Six years from the Great Recession and the excuses for the tepid recovery are becoming worn. This time is different- well it always is. There may be an issue with structural changes that affect employment and wages, but this is less of a rationalization for greater government intervention than it is to let the market sort this out. It is challenging for the government to take steps to aid those who fall through the cracks without creating disincentives to adjust and work.
Regulatory friction costs were mounting before this recession and perhaps we have just reached a cumulative critical mass that has truly stifled economic growth. Like overloading the pickup truck with bricks. At some point one more brick will bust the axle. We want to blame the last brick. My favorite quote from Stanislaw Lec-“Every snowflake pleads innocent, but it is till an avalanche.”
Yuval Levin in his excellent The Fractured Republic notes that both parties yearn for old solutions that only worked under conditions that no longer exist. I contend that there is a new friction cost: the constant change of investment incentives, tax laws and hyperactive regulatory activity that stifles incentives to such a degree that even if positive changes are made there is an inherent lack of trust that they will remain stable long enough to benefit from them. This suggests a need for radical reform, a dramatic claw back of the regulatory state, that is unlikely to come from the stagnant inertia of the established parties.
from The Wall Street Journal, What’s Killing Jobs and Stalling the Economy by Marie-Josee Kravis
As the Economic Innovation Group shows, the 1990 recovery registered a net increase of over 420,000 business establishments, or a 6.7% increase. The numbers for the 2000 recovery were 400,000 and 5.6%. Since 2010, the number of new business establishments has grown by only 166,000 or 2.3%
Many studies have also attributed the slow rate of business formation to the regulatory fervor of the past decade. Some point to the deadening effect of the Dodd-Frank law, which is 23 times longer than the Glass-Steagall Act passed in response to the 1929 Depression. One part of Dodd-Frank, the so-called Volcker rule pertaining to bank investments, has 1,420 subsections. Then there is the Affordable Care Act.
It is not clear to what degree these laws affect business formation, but in a 2010 report for the Office of Advocacy of the U.S. Small Business Administration, researchers at Lafayette University found that the per employee cost of federal regulatory compliance was $10,585 for businesses with 19 or fewer employees, compared with $7,755 for companies of 500 employees or more. Large and established businesses navigate through rules and compliance requirements. Small and new businesses often find them prohibitive.