In a world of Keynesian thinking, which has been in vogue for more than 60 years, moving an economy to higher output requires spending in excess of income. This is usually financed by lending to the private sector.
To accomplish this, borrowing costs are reduced to encourage (you guessed it) more borrowing and more spending on investment products that yield positive returns. But if the private sector doesn’t snap up the bait, governments can step in to be both the borrower and spender. And step in they did.
Following this script, in order to motivate that higher output when the Great Recession hit, borrowing rates were pushed down to a minimal level in the US and to a negative rate in the Euro zone. Realize what negative borrowing rates mean. We (the lender) will pay you (the borrower) to borrow. So please do so, and please spend the funds on something to create output and jobs!
It’s a tempting offer, but it didn’t have the intended effect. That is to say, corporate borrowing did occur, but the spending on physical or intellectual property did not. Instead, corporations have been stockpiling cash.
Alas, the funds have been primarily used to support corporate stock prices via dividends or stock buybacks. Another use has been corporate buyouts (M&As) in order to reduce competitive pressures on prices and profits.
The relative non-response of investment spending to the low cost of funds amounts to a Keynesian conundrum wherein lower interest rates have not been the solution to business lethargy.
Indeed, businesses’ muted response to cheap money suggests there are impediments to putting that money to work. So what’s the fly in the ointment? The experience based gut reaction of a CEO oriented administration points to regulatory barriers. And this view is buttressed by the accumulating data on the cost of regulation. For example, the Competitive Enterprise Institute puts the annual cost of regulatory barriers to $14,678 per household or 23% of the average household income.
This has made the reduction in regulation, a top agenda item for the Trump administration which has instituted a 2-for-1 rule. Each new regulation requires jettisoning two others for a net -1. But this doesn’t begin to scratch the surface of the mountain that needs to be leveled. Currently, there are 178,277 pages of Federal regulations with which American businesses, workers, and consumers must comply. The Trump administration is aiming for a 75% reduction of that amount.
Here’s some background on how we got here: Regulations started out as constraints on what economists call “externalities.” In other words, they were a way to restrain economic actions that affect external parties without consideration or compensation. But the process of creating regulations to counteract negative externalities has morphed into something else entirely. Now federal agencies are authorized to promulgate rules based on existing legislation which appear in the Federal Register in the hundreds of thousands.
We can track the number of rules but more importantly we focus not on the numbers but on the effects of those rules on business entry and growth. To that end, the Census Bureau keeps statistics on death and birth rates of enterprises in America. Not surprisingly (albeit alarmingly), the birth rate of enterprises has been falling for 40 years and has especially nosedived since 2008, as shown below.
In absolute terms, the birth of business enterprises is not just declining but has declined to a level below the death rate. This means the number of businesses in America has been on the absolute decline since 2008.
To take a very simple example as to the impact of regulation, let’s say your 7-year-old has an ambitious idea. Because you live on an access to a state park with visitors and hikers walking by, she has the idea to open a lemonade stand. Well, if you are up-to-speed on business regulations, you might start to envision the criminal and civil offenses your child might be committing, and there are innumerable candidates to choose from. There are forms, permits, and permissions and compliance costs to think about if she’d like to sell lemonade legally (so you might as well steer your child away from selling Girl Scout cookies too).
For an actual start-up, it takes thousands of hours of billable attorney’s fees to properly navigate all the relevant regulations. For most, this is unaffordable. In their case, starting a business requires an article of faith that what they’re doing is somehow not illegal.
In my mind’s eye, I have a vision of Michael Dell producing computers in his dormitory room and delivering them from the trunk of his car. From there, he went on to become an industrial giant. You have to start somewhere, but — alas — it seems innovation like his is no longer an innocent opportunity and without it, we are left in a withering state as far as enterprise is concerned.
So yes, the Trump nominees have little-to-no government experience and will blunder, but what they do have is experience in producing business results that, in turn, translate into income and jobs for a lot of other people. I will take their government on-the-job training any day as compared to those steeped in how to promulgate regulations. Indeed, these nominees have a far clearer understanding of what it takes to succeed and what barriers need to be eliminated in order to do so. Or better still, ways to achieve goals while not impeding business.
Even if that business is just a child’s lemonade stand.