 10 percent of earners.”

Finally, there is the issue of lost liberty. Crews released a second study last year entitled “Mapping Washington’s Lawlessness 2016.” It reviewed what he termed “regulatory dark matter.”

America supposedly reveres the rule of law, not of men. Yet the regulatory process is essentially lawless, beyond the normal accountability of a democratic system. As Crews explained:

Congress passes and the president signs a few dozen laws every year. Meanwhile, federal departments and agencies issue well over 3,000 rules and regulations of varying significance. A weekday never passes without new regulation. Beyond those rules, however, we lack a clear grasp on the amount and cost of the thousands of executive branch and federal agency proclamations and issuances, including memos, guidance documents, bulletins, circulars, and announcements with practical regulatory effect. There are hundreds of “significant” agency guidance documents now in effect, plus thousands of other such documents that are subject to little scrutiny or democratic accountability.

In fact, one is tempted to speak of administrative tyranny. Obamacare demonstrated how the executive branch even could ignore the clear language and intent of legislation and “repair” “problems” which it alone discerned. When benefits are provided and penalties exacted without lawmakers’ approval, do we still live in a democratic system based on the rule of law?

Americans are suffering, especially blue collar workers and others who have less education, are less mobile, and enjoy fewer opportunities. But closing off the economy is no answer to them. Why aren’t Donald Trump and his supporters inveighing against federal, state, and local governments for doing so much to prevent American companies from being the best they can be, out-competing foreign operations and rewarding Americans accordingly?

Critics of the regulatory state often discuss federal rules and controls in the abstract. Instead, advocates of a free economy must address people who believe they are losing in today’s economy. It is important to point out who really is to blame for creating today’s economic problems and imposing widespread financial hardship, thereby fueling the populist Trump bandwagon.

Doug Bandow is a senior fellow at the Cato Institute. A former Special Assistant to President Ronald Reagan, he is the author and editor of several books, including The Politics of Plunder: Misgovernment in Washington (Transaction) and Beyond Good Intentions: A Biblical View of Politics (Crossway).