By John B. Taylor and Tad Lipsky
While economists declared the national recession over as of June 2009, unfortunately, the economy has remained very weak since then and has recently grown weaker.
Compared with recoveries from past recessions, economic growth has averaged only 2.2 percent in this recovery while it averaged 5.7 percent in the recovery from the equally severe early 1980s recession. Since the recovery began, the working age population has increased by 8.3 million, but employment increased by only 2.7 million — not enough to employ the growing population let alone make up for the jobs lost in the recession.
The improvement in employment in Iowa in this recovery has been even worse than the national average. Employment has not grown at all since the start of the national recovery in mid-2009. In fact, in the past few months the number of jobs in Iowa has declined. In June 2009 employment was 1.571 million. In September 2012 (the most recently reported month), it was 1.552 million. The only reason that the unemployment rate is down in Iowa is that people have dropped out or not entered the labor force — many discouraged by the lack of jobs.
Based on our experience in government and the private sector, we have come to the conclusion that the reason for the weak economy is poor economic policy. Burdensome regulations are increasing rapidly, the national debt is exploding, and tax policy is so uncertain that businesses have no idea what the tax rates will be next year. No wonder so few are hiring workers.
One measure of the difference between the regulatory policies in the two recoveries compares the number of federal workers engaged in regulatory activities in the years before and during both recoveries (from analysis of federal budget data):
l The number of federal workers in regulatory activities declined from about 155,000 in 1979 to about 125,000 by 1985.
l Even when TSA workers are excluded, the number has grown from just over 180,000 in 2006 to about 238,000 this year.
While correlation does not prove causation, these policies raise the cost of doing business and thus discourage business expansion and economic growth. This does not imply that increased regulation was the cause of the recession, which was surely due to other factors, including financial and monetary shocks.
But without the recent regulatory expansion, we would have had a stronger economic recovery.
This regulatory surge engulfed a large fraction of the economy: health care (impacted by “Obamacare”), banking and financial services (“Dodd-Frank” legislation and the impending “Volcker Rule”), energy (greenhouse gas regulation), and others. Many such efforts have produced only regulatory quagmire, or are half-implemented.
The Volcker Rule, for example, was supposed to separate what banks do for investment clients and what they do for themselves. Yet the implementing regulations, already running into the hundreds of pages, are mired in controversy, while any possible implementation is still years away. In the meantime, businesses hesitate to make commitments — especially those badly needed decisions to invest and hire — as long as the regulatory picture is clouded.
There is often consensus on the need for regulation, but “the devil is in the details” of implementation and enforcement. Regulation works best when it pursues a small number of well-defined and achievable goals. Few recent regulatory efforts meet these criteria.
With so many U.S. businesses struggling to find new markets, invest in new technology and get back on the track to success, the last thing they need is a constant onslaught of new and heavier bureaucratic controls.
The family of one of this article’s co-authors (Lipsky) immigrated and took root in Cedar Rapids in the 1880s. Within a single generation, they established a successful business and were already making key contributions to the community. The continuing success of American enterprise depends on a commitment to the type of freedom and opportunity that produced that success, and millions of others like it. The American system will not long survive continuing regulatory overkill.
We need to change national policy if we are to grow jobs and restore prosperity. Mitt Romney has proposed such a change with a plan to stop the debt explosion, end the regulatory expansion, and start to introduce predictable policy on a bipartisan basis.
John B. Taylor, professor of economics, Stanford University, is former Undersecretary of the Treasury (2001-2005); Tad Lipsky, Cedar Rapids native, now a partner and attorney in Latham & Watkins’ Washington, D.C. office, is a former Deputy Assistant Attorney General, Antitrust Division, U.S. Department of Justice (1981-83). Comments: firstname.lastname@example.org or JohnBTaylor@Stanford.edu