President Trump Working With Congress to Ease the Burden of Massive Regulations
February 10, 2017
Over the past few decades, our nation’s gears of productivity have been clogged by an avalanche of rules and regulations created by meddling bureaucrats in Washington. This gusher of new, complex regulations has wreaked havoc on the economy by relegating companies across sectors to bureaucracy processing centers. Implementation of Dodd-Frank rules, for instance, has prompted large financial institutions to turn to cognitive systems like IBM’s Watson for help. With sufficient expertise and resources required to ride out the regulatory storm, larger corporations took advantage of low borrowing costs under the new government framework. So, it should come as no surprise that three of the “Big Four” banks – Wells Fargo, Bank of America, and JPMorgan Chase – have gotten bigger since the end of the financial crisis.
While large banks and investment firms celebrate government favors, community banks have largely been left to the wolves. There’s been a dearth of bank formation, as prospective institutions realize that healthy earnings will result in hefty mandates from the federal government. Mercatus Senior Fellow Hester Pierce surveyed small banks in 2014 and found that more than eighty percent of these institutions faced increased compliance costs. Additionally, a quarter of small operations were contemplating mergers as the result of regulatory overload.
Similar problems will likely plague the financial advisory industry with the Obama-era fiduciary rule. This regulation, which require advisors to act in the “best interest” of clients rather than produce “suitable” arrangements for the customer, will leave brokers footing large compliance bills. These costs will prove too onerous for smaller, boutique firms to handle, prompting closures. We need only look across the Atlantic to the U.K., where a similar rule enacted six years ago resulted in a 22.5% drop in financial advisors. Regardless of industry, creating barriers of entry via burdensome regulation increases instability by creating concentrated market shares. When only a few companies are able to successfully navigate a complex regulatory framework, the failure of just one corporation can have gargantuan consequences.
Advocates of increased regulation will counter that new rules have important benefits that more than outweigh these macroeconomic costs. While agencies are required to conduct a cost-benefit analysis of rules deemed to be “economically significant,” these analyses regularly incorporate dubious assumptions that enhance benefits and water-down costs. Consider the Environmental Protection Agency’s (EPA) recently promulgated stream rule. EPA used implausibly high estimates of economic growth occurring due to new compliance-related jobs. Additionally, the creation of new bureaucracy is quantified as a benefit rather than a toll on taxpayers in an Orwellian attempt to justify government expansion. These practices are bound to continue, since researchers and economists hired by the federal government have job-related incentives to “score” the proposed rule in a way that puts benefits above costs.
To keep regulators from ushering in new, onerous rules, Congress and the Trump Administration will need to remain vigilant. Using the Congressional Review Act to nix recently-created rules is a good start, but insufficient to cure our regulatory appendicitis. SEC and DOL rulemaking can be effectively curbed in the short-run by congressional legislation targeting enabling laws such as the Dodd-Frank Act.
Over the long-run, agency ambition can be held in check by a beefed up 2-for-1 rule that requires the government to do regulatory spring cleaning. President Trump’s Executive Order, requiring agencies to identify two rules for elimination for every new rule created, is a good start and will likely be clarified by congressional legislation. Policymakers would be wise to look to Canada and the U.K. for successful models of regulatory reform. Fighting the entrenched interests of large businesses and ambitious technocrats won’t be easy. But easing the regulatory burden will pay dividends for years to come, and open the floodgates of innovation.