Recession from Regulatory excess is Coming

On Tuesday of last week, a huge drop in consumer confidence was announced. One day later, the Bureau of Economic Analysis of the U.S. Department of Commerce reported the stunning news the U.S. economy actually contracted by 0.1 percent in the fourth quarter of 2012. Then on Friday, unemployment ticked back up to 7.9 percent.

So what was the reaction of the establishment media and many politicians? Downplay the news or blame phantom “spending cuts.” Hardly anyone spent a minute looking at the dramatic increase in regulation over the last few years, and the election results that may portend even more of an increase in red tape over the next few years.

The Washington Post sent a news bulletin shortly after the GDP contraction announcement that blamed the problem on “cuts in government spending, fewer exports, and sluggish growth in company stockpiles.”

The “cuts in government spending” part is wrong on its face. According to the U.S. Treasury Department (and hat tip to John Nolte of Breitbart.com), government expenditures actually increased by more than 10 percent from the previous quarter.

The Associated Press story The Post linked to in the bulletin did not repeat the error and was technically accurate in noting reduced defense spending. Other establishment media outlets took a similar approach, seeking to “blunt the bad news [and] continuing the left-wing theme that government spending/stimulus is the solution,” notes Julia Seymour of the Media Research Center.

But a more likely cause of the economy contracting was the very real threat — and realization — of the “regulatory cliff.” If there’s one thing worse than uncertainty, it is the certainty thousands of pages of new regulatory policies will go into effect. It’s far more likely the contraction was caused by entrepreneurs and investors seeing this future of shackling regulations and pulling back their investment in response.

President Obama’s re-election made it highly unlikely job creators would get any substantial relief from costly new provisions of the Affordable Care Act (Obamacare) or the Dodd-Frank banking overhaul that hits many community banks and non-financial businesses hard.

As Adam J. White noted recently in The Weekly Standard, “The Obama administration’s first three years of major rules, costing up to $26.7 billion, were five times more burdensome than the Bush administration’s first three years ($5.3 billion) and three and a half times more burdensome than the Clinton administration’s ($7.6 billion).”

White adds that these “major rules” were only a fraction of the 3,500 total regulations Obama has issued so far, and the cost figures did not even included the opportunity costs for the economy in his blocking of the Keystone XL pipeline.

In addition, government entities that faced bipartisan criticism for being out of control, such as the EPA and Department of Labor, now had free rein. Indeed, a torrent of new regulations that had been on hold for more than a year were suddenly released — in President Obama’s post-election Unified Regulatory Agenda and elsewhere.

National Journal reported just after the election that “federal agencies are sitting on a pile of major health, environmental, and financial regulations that lobbyists, congressional staffers and former administration officials say are being held back to avoid providing ammunition to Mitt Romney and other Republican critics.”

As my Competitive Enterprise Institute colleague Ryan Young has put it: “Now that this ammunition will no longer have electoral consequences, the EPA can move ahead on delayed rules on everything from greenhouse gas emissions to ozone standards. Rules from the healthcare bill and the Dodd-Frank financial regulation bill also likely will make themselves known in the weeks to come.”

In addition to the domestic rules, the Basel III international banking accord that was scheduled to go into effect this year threatened to severely constrict banks of all sizes from making loans even to high-quality borrowers. Under the regime, banks would have been forced to hold two to three times as much capital against most mortgages and small business loans.

The good news is slow growth — or even negative growth — can be dramatically reversed if the regulatory onslaught is reversed or at least significantly reduced. For instance, the first quarter of 2013 may be better because Basel III was delayed and somewhat revised to allow banks to hold different types of capital.

To get growth going again, President Obama and Congress’ first priority should be to reduce or reverse the “regulatory cliff.”

Evan Woodham, a research associate at Competitive Enterprise Institute, contributed to this article.

John Berlau is director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute. He is the author of the book “Eco-Freaks.” Read more reports from John Berlau — Click Here Now.