The U.S. Growth Machine is Red-Taped to Death


With the onset of the Great Recession, the revival tools of monetary and fiscal policy were applied in the extreme to resuscitate spending and return solvency to the banking system. All textbook Keynesian approaches to restoring demand levels to previously attained aggregate supply.

That much has been accomplished. But now seven years later, the realisation has sunk in that a return to the economy’s past high water mark is not the same as causing the high water mark to continue to grow at rates the US economy had been accustomed to. Keynesianism did its job of restoring aggregate demand to already existing aggregate supply levels.

But resuming economic growth from there requires growing a globally competitive supply capability as well.

Certainly the Fed’s obsession with holding interest to near zero is not doing the job because as cheap as the Fed can make credit there are too few takers to translate that cheap credit into business investment that leads to spending, productivity, competitiveness, jobs, wage growth and wealth.

While the price of credit factors into that chain of events, that, in itself, is not sufficient to do the job because credit cost is but one side of the market and business borrowers’ and their capex motivations is the other.

We can chastise the Federal Reserve either for being unable to get itself to move off of a zero cost of credit, as it does have harmful side effects, or we can chastise the Fed for a lack of growth but the Fed has no other way to influence the growth machine.

Only Congress and a President do and the Fed would be doing a public service if they stated so publicly, instead of putting the onus on the back of a central bank that can’t influence the desire for business investment capable of producing growth.

Essentially, it all goes back to William McChesney Martin’s observation that monetary policy is “pushing on a string.” That is, the central bank is better in reining in business adventurism than motivating it.

Just why nearly free credit is not causing businesses to jump on investment opportunities certainly has to do with confidence and taxation but mostly its red tape that inhibits the instinct to take the cheap money and invest in new, real things.

Regulatory red tape whether calculated by the costs to fathom how to build and shape your businesses adventure and be aware of its legal exposure, sometimes criminal, seems to be inhibiting the instinct to take the near zero money.

And without a healthy investment response to credit availability there are poor economic outcomes. Indeed, the decline in Real Median Family Income did not gone unnoticed in the first Democratic Party debate which showed interest in the issue of red tape so much as it ultimately relates to income distribution, but nary a mention at the Republican debates.

But to do something about red tape that binds businesses would require some focus and measurement without which it is not easy to highlight its adverse influence on growth. What we are talking about is measuring the opportunity cost (the loss of) new goods, and output and jobs due to red tape constraining business from undertaking projects and new businesses to enter markets. There is obviously a major problem with a declining census of the number of businesses in America.

But how does one measure what was lost when we never had it to begin with, in order to understand the significance of the red tape constraint to economic opportunity and growth.

Instead we are left with arguments of logic or measurements of tell-tale signs of red tape to attempt to make a convincing argument of it smothering effects such as how many pages are there of Federal Regulation (174,000 as of 2010) or how many feet tall is the pile of the Code of Federal Regulations volumes, if piled one on top of another (24 feet) or the total number of restrictions that contain language of “shall” or “will” (over a million by 2012) or what is the multiplier of regulations that emanate from the average piece of Federal legislation (27).

Or what percent of Federal government revenues are spent on regulatory bodies that ostensibly read  [fed] and act on the regulatory reports or what is the dollar cost of corporate and personal compliance to regulation? Does that make the argument?

All those numbers are large but still do not accurately convey what is lost in terms of output and goods and firms and the employees of firms that either didn’t survive or were still-born because of the constraints and the cost of fathoming and adopting to the rat maze of regulation.

While we can’t totally give up hope for a return to free enterprise as it has happened before. During the Jimmy Carter Administration every regulation was looked upon with disdain and many, many regulations and even regulatory bodies were dispatched.

But alas hope is on the horizon.

The Mercatus Institute at George Mason University’s efforts at documentation of the regulatory load is bringing some measure of the cost of regulation to attention. Furthermore there is the Simon Frasier University country indices of economic freedom.

And now the World Bank is involved in lending credibility to the issue and ranking the US in the global spectrum of regulation. It’s all published in its annual “Doing Business” where the World Bank counts the opportunity cost in days lost to start a business such as for obtaining a construction permit, the registration of a property, paying taxes, obtaining an export or import license or enforcing a contract as measures of time lost.

In this regard the World Bank finds that in most countries, days lost to regulatory matters are generally declining but for a group of 20 countries, the cost of regulatory days lost is rising. As you could guess that group includes the US which is ranked sixth among those countries with an 18% increase in regulatory days lost since 2000.

Now we are starting to get somewhere in terms of defining the size of the regulatory overhead but that measure still doesn’t carry the authenticity that interest rate multipliers do. So the Fed’s ultra-low interest rates still gets all the attention as if it would take care of the economic growth problem while de-regulation remains a step child in the policy domain.

Probably the best way to appreciate the problem is to contemplate being an entrepreneur in today’s regulatory environment and think of the number of regulations required to be navigated and the number of times per day you are exposing yourself, not just to fines but criminal indictments and the billable legal hours that go with it. Apparently, it is taking its toll as the number of corporate “deaths” exceed the number of corporate “births” each year.

Whatever the “multiplier” effect from de-regulation, it has to be greater than the stimulus effect of continuing to keep interest rates about 200 basis points below all-time lows and keeping it there for almost seven years.

It’s time for the Federal Reserve to go public with a direct enough SOS for Congress and a President to hear and understand because they can’t do the job of promoting economic growth with credit cost and availability alone. Accomplishing growth also needs unshackled, ready willing and able users of the credit to produce economic vitality with the credit being offered.


The views expressed are those of the author and not necessarily The University of Texas at Austin.

About The Author

Lew Spellman

Professor, Department of Finance, McCombs School of Business, The University of Texas at Austin

Lewis Spellman received his BBA and MBA from the University of Michigan and his MA and Ph.D. from Stanford University. His research interests include...

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