Garrotted By Red Tape

While the country’s attention has been riveted by the debt ceiling and downgrades, there is a more ominous phenomenon that has largely gone unremarked: overregulation.

October 5 2011 by ChiefExecutive.net


Garroted by Red Tape

While the country’s attention has been riveted by the debt ceiling and downgrades, there is a more ominous phenomenon that has largely gone unremarked.

As serious as the federal government’s spending problem is, it is made more so by the economy’s anemic growth rate. The U.S. economy has grown 0.4 percent and 1.3 percent respectively in the first and second quarters of 2011 after the Commerce Department revised its previous estimate of first-quarter GDP growth of 1.9 percent—nowhere near the 6.2 average post-recession growth rate of past recoveries. Despite the surge in corporate profits, U.S. employment is at the lowest levels in 28 years due in no small measure to uncertainty created by the very administration that claims it is pivoting to make job growth a priority.

In a conference call with investors, casino developer Steve Wynn, who styles himself a “ Democratic businessman” put his finger on the problem of why this is so when he said that companies he works with “are frightened of this administration,” adding that “it makes you slow down and not invest your money.”

The problem to which Wynn refers goes well beyond bashing billionaires and corporate jet users “who don’t pay their fair share” in taxes. It’s the hidden tax on everyone that dare not speak its name: overregulation. Every year economist Clyde Crews of the Competitive Enterprise Institute sizes up the costs of Federal regulatory spending and found in his analysis that in 2010 the government spent $55.4 billion to fund federal agencies enforcing regulations. But Crews reports that this figure does not come close to describing the true scope of the drag on the economy. Citing the work of economists Nicole Crain and Mark Crain who have studied the net cost of regulations, they estimate that in 2009, the true cost of federal regulations to business and consumers was $1.75 trillion or about 12 percent of GDP.

This exceeds what the IRS collected in revenues, or the $1.46 trillion in pre-tax profits business earned in that same year. Critics on the progressive left have denounced the figure as grossly inflated, claiming faulty methodology—which is curious considering the methodology has not be released.

James Gattuso and Diane Katz, both research fellows at the Heritage Foundation, however, have also tracked federal regulations and found that the cost is growing substantially, which isn’t surprising considering that the Federal Register that compiles them is now over 81,405 pages long. From the beginning of the Obama administration to mid-FY2011, regulators have imposed $38 billion in new costs, “more than any comparable figure on record.” Of the 1,827 rulemaking proceedings completed in the first six month of FY2011, 37 were classified as “major” meaning they have economic impact of at least $100 million a year. No major rulemakings decreased regulatory burdens.

This trend didn’t begin with the current administration. However, the rate of such burdens has accelerated under Barack Obama. President Bush was in his third year before costs hit $4 billion—a figure Obama achieved in his first 12 months. Nor will the fire hose be turned o! soon. Gattuso and Katz report that 2,785 proposed rules are in the pipeline, with 144 classified as “economically significant, ” meaning each represents $100 million annually or for a total of $14 billion in added burdens each year. Despite lip service given to reducing unnecessary regulations via executive order, the Obama administration seems to be doubling down with more rules covering energy, health care and financial services.

“Until we change the tempo and the conversation from Washington, it isn’t going to change,” Steve Wynn said during his celebrated call. We couldn’t agree more. Calling for Congressional oversight is useless. They don’t even read the bills they vote into law. And asking agencies to review their rulemaking for economic benefits is like having North Korea chairing the Conference on Disarmament, or Iran officiating on the U.N Commission on the Status of Women. Establishing sunset provisions for all federal regulations might work, but President Obama can’t have it both ways. Having identified overregulation as a growth killer he must take steps to rein it in.