Environmental regulations entailed by GND gut business confidence and crush the economy --- costs, litigation, and undermine small businesses

Survey results for businesses — especially smaller firms — suggest regulatory changes are having some impact nonetheless: As shown in Figure 1 below, there is a link between the way small businesses view regulations and improvements in manufacturing sentiment.1 This is consistent with research that shows the impact of government regulations is greatest on small size firms. The environment is an extensive area of regulations to deal with externalities such as pollution. However, several studies suggest environmental regulations have become overly complex, and market-based solutions offer a more effective means for dealing with the problem of acid rain. Although several former Republican policymakers have proposed a carbon tax to combat global warming, President Trump believes the costs are too great for the economy. Another important area is financial services, where the principal challenge is to ensure stability without turning banks into quasi-utilities. It is too early to ascertain the impact of policy changes to lessen the impact of Dodd-Frank, but financial stocks have matched the overall stock market for the first time in several years after trailing the broad market consistently since 2008. Small Business Views on Regulation and ISM Manufacturing Sentiment chart Background: The Case for Deregulation One of the most controversial issues in public policy relates to the role of government regulation of the economy. This is an area in which many businesses have expressed frustrations over the past two decades. In a speech to the Economic Club of New York shortly before the November 2016 elections, Donald Trump mentioned that he frequently asks CEOs what they would pick if forced to choose between tax cuts or diminished regulations. According to him, nine out of ten executives would opt to have fewer regulations. The reason: companies can hire tax experts to navigate their way around the tax code, but it is more difficult to circumvent regulations. The regulatory burden is especially problematic for small businesses because the rules cause them to incur fixed costs, and the scale of operations is much smaller than for larger firms. For example, a study by Nicole Crain and Mark Crain of Lafayette College estimates the cost per employee of complying with federal regulations at $10.6 thousand for businesses with fewer than 20 employees compared with $7.8 thousand for those with more than 500 workers.2 The researchers also contend that government regulations make small business less competitive against foreign firms. Nor does the United States fare well when compared with many industrialized nations. A study by the Organization for Economic Cooperation and Development (OECD) undertaken a decade ago found the U.S. barriers had higher regulatory barriers to entrepreneurship, greater administrative burdens on small business owners, and higher barriers to competition than a number of other industrialized countries. An article in The Economist titled “Over-regulated America” (February 18, 2012) made the following observation: Americans love to laugh at ridiculous regulations…But the red tape in America is no laughing matter…Americans are supposed to be free to choose for better or worse. Yet for some time Americans have been straying from the ideal. How Costly Are Regulations? This begs the question about how costly regulations are for the economy as a whole. The problem is no one really knows.The federal government is not required to track regulatory costs, and most empirical studies have focused on a narrow set of industries. Federal agencies are only required to conduct cost-benefit analyses on rules deemed “economically significant,” which are defined as having an annual effect on the economy of at least $100 million. The Congressional Research Service, therefore, has warned that it is inherently difficult to estimate the total cost of regulations and that estimates “should be used with a great deal of caution”.3 What is clear is the Trump administration is serious about reducing regulatory burdens businesses face. It has done so by instituting a freeze that has slowed the number of new regulations considerably and by reinterpreting existing statutes to be more favorable to business than during the Obama administration. The Trump administration, in turn, has touted its pro-business stance as having contributed to the acceleration in economic growth over the past year to a 3% annual rate from 2% previously. Most economic analyses have credited the changes in tax legislation that were enacted at the end of 2017 rather than deregulation for this outcome. The consensus view, for example, is the stimulus from corporate and personal tax cuts were front-end loaded and will add the equivalent of 1% to 1.3% of GDP this year. By comparison, the impact on the economy over the long-term is estimated to be 0.1%-0.2% per annum, compared with 0.5% by the Trump administration. An alternative view is that of Mickey Levey, chief economist for Berenberg Capital Markets, who contends the easing of burdensome regulations has been a key factor driving U.S. business confidence, production, and capital spending: “While the deregulatory thrust has received far less attention than 2017’s tax reform deliberations or 2018’s skirmishes on trade policy, it is of utmost importance to business production processes and decisions about hiring, expansion plans, and investment strategy.” As evidence, Levy cites the latest survey by National Federation of Independent Business (NFIB), which shows that many small businesses have expressed reduced concerns about government requirements, and Levy links this to improved manufacturing sentiment in the ISM survey. Levy’s forecast for the U.S. economy over the long-term is upbeat: He believes the improved climate for business investment spending will help lift the potential growth rate of the economy from the Fed’s estimate of 1.8% per annum to at least 2% soon. In this regard, Levy contends that a “growing web of regulations imposed at the national, state and local level” after the 2008-09 financial crisis created policy-induced “supply constraints” that offset the Fed’s unprecedented monetary stimulus.4 At this juncture, it is too early to tell which view is correct. However, insofar as improved business sentiment translates into increased business capital spending, there is some corroboration for the view that burdensome regulations impeded economic growth after the financial crisis. Impact of Environmental Regulations Because of difficulty quantifying the impact of regulations on the overall economy, I have taken a closer look at two areas — the environment and financial services — where government regulation is especially important. With respect to the environment, the signature piece of legislation was the Clean Air Act that was enacted in 1970, which authorized the development of comprehensive federal and state regulations from both industrial sources and automobiles. It was followed by amendments to cover geographic areas that do not meet one or more of the federal quality standards in 1977 and legislation enacted in the early 1990s to deal with the problem of acid rain. Considerable progress has been achieved in battling air and water pollution, which has improved human health and the environment. Nonetheless, a prevalent view today is environmental policy is extremely complex, has led to ungainly bureaucracies, has incurred high costs, is politically polarized and is also very litigious.5 A report by the Brookings Institution on the 30th anniversary of the creation of the EPA, for example, acknowledged that U.S. companies were complaining about the high cost of compliance, and it cited two studies that estimated the annual cost in the late 1990s to range between $144 billion to $185 billion.6 Businesses have also complained the rules have outlived their usefulness, have resulted in job losses, and make American companies less competitive internationally.7