It has become a common refrain in both politics and finance: intrusive regulations, an overreaction to Wall Street’s 2008 crisis, are generating uncertainty and preventing employment from bouncing back. Some top Federal Reserve officials have joined the chorus. Dallas Fed President Richard Fisher made the argument to business executives in Austin, Texas last month to justify his lack of support for additional monetary stimulus.
I maintain that no matter how much cash you have on your balance sheet, or how compliant your banker might be, or how cheap the cost of money, you will not commit substantial capital to expanding your payroll or investing significant amounts to expand plant and equipment until you know what it will cost you to run your business; until you know how much you will be taxed; until you know how federal spending will impact your customer base; until you know the cost of employee health insurance; until you are reassured that regulations that affect your business will be structured so as to incentivize rather than discourage expansion; until you have concrete assurance that the fiscal “fix” the nation so desperately needs will be crafted to stimulate the economy rather than depress it and incentivize job creation rather than discourage it.
Jeffrey Lacker, head of the Richmond Fed, also gives credence to the view that regulations are a burden on hiring:
Another impediment to growth cited by a wide range of observers is the array of changes in tax and regulatory policy, both actual and anticipated. The list of significant recent and prospective policy changes includes the enactment of far-reaching health care and financial reform bills in the last 2-½ years, as well as significant shifts in environmental and labor regulations over that period. While it is inherently difficult to model and estimate such effects with any confidence, we continue to receive widespread and persistent anecdotal reports from our Fifth Federal Reserve District contacts about how uncertainty about regulatory policy changes is discouraging firms from making new hiring or investment commitments. It seems plausible to me that such effects could be having a noticeable effect on measured growth rates.
There’s only one problem with that thesis, says economist Dean Baker in his most recent book – it’s not true. Baker, co-director of the liberal Center for Economic and Policy Research in Washington, cites the following intriguing evidence: