Over-Regulation Now Makes America $4 Trillion Poorer

Thursday, August 18th, 2016 @ 5:58PM

Gary D. Halbert

Between the Lines

I have focused on over-regulation in America for the last couple of months because it is such a crippling impediment to the US economy, and because it is such a critical issue in the upcoming presidential election. The candidates have starkly different views on this issue.

Today we’ll look at a new study from the George Mason University which not only confirms that over-regulation is a serious drag on the US economy, but more importantly, it quantifies the massive cost of that drag. Even I was surprised.

Bottom Line: Thanks to the regulatory drag, the US economy is $4 trillion smaller than it otherwise would have been, according to the new study. Gross Domestic Product, the sum of all goods and services produced in the US each year, was $18.04 trillion in 2015.

Yet according to the latest study from George Mason University, the US economy would be over $22 trillion today in the absence of the excessive over-regulation in the last several decades, under both Republican and Democratic leadership, and especially under Obama.

Not to oversimplify, but the excessive growth in regulations means that US companies must spend more on compliance, both in terms of capital and staff, and that leaves less to spend on new plants, equipment, hardware, software, new product development, etc. In short, over-regulation, which has been on steroids during the Obama years, is a huge drag on the economy.

The authors of the George Mason University study concluded:

“The economy would have been about 25 percent larger than it was in 2012 if regulations had been frozen at levels observed in 1980. The difference between observed and counterfactually simulated GDP in 2012 is about $4 trillion, or $13,000 per capita.”

The point of this and numerous other studies on over-regulation is not to suggest that no regulation is preferable. To the contrary, reasonable regulation is definitely in the public’s best interest. But as with most things in life, out-of-control regulation is strangling our economy. And President Obama holds the record for the most new regulations in any presidency.

Our economy could be humming along at $22 trillion or more today instead of $18 trillion.  For the first time in US history, more businesses are closing than there are new business startups. This is in large part due to over-regulation which tends to strangle small businesses.

We all need to think about that. I don’t personally like Donald Trump. But he is for not only less regulation, but also rolling back some of the existing regulations. Hillary wants even more. We may not like Trump, but on this issue, we have a clear choice on November 8.

Hillary Clinton will continue the torrid pace of new regulations, while Donald Trump vows to put a moratorium on new regulations and appoint a task-force to see what existing regulations should be scrapped. The difference between the two is stark!

Fed Leaves All Options on the Table at July Policy Meeting

The minutes from the July 26-27 Fed Open Market Committee (FOMC) meeting were released yesterday, and they revealed a Fed that is deeply divided on the question of when to enact another interest rate hike.

Essentially, the 10-voting-member Committee is broken up into three groups: 1) those who believe the Fed Funds rate should have already been hiked earlier this year; 2) those who don’t think the rate should have been hiked in late July, but could be inclined to vote for an increase very soon if the economic data holds up; and 3) those who don’t want a rate hike this year at all.

Given this fragmented makeup of the policy Committee, the possibility of a rate hike at the September 20-21 FOMC meeting cannot be ruled out. Likewise, the possibility of a second rate hike on December 14 (the last policy meeting of this year) cannot be ruled out either. But I don’t think two rate hikes this year is the most likely scenario.

Bottom Line: If I had to bet based on what we learned from the Fed yesterday, I would look for no rate hike on September 21 because Janet Yellen is thought to be among those who are not ready to hike just yet. Obviously, I don’t know but I suspect that Yellen would also prefer to let the presidential election go by, and then consider a quarter-point hike at the December meeting, if the economic data continues to look firm.

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