Death by a thousand cuts

Matt Yglesias discusses Republican intransigency is his latest post.  I'm not particularly interested in the partisan implications here, but Matt makes a good point about one specific policy issue:
Republicans have hammered away at the idea that Obama's environmental commitments are stifling the short-term job creating impact of investment in fossil fuel extraction and transportation. And precisely because this isn't a crazy idea, over time Obama administration policy has evolved to become increasingly enthusiastic about the short-term economic impact of fossil fuel extraction and less and less focused on the long-term environmental problems involved. 
Obama's willingness to make concessions on this point hasn't changed partisan politics, but has had impact in the real world. As expected, we have both more pollution and more mining sector employment than we would had this pivot not taken place. 
But America's way too big a country for us to all get jobs fracking for natural gas.
Matt goes on to opine about the need for Keynesian stimulus spending, but he should pause and think about his own example.  Relaxing regulations on natural gas drilling resulted in more investment, more jobs, and greater wealth.  No Keynesian stimulus required!

Matt is right to point out that fracking alone cannot restore full economic growth.  But perhaps we can apply to same principles to other fields- if the returns are high enough, businesses will invest and create jobs and wealth. Matt actually goes on to suggest something along these lines with respect to housing and he doesn't mention it here, but he'd probably also favor deregulating occupational licensing.  These are just the tip of the regulator iceberg however.  There are thousands regulations at the federal, state, and local level which drive up the costs of investment and drive down the return on capital, meaning less investment and fewer jobs.

We see the impact of fracking regulations because it's new, it's large, and it's disparate- America now has low natural gas prices and a thriving natural gas sector, France does not.  There's no symbolic industry where we see the impact of  the Endangered Species Act, but business know it slows down development, and increase costs.  They understand these costs- they lead to less investment.  We don't see how standards of "disparate impact" and discrimination lawsuits impact employment, but we know it does raise costs and reduce employment.  Businesses are not blind to these costs and it reduces employment since we've made it more expensive to employ people.

Matt might argue that this doesn't explain why 2012 is different than 1994.  Regulation isn't that different now than 1994- why is this recovery so much slower?

First, there actually is a lot more regulation now than 20 years ago. In the past 3 years, the Code of Federal Regulations has increased 7.4%.   Of course, the size of the federal register is only and a rough proxy.  Also this is not a Democrat vs. Republican issue.  For instance it was Bush Sr. who signed the ADA, which has been interpreted to mean you can't fire drunks and makes building new commercial or multi-family housing more expensive.

The second reason we're seeing the impact of these regulations now, is that most regulations grandfather in existing facilities and arrangements.  The ADA didn't make it illegal to work at a non-compliant building- it simply required new buildings to comply to code.  Existing building owners didn't need to teardown their buildings, the law simply make it more expensive to build new ones or remodel old ones.

Further more, regulations which do apply to existing business often benefit from sunk costs.  Citibank may hate the new Dodd-Frank credit card regulations which cost them money and lower their return.  However, Citibank has already invested in the business- they have millions of customers, offices, back-office technology, and employees.  Perhaps they make 4% instead of 6%- the regulations aren't so onerous that they abandon the business.  A new competitor will forgo entry when faced with these higher costs- it's not worth tying up capital at the new low rates of return.

The housing and investment bubble combined with changing technology and globalization resulted in a real shock to the economy.  Old jobs disappeared.  Old jobs have been disappearing for 200 years in America- we typically see new ones appear almost immediately.  But the weight of regulation represents a huge drag.  It was worth hiring the old employee because they were hired *before* ADA and other laws increased the cost of employment.  It was worth investing in the existing infrastructure because this was done under a more liberal regime- no need to worry about multiyear EPA delays.

There's an asymmetry between the old and the new.  We only see the full price of regulations when we face change.  New businesses see the full weight of these costs in a way old businesses never did.  It's death by a thousand cuts.  Each regulation has a small impact, but the weight of all these thousands of cumulative regulations slows down investment and reduces entrepreneurial risk taking.


Popular posts from this blog

Why Tesla's FSD Approach is Flawed

What Smart Tesla fans Get Wrong about FSD

Modelling Q4 Model 3 Deliveries