Revitalizing the American Dream

Big government. It coddles me, tucks me in at night and kisses me on my forehead. It tells me not to worry about a thing because it will protect me. All this of course because I am too incompetent to make my own decisions.

Government regulation is a growing epidemic in this country that acts as an anchor on economic growth and prosperity. It stymies small business creation that is the fuel for our capitalist engine driving the American dream.

Consider the number of pages in the Federal Register. The Federal Register is the journal that tracks all newly proposed rules, final rules, executive orders, and other agency notices. From the early 1940’s through 1960, the number of pages in the register increased 30% to just over 14,000 pages. From 1960 through 2014 the number of pages increased a whopping 445% to just under 80,000 pages.

Alas, our government is made up of several different agencies. The Code of Federal Regulations is the codification of all rules and regulations promulgated by federal agencies. In 1960 there were just under 23,000 pages. In 2014 that figure has ballooned 667% to just over 175,000 pages.

According to the George Washington University Regulatory Studies Center, annual expenditures and agency staff devoted to federal government and agency regulatory activity was less than $5 billion annually in 1960. By 2014 that figure approached $50 billion annually, a 900% increase.

Small Business Creation

I’ve written in the past about the importance of small business creation in this country (Irresponsibility in Government). In that article I stated, “It has been shown that of the 30 million small businesses in this country (defined as those companies with fewer than 500 employees), they employ over HALF of the country’s private sector workforce. Seven of every ten jobs that are created in this country are done so from this segment of the private sector. According to the SBA Office of Advocacy, small businesses account for half of the economy in terms of Gross Domestic Product and have generated 64% of net new jobs over the past many years.”

Over-regulation chokes the creation of small business and disturbingly it has been found that small businesses in this country are struggling. According to data compiled from the Kaufman Foundation (via the Washington Post) they find, “the country’s rate of new business creation, which peaked about decade ago, plunged more than 30 percent during the economic collapse and has been slow to bounce back following the recession. And that’s despite the fact that, over the last few years, the portion of the U.S. population between the ages of 25 and 55 – historically the prime years for starting a business – has been expanding”

Taken from the same article, “Labor Department statistics showing that companies less than one year old contributed 5.2 million jobs in the year ending June 2014, down from the usual 6 million or so they generated in the years leading up to the recession and well off the normal pace of 7 million to 7.5 million jobs a year seen in the 1990’s.”

According to labor data, we are now seeing the closure of small businesses outpace the formation of new businesses. “While the rate of business formation has slowed, the pace of business closures, which had held steady over the previous decade, started to ascend in 2005 and spiked in 2008, according to data compiled by the Brookings Institute. Consequently, business deaths now outpace business births for the first time since researchers started collecting the data in the late 1970’s.”

Costs of Over-Regulation – Economic Freedom

After reading the Economic Freedom of the World 2015 Annual Report conducted by the Fraser Institute, there were a few items that jumped out at me. Before I go into the details of the report I’ll first explain what this report measures and how it should be interpreted. The Economic Freedom of the World annual report measures the degree to which the policies and institutions of specific countries are supportive of economic freedom. They compile forty-two total data points for 157 different countries that take into account (1) the size, expenditures, tax rates and enterprises of that country’s government; (2) legal structure and security of property rights; (3) access to sound money; (4) freedom to trade internationally; and (5) regulation of credit, labor and business. It is on the fifth variable that we will discuss.

Without exception it has been shown that those countries with the greatest economic freedom ranking exhibit higher investment rates, greater economic growth, higher income levels and the lowest poverty rates. Those nations that rank in the top 25% had an average per-capita GDP of $38,601 in 2013 compared to $6986 in the bottom 25%. The average income of the poorest 10% in the most economically free nations is approximately 50% greater than the overall average income of the least economically free nations. Life expectancy in the top 25% economically free countries is 80.1 years compared to 63.1 years in those countries that rank in the bottom 25%. It is hard for one to argue that economic freedom and capitalist principles provide higher living standards.

So how did the United States of America - the beacon of freedom, the nation of capitalism, the shining city on a hill rank. We didn’t even make the top ten in the overall rankings this past year. We rank sixteen. What’s worse, our score of 7.73 out of 10 is more than 0.9 units lower from our 2000 rating. According from the producers of the report, “This decline in economic freedom is more than three times greater than the average decline in the OECD. It could cut the U.S. historic growth rate of 3% by half.”  

The report cites the rise of regulation among other things as a key contributing factor in the deterioration of our economic freedom. When government builds excessive barriers to entry in the formation of business through excessive regulation, it corrodes economic freedom and lowers our standard of living.

Open request to the next Republican Presidential Candidate

These facts seem to be lost on many of today’s politicians. Our pundits applaud lackluster economic growth as the new normal. It aches to watch the purveyors of liberal policies take credit for the anemic recovery that has happened not because of their economic policies but in spite of them. It angers me when I hear our leaders tell us that economic results have improved but “we have much more to accomplish”.

No you don’t. Just stop. To add insult to injury the Obama Administration just released plans to introduce 2,224 new regulations. Merry Christmas small business owner.

What we need in Washington is a regulatory overhaul. Our next President needs to conduct an independent audit of all outstanding government regulations and eliminate those that are outdated, redundant and abused. This will close loopholes and reduce complexity and fraud. As new regulations are introduced, we need to have an independent watchdog that legitimately quantifies the cost – benefit analysis of that regulation and it should meet a certain value-add threshold prior to introduction as legislation. Of those regulations that are introduced, they should be simplified to the point where those that are voting on its passage actually have an opportunity to read the rule. By constructing complex rules that are thousands of pages long and comingle various pet projects we open ourselves to a quagmire of ineffective policies and unintended negative consequences.

I love this country and still consider it to be greatest nation on the planet. That said, it pains me to say there are times when I don’t recognize my country anymore.  Let’s not forget the principles that made us great. Let’s revitalize the American Dream.

  

Joseph S. Kalinowski, CFA

Additional Reading

Over-regulation: Moving from addition to subtraction – The Hill Opinion

Over-regulated America – The Economist

Federal Regulations Have Made You 75 Percent Poorer – Reason.com

Obama Quietly Releases Plans For 2,224 Regulations Ahead Of Turkey Day – The Daily Caller

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