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How Over-Regulation Hurts Us - Some Eye-Popping Numbers

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert

October 14, 2014

IN THIS ISSUE:

1.  Over-Regulation Has Created a Big Hit to the Economy

2.  Reducing Regulations Should Be a Top National Priority

3.  How Over-Regulation Slams US Worker Productivity

4.  US No Longer World’s Economic Freedom Standard

Over-Regulation Has Created a Big Hit to the Economy

You might recall that my September 16 E-Letter focused on how out-of-control federal regulations stifle the US economy. Since then, I have run across an independent study which puts actual numbers to the cost of over-regulation, and the figures are staggering!

The study entitled “Federal Regulation and Aggregate Economic Growth” was published by the Journal of Economic Growth. Among other things, the Journal conducts research on how over-regulation hurts the economy. The Journal calculates that over-regulation has shaved at least 2% off of annual economic growth since 1949.

As a result, the Journal studied the effects on the US economy if GDP had grown just 2% more each year since 1949, which it believes would have been entirely possible with more reasonable (meaning less) federal regulationsFasten your seatbelt!

If the US economy had grown an extra 2% per year since 1949, 2014′s Gross Domestic Product would be about $58 trillion, not $17.5 trillion
as it is today.

That’s simply not possible, you may be thinking. There’s no way the economy could be over three times larger with only a 2% annual bump in growth. But think again and consider the power of compounding over this 65-year period. Albert Einstein is believed to have said, “Compound interest is the eighth wonder of the world.”

Before I get into more mind-boggling numbers, let me state that the Journal of Economic Growth is not opposed to all federal regulation, nor am I. Not all regulation is bad. For example, mandatory seat belt laws have helped cut traffic fatalities by 51% on a population-adjusted basis since 1949. And there are plenty of other examples of federal regulation that have greatly benefited our society.

Since I think that most all of us would agree that some regulations are good, the Journal ran some numbers using only 1% as the yearly cost of over-regulation to the economy. Let’s look at where that would leave us today, if the economy had grown simply by an extra 1% a year since 1949.

  • The 2014 GDP would be $32 trillion, not $17.5 trillion.
     
  • Per capita income would be $101,000, not $54,000.
     
  • Per capita wealth would be $480,000, not $260,000. It would probably be higher than that, since savings rates might be higher.
     
  • The US would have no federal, state or municipal debts or deficits.
     
  • Pensions would be fully funded. So would Social Security.

These are only the headline benefits if the economy had grown by 1% a year more over the last 65 years. Here are some other potential benefits if the economy had not been held back by over-regulation.

More cheap, safe nuclear power plants. More cancer-curing drugs and other medical cures. More faster, quieter fuel-efficient airplanes. Ditto for automobiles and trains. More mass-transit in urban areas. More and better national security. I could go on and on.

The point is, our economy could be significantly stronger if it weren’t for over-regulation. People at all levels would have more money in their pockets to spend. Consumer spending makes up 70% of GDP. Do the math – would you rather GDP be $17.5 trillion or $32 trillion?

Reducing Regulations Should Be a Top National Priority

Over-regulation should be a huge national issue but hardly anyone talks about it. Name me one national political figure that has run on scaling back government regulation in recent years. It’s hard to find one, perhaps other than Ron Paul who is no longer in politics. With an issue this big, the question is, why not?

You might be thinking that this is a partisan conservative issue. It is not! John F. Kennedy, Ronald Reagan and Bill Clinton – two Democrats and a Republican – were the best presidents since 1949 regarding regulation. And by “best” I mean that these three presidents allowed regulation to grow the least.

The three worst presidents: Harry Truman, George W. Bush and Barack Obama, who still has two more years to go.

Over-regulation is one of the most important issues of our day. It should be front and center in the national debate. It is not a partisan issue. The problem is, few Americans even know what a huge drag over-regulation is on the economy.

Just imagine what it would be like if our economy was $32 trillion instead of just $17.5 trillion today. That’s almost twice as large! Imagine what it would be like if Americans had almost twice as much to spend or save.

Just imagine if the government had no national debt instead of the current $17.8 trillion that will never be repaid. Imagine if we had a balanced budget every year.

The problem is, of course, that if the economy had grown by an extra 1% a year since 1949 – due to reduced regulation – politicians would have figured out a way to spend all of that extra federal revenue.

It sounds so simple, doesn’t it? You would think we could figure this out and fix it.

Yet sadly, over-regulation is rarely even a part of the national debate. It should be!

How Over-Regulation Slams US Worker Productivity

Since 2011, productivity – the main driver of job creation and economic growth – has been growing at just half its historical rate, according to the government’s Bureau of Labor Statistics (BLS). Worker productivity is determined by the amount of goods a worker produces in a given amount of time.

Economic growth is largely driven by gains in productivity, not increases in capital and labor. And productivity is determined by innovation, resulting in more efficient businesses and workers, lower costs, higher profits and incomes, increased demand and gains in job creation. As businesses become more efficient, costs fall and profits and incomes rise.

Productivity Change in the U.S. Manufacturing Sector

According to the BLS, US productivity has averaged 2.5% annual growth since 1947. However, since 2007, it has grown by only 1.5%. Since 2011, it has grown by only 1.1% (as of the end of last year). Then in the 1Q of 2014, productivity actually declined at an annual rate of 3.2%, the weakest showing since the beginning months of the recession in 2008.

Most analysts attributed the sharp decline in the 1Q to the severe winter and predicted a significant increase in the 2Q. Productivity did rise by 2.3% in the 2Q, according to the BLS, but it was below expectations. For the 12 months ended June 2014, productivity rose only 1.1%.

Historically, start-ups launched by entrepreneurs have been responsible for some of the most important innovations of the past century. But alarmingly, new business formation has been declining across the country.

Earlier this year, John Dearie, Executive Vice President at the Financial Services Forum, a non-partisan consulting firm, conducted roundtables with entrepreneurs across 12 American cities and looked at several studies on the issue. Here is what he found:

  • According to the entrepreneurs, regulatory burdens, complexity and uncertainty are dampening their ability to launch new businesses and create jobs – and hurt productivity. For the first time ever in this country, more small businesses are closing down than are starting up.
     
  • According to a report from the Competitive Enterprise Institute, almost 90,000 new regulations have been issued over the past 20 years – an average of more than 4,500 per year. The report estimates their annual negative economic impact to be $1.9 trillion, a figure equivalent to the world’s tenth largest economy.
     
  • Three-quarters of American voters say that American businesses are over-regulated, and that more regulations cause jobs to move overseas, according to national surveys. Three-quarters of Americans also say that every time the government mandates a new regulation on large and small businesses, the prices of goods such as food and gasoline go up.
     
  • Three-quarters of Americans say they associate regulations most with unnecessary red tape and restrictions that lack common sense and result in higher costs for American goods. Only 2% of Americans said they associate regulations most with protections for customers from businesses.

While some regulation is essential, over-regulation creates economic distortions and imposes costs that must be borne by businesses, including productivity losses. Start-ups are especially susceptible to the effects of over-regulation, because they often lack sufficient capital to absorb compliance costs.

Business experts pretty much across the board agree that regulations are not only concealed taxes but they also increase costs and hurt overall productivity and economic growth. With both GOP and Democratic lawmakers unlikely to make any significant pushes to diminish the regulatory burden, it may worsen over time.

Politicians on both sides of the aisle say that they are seeking to pass the “Regulatory Improvement Act of 2014,” a bill they promise will evaluate, simplify, streamline and eliminate certain regulations. While doing so might decrease regulatory burdens and promote higher productivity and greater economic growth, I see no evidence that this legislation is anywhere near passage – especially as long as President Obama is in office.

US No Longer World’s Economic Freedom Standard

There was a time, not so long ago, when the United States was considered the “world standard” for economic freedom. Yes, there were countries out there, like Hong Kong and Singapore, that might have had lower taxes or fewer regulations. But the world could still speak confidently of the American free-enterprise system. No longer.

Last week, a consortium of think tanks from almost 90 countries released their Economic Freedom of the World Report. The United States is no longer among the top ten countries when it comes to size of government, rule of law and property rights, soundness of the money supply, regulation and free trade.

We now rank 12th, down from second as recently as 2000. For the record, we now trail Hong Kong, Singapore, New Zealand, Switzerland, Mauritius, the United Arab Emirates, Canada, Australia, Jordan, Chile, and Finland.

America in DeclineOur economic situation looks even darker when one examines the individual components that made up our overall ranking. Americans may be aghast at the big governments of Europe, but we actually rank 46th in the world using the so-called “chain-linked” rankings. Our government is not yet as big, relative to population, as France’s (ranked 113th) or Italy’s (115th), but we are headed in that direction if we don’t change our ways. Already we rank below Brazil and even Mexico.

As the chart at left from the Heritage Foundation illustrates, the US is the only country to have lost economic freedom for seven straight years.

Nor are we a bastion of free trade; we now rank 29th worldwide. Of particular concern, the soundness of our money continues to erode. As recently as 2005, we were an unsurprising number one. Today, we’ve slipped to 38th.

Even more frightening, in 1980 when the report was first issued, the US legal system and our respect for property rights were the world’s best. In 2000, we still ranked in the top ten. Today, we have fallen to 36th, trailing countries like Malaysia, Namibia, and Cyprus. That’s pretty poor company.

Among the reasons cited for this precipitous decline are the increased use of eminent domain to seize private property for public use (and often for the benefit of powerful political interests), increased property seizures resulting from the wars on terrorism and drugs, and violation of the property rights of bondholders in the automakers’ bailout. Overall, the report concludes that the United States:

“experienced a significant move away from rule of law and toward a highly regulated, politicized, and heavily policed state.”

Only on regulation did we squeak into the top ten. But even here the deterioration is significant. In 2000, before George W. Bush took office, we ranked second.

Of course, we can take comfort that we are not as bad off as Venezuela, which ranked dead last among the 152 nations that were evaluated. Other countries in the bottom ten included: the Republic of the Congo, Zimbabwe, Argentina, Algeria, Iran, Chad, Burundi, the Democratic Republic of the Congo and Myanmar.

Still, we should probably shoot for something a little higher than not being Chad.

As bad as this report is, it may actually understate our worsening condition. Most of the report’s data come from 2012. Given the trajectory of governmental growth over the last two years (Obamacare, anyone?), next year’s report is likely to look even worse.

Nor is this report the only indication that our economy is far from free. For example, Transparency International ranks the US 19th on its “Corruption Perceptions Index.” While this ranking is distorted by the organization’s antipathy to our campaign-finance laws, it also demonstrates increasing corruption and venality among our elected officials.

On the World Bank’s Ease of Doing Business Index, we do better, but we still trail Singapore, Hong Kong and New Zealand.

It has long been pointed out that the United States has the highest business-tax rates among industrialized countries. And a broader look at overall business-tax competitiveness by KPMG ranked the US behind such nations as Canada, the United Kingdom, Mexico, and the Netherlands.

There are very real consequences to the decline in US economic freedom. The new report makes very clear that there is a strong correlation between economic freedom and economic growth. Duhh!

For example, the quartile of countries rated most economically free had an average GDP per capita of $39,899. The least free quartile averaged just $6,253. Economic growth among the most free countries averaged 3.43%, compared to just 2.55% for those ranked least free.

Freer countries also perform better on measures ranging from life expectancy to the amount of income earned by the poorest citizens. The authors conclude that “unless policies undermining economic freedom are reversed, the future annual growth of the U.S. economy will be only about half its historic average of 3%.”

Moreover, while this report looked only at economic freedom (which is why Hong Kong and Singapore scored so high), the United States’ growing surveillance state, the ongoing wars on drugs and terror, police militarization and the increasingly intrusive regulatory bureaucracy raise important questions about civil liberties and civil rights as well.

We should not get too excited over the year-to-year fluctuations in these rankings. But the broad long-term trend has become ominous.

The US is steadily becoming less free. Like the frog in the proverbial slowly heating pot of water, we might not have noticed. But unless we reverse course soon, the consequences may be inescapable.

Sorry to end on a negative note, but this is where we are.

Very best regards,

Gary D. Halbert

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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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