19 October 2010

False Comparison Much?

The Denver Post's editorial page has a "PointCounterpoint" column that is over the top.

The question: "Should the U.S. loosen regulations on businesses?"

Point: "Yes: Regulations devastate economic growth" by Thomas J. Donohue, who is "president and CEO of the U.S. Chamber of Commerce." He relies upon a dubious study of the cost of business regulation on small business by Nicole V. Crain and W. Mark Crain that I examined a couple of weeks ago at this blog.

Simply put, the claim that business regulation disproportionately burdens small business, or costs $15,500 per U.S. household is baloney.

Counterpoint: "No: Bailouts are to blame for slow recovery," by George Chack and Carolyn Evans, who are business school professors at Santa Clara University arguing for a lassiez-faire approach to an economic downturn that like Donohue's lassiez-faire approach to economic regulation is out of the mainstream of economic scholarship.

They are right that recent regulatory reforms probably don't have any effect on job creation (they are mostly intended to prevent the government from having to bail out banks in the future). But, the argument that allowing bailed out firms to fail would have led to more hiring is also dubious.

Equally important, their argument is not a counterpoint to the argument that there is too much business regulation in the United States.

There are legitimate reasons to think that Lehman Brothers style bankruptcies, rather than bailouts, would have been better options, mostly because of the moral hazard and unfair distribution of risk that the bailouts created. The possibility of a bailout may encourage unreasonable risk taking in the future, and people who took risks that didn't pan out, and should have lost money as a result didn't.

But, it is hard to see how the liquidation of GM and Chrysler, and accompanying elimination of those jobs would have done anything but made the job situation in the United States worse, although it may have helped create jobs abroad. Unlike economic models, the U.S. economy is not a closed system.

A lot of the rest of the bailout funds were of the "nothing to fear but fear itself" variety, as evidenced by the fact that a very large share of the bailout funds have been repaid. If Fannie Mae and Freddie Mac securities had not been guaranteed by the U.S. government, the housing market would have been even weaker than it is now -- the collapse of the mortgage backed securities market left even perfectly safe borrowers without anyone willing to lend to them. Federal Reserve intervention in the form of offering short term credit to well established big businesses and banks when credit market froze prevented lots of healthy businesses from collapsing because their bankers had a fit of panic.

There is no evidence that deeper job cuts in a recession leads to a shorter period of job losses.

The response to the recession was almost certainly not the best possible. Stimulus funds have been spent inefficiently, although the mainstream economic viewpoint is the stimulus funds can create jobs. We could adopt policies that would encourage job creation (like reducing the tax penalty for making profits via labor as opposed to capital). But, given that the U.S. has some of the more lenient regulatory states in the developed world, the claim that government regulation is bad for our economy is a weak one. Generally, less regulated economies have weaker, not stronger economies.


Maju said...

Whatever liberal economists believe, markets do not appear out of thin air by mere spontaneous gathering of people to exchange their products and services: it happens that way but does so where property is protected. This is something the state does and is absolutely needed for it.

Following P. Kropotkin, the state's role, one of legislation and law enforcement, creates three kind of laws: those that defend property and therefore owners, those that defend the state itself (including those that protect certain ideologies/sects) and those of generic social dimension, mostly aimed to punish irrational crimes.

So it's essentially there to protect property and markets, at least in Capitalist economies, which cannot exist without the appropriate state intervention. However the state must be neutral and a reason for its decadence is that it is taken over by some oligarchic forces which slant its neutrality, which corrupt its ethics and purpose for private goals. Even the most liberal (Capitalist) of ideologues must accept that the state is there for a reason and that guaranteeing this original purpose of the state is central for the stability of society and the economy.

Michael Malak said...

My belated response to your older post on regulatory burden on small businesses:

The CBO report was flawed, and thus so was your analysis, because it ignored the cost of sector-specific licensing. Licensing is usually advocated by established businesses to raise the bar of entry to new businesses.

The word "license" does not appear once in the CBO report.

Licensing not only is a fixed cost that raises the cost per employee, but it also raises the bar for entry, preventing new businesses from forming and killing nascent businesses that struggle to comply.

Also missing from the CBO report is legal fees. Even though the report covers accounting fees, it ignores legal fees. Although the risk of a lawsuit may grow with business size, perhaps even faster than proportional, the $30k cost to argue a single case constitutes a fixed cost that, as with licensing costs, raises the cost per employee. As you must know, in Colorado, no corporation (even a tiny one) is permitted to argue a case pro se.

Andrew Oh-Willeke said...

@ Maju

Your points are well taken, but too epic to address in a comment.

@ Miachel Malak

Licensing is a regulatory cost, but I think that you overestimate its bite. The direct cost of licensing, of course, is modest - almost all of the costs are indirect market restriction effects. Coase's law has done a relatively good job in working around the economic impact of licensing where it is excessive in its demand for skills via paraprofessionals who work under the supervision of licensed professionals (e.g. dental hygenists) or parallel professionals (e.g. nurse practitioners, midwives and doctors).

Legal fees can be estimated from the share of the work force that works in legal services firms (including many people who aren't lawyers) which is 1-2% of the work force, admittedly with above average compensation, but not as high as you would expect on average once secretaries, paralegals, small firms, public defenders, prosecutors, etc. are considered.

Also, some of regulatory costs implicitly do include legal fees incurred by big businesses.

A lot of business legal fees go towards collection costs on unpaid debts which are pretty modest, include lots of non-lawyer employees in collections firms (or in house AR departments) and would not normally be considered "regulatory" in nature.

Tort litigation, which many people would consider to be regulatory in nature, makes up a pretty small share of all legal fees, and it isn't obvious that from an economics perspective that settlement and judgment awards for compensatory damages (as opposed to legal fees) are really a regulatory cost. The classification comes down to where you consider the status quo to be which is a highly political matter.

Michael Malak said...

10% of our staff at Bergamo Academy is dedicated toward regulatory compliance, including one full-time employee dedicated solely toward that task. Physical modifications (building and outdoors) mandated by regulations have come to 3% of gross revenue. Staffing qualification requirements (the specifics of which conflict with and are counterproductive to our Montessori curriculum) add 10-15% to our payroll. Staffing level requirements (again, opposed to what Maria Montessori did in Italy in 1907, and also opposed to our international Montessori accreditation requirements for which we have to request an exemption due to these Colorado regulations) add 40% to payroll. Combining everything, at least 25% of gross revenue, and possibly as much as 33%, at Bergamo Academy goes toward compliance with regulations that are either of no value or detract from the Montessori curriculum.

Regarding tort legal fees, which I did not include in the above, I consider the arbitrary Colorado requirement of professional representation for corporations to be a regulatory requirement.