Last week we contemplated the recent meeting of G20 ministers, and in particular the importance of what was not discussed. Conspicuous by its absence was any mention of the suffocating burden of over-regulation and government intervention.
Warnings about the stifling crush of excessive governance have echoed for years. "What now concerns us is quite new in the history of Americathe assault on the enterprise system is broadly based and consistently pursued. It is gaining momentum and converts." This observation was made by future Supreme Court Justice Lewis Powell in 1971. Since that time the Federal Register, the annual journal of all new Federal laws and regulations, has ballooned from 25,000 pages to an astounding 79,000.
Chris Hopkins of Barnett & Co.A U.S. regulation is considered "major" if it will cost the economy more than $100 million annually, imposes a major burden or substantially changes an industry. Data from the US Government Accounting Office shows that President Obama has earned the rulemaking championship, presiding over 512 major regulations in just 6 years. But the damage has been decidedly bipartisan: President George W. Bush's administration clobbered the economy with 496 new major rules during his 8 years in office.
Economists Alan Krueger (former advisor to President Obama) and Morris Kleiner report that over 800 occupations require licensing in at least one state, and the share of workers who need government permits has grown from 5 percent in 1950 to 35 percent today. Too often these requirements serve to protect politically connected incumbents from potential competition and extort fees into state coffers, much like the guild system of the 14th century. Regrettably, some things never change.
Just how much mischief can a few regulations cause? Researchers John Dawson and John Seater authored an interesting paper quantifying the impact, and it is staggering. Their work suggests that from 1949 to 2011, the expansion of the regulatory state has sapped the US economy of nearly $39 billion in output. In other words, if regulation had remained static since 1949, US GDP would have totaled $54 trillion instead of $15 trillion. That difference represents about $277,000 per household per year.
Meanwhile direct government intervention in economic activity has reached epic proportions. Never mind the wasteful and ineffective fiscal stimulus offensives (like the risible "cash for clunkers"). Central banks around the globe have given up any pretext of allowing markets to determine prices, embracing an extended zero interest rate policy and massive bond buying. The result has been colossal misallocation of capital away from the real economy into capital assets (stocks and real estate). The cure has proven much worse than the disease.
These well-intentioned monetary interventions have exacerbated income inequality in developed economies (and especially the US); the rich are getting richer while the middle class continues to lose ground. The law of unintended consequences has slapped the cuffs on economic growth and handicapped the very segment of the workforce their actions sought to aid.
Small wonder that US economic growth has barely attained 2 percent per year since the Great Recession. But that sounds positively robust compared with the 1 percent annual rate in Europe, and in Japan, which has suffered 3 new recessions since the Great One. In each case, a regulatory strait jacket and massive government intervention have stifled the dynamic expansionary force of the free market and inhibited a more rapid and vibrant recovery.
Ironically, the Chinese government is clumsily implementing measures to partially loosen regulation and allow interest rates more leeway to float with market forces in an effort to stimulate growth. Perhaps the developed world should look east for inspiration on how to reinvigorate Western capitalism.
Christopher A. Hopkins, CFA, is a vic president and portfolio manager for Barnett and Co.