Sunday, October 31, 2010

Health-care bill has given birth to new regulations

Published in The Tennessean, Sunday, October 31, 2010

Health-care bill and others have given birth to new regulations

by Richard J. Grant

When the Speaker of the U.S. House of Representatives, Nancy Pelosi, famously let slip, “But we have to pass the bill so you can find out what is in it,” she was referring to the health care reform bill of March 2010. She wasn't kidding. The bill had become increasingly unpopular with the American people, so she found it necessary to logroll a coalition by adding big scoops of political sweeteners to buy the support of individual senators and congressmen.

The bill was passed with great urgency but little understanding. It was like a cluster bomb, full of unpleasant surprises. The final bill was so long and complicated that, now seven months later, even its supporters are expressing surprise as insurance companies raise health-care premiums and eliminate particular categories of coverage. These consequences might have been unintended, but they were predictable. Worse, it is still full of unexploded regulatory and tax bomblets.

Another legislative “success” of the Obama administration and the Democratic majority was the passage of the financial regulatory reform bill that was intended to protect consumers by reining in the bad behavior of financial institutions. The financial industry was already one of the most heavily regulated in the country, with protections and restrictions that encouraged much of the moral hazard and bad behavior in the first place.

Passage of the bill began the gestation of a cluster of new regulatory agencies and will give birth to a whole new generation of financial distortions and unintended consequences. Over the past several months, government officials have impugned the financial institutions for not lending more. But at the same time, those officials have deployed regulators to second-guess the actions of bankers and to micromanage the market. While the private debt markets are stilted, the size of the government debt market is exploding. In this we get a hint of what is to come.

Speaker Pelosi, with her large Democratic majority, was successful in passing the carbon dioxide limiting “cap and trade” bill in the House. This would have pounded the entire economy with another cluster of taxes and regulatory bomblets, but public awareness that a better nickname for the bill was “cap and tax” caused some members of the Democratic majority in the Senate to balk.

Where the Senate failed legislatively to impose these new powers of central planning, the Obama administration would fill the gap by mobilizing the already existing regulatory powers of the Environmental Protection Agency. It had already declared carbon dioxide to be a “pollutant,” thereby granting itself the power under the Clean Air Act to impose limits on emissions. Now the EPA stands ready to impose new regulations on electric utilities, particularly those with coal-fired plants. Whether intended or not, it will serve to reduce further our ability to produce energy in America. We will pay more for less.

It should be no surprise that none of the Obama administration's efforts to “stimulate” the economy could succeed. With hundreds of billions of dollars diverted from private sector use into politically selected public works projects, and with the fact and threat of increased regulation, our national productivity levels will continue to suffer. And protectionist currency depreciation is no less destructive than tariffs. Jobs are lost.

Voters can now judge the combined performance of the Obama administration and the Democratic majorities in Congress. It means “not working.”


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean

Sunday, October 24, 2010

Tension between government, voters is nothing new

Published in The Tennessean, Sunday, October 24, 2010

Tension between government, voters is nothing new

by Richard J. Grant


Just when our epoch seemed to be lost in vacuous notions of “hope and change,” we have suddenly noticed that some things are permanent. The laws of nature, which include the laws of human action, seem to persist no matter how well or poorly we understand them. And recent political events have arisen that remind us of our cultural and political inheritance and of the chain of responsibility that has been passed to us by previous generations. It is for us to build upon and to preserve for our descendents.

The malaise in our nation is more than economic. What we today call the tea party movement is, like the Boston Tea Party of 1773, an act of open defiance by a people against what they see to be their government’s disrespect for, and encroachment upon, their rightful liberties. That original tea party gave rise to events that provided the constitutionally limited democratic tools through which we can now act to replace representatives who fail to respect the original intent of the Constitution that they have sworn to uphold.

This tension between the people and those who would assume power over them is a recurring theme in history. The providential manner in which colonial Americans faced this challenge is succinctly portrayed by Professor Timothy D. Johnson, of Lipscomb University, in Liberty vs. Power: The Founding Fathers’ Vision for America. It is a fine little book that can be read with profit by young and old.

Johnson points to the cultural roots of America extending through the English people who were “notoriously unsubmissive and quick to challenge authority.” As another historian put it, they “made poor subjects for monarchy, and they were proud of it.” They cherished their liberty and passed this trait to their American descendants.

Johnson hints at the timeless parallels between our age and 1773, when Parliament passed the Tea Act. “Believing that the huge but struggling East India Company was too big to fail, the legislation was essentially a government bailout.” The company was failing and was unable to get loans. “So it agreed to a reorganization that gave government officials administrative oversight, and in return Parliament gave the company a monopoly on the sale of tea in the colonies.”

The inflammatory aspect of the Tea Act was that it “reiterated Parliament’s assertion that it had the authority to levy taxes” on the colonists. Johnson, the historian, gives us an eerie reminder of the persistent nature of politics. “Parliament had provided a splendid example of the old adage that oppression is based on fear and favor – in other words, intimidation for those who resist power and privilege for those whose patronage is needed to prop up power.”

Johnson treats the philosophy and events that gave rise to this Republic but also gives attention to what is essential to its preservation. The indispensability of civic virtue was acknowledged by the Founders in their words and their actions. From James Madison: “To suppose that any form of government will secure liberty or happiness without any virtue in the people is a chimerical [delusional] idea.”

A people show their worthiness of liberty in how they live with it and in how they exercise their responsibility to defend it. Each September 17 we passively remember Constitution Day. But this year, we will actively demonstrate our worthiness on November 2.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean

Sunday, October 17, 2010

Reaganomics led to an economic turnaround

Published in The Tennessean, Sunday, October 17, 2010

Reaganomics led to an economic turnaround

By Richard J. Grant

When judging the results of successive U.S. governments, it is common to focus on the simple matter of who the president was. But this neglects the importance of Congress in all legislative matters. We cannot understand the actions or the results of an administration without examining both its intentions and the context in which it served.

That context includes not only the composition of the contemporary Congress, but also the cumulative legacy of previous governments as well as the economic and strategic conditions in the contemporary world. Strategies and ideologies manifest differently in different contexts.

It is common, for example, to note the increases in the federal budget deficit during the years of the Reagan administration. Shallow analysts look at this one statistic and dismiss “Reaganomics” as a failure. They fail to note that the national debt had been trending upward at an increasing rate during the 1970s, but peaked out during President Ronald Reagan’s first term. That began a twenty-year downtrend in the rate of growth of the national debt.

Interestingly, that downtrend began after the Reagan-initiated cuts to marginal income-tax rates that were partly responsible (along with deregulation and reduced inflation) for the strong economic growth that followed. Analysts with a static view of the world are unable to comprehend that cuts to marginal tax rates can lead ultimately, after an initial dip, to higher tax revenues. Some tax bases, such as capital gains, are more responsive than others.

Reagan recognized the Soviet Union and its contagious ideology for the existential threats that they were and accordingly requested increased defense spending. But he clearly wanted a balanced budget and pushed for spending cuts in other areas. Congress preferred to spend.

Just when we needed it most, Reagan’s policies provided both a challenge and a contrast to the Soviet myth and to the Soviet reality. When the USSR collapsed, leftist ideologues around the world were knocked back on their heels. A window of opportunity opened in many previously oppressed regions to join world markets and to engage in trade and production.

This was the world inherited by the Clinton administration. President George H. W. Bush had failed to maintain the Reagan trend, but President Bill Clinton began his first term as if he had not learned anything from Reagan. The American people checked him in 1994 by giving him a Republican congress that had learned something and would not allow his wide left turns.

As a result, government spending was lower than it would have been, nationalization of heath care was averted, and deficits continued to fall. President Clinton, recognizing the political context, signed a reduction in the capital gains tax rate and championed welfare reform. The economy boomed.

During the administration of President George W. Bush, marginal tax rates were reduced (temporarily) again and contributed to the strong growth. Tax revenues had already fallen in the wake of the 2001 recession, but government spending increased faster than it had under previous Republican congresses before slowing briefly in 2007. War spending contributed, but only a small portion of the total.

As the recent financial crisis emerged with its recession, the Congress was again controlled by Democrats who were far less inhibited about taxing, spending, and regulating. The Bush administration intervened heavily, before handing off to the Obama administration, which will be remembered differently than the Reagan administration.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean

Sunday, October 10, 2010

Paying for government is burdensome to taxpayers

Published in The Tennessean, Sunday, October 10, 2010

Paying for government is burdensome to taxpayers

by Richard J. Grant


To direct our attention to the cost of government, the Framers of the U.S. Constitution included in Article I, Section 9 that “a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.”

In compliance with this requirement, government agencies provide regular reports and projections of federal revenue and expenditures. The recent content of these reports, such as budget deficits reaching $1.4 trillion, which is about 40 percent of the budget, suggests that our government should try harder to comply with the other parts of the Constitution.

There are also costs of government that go beyond narrow fiscal matters. The expanding federal regulatory structure has costs that few perceive.

The best recent study of the federal regulatory burden is “The Impact of Regulatory Costs on Small Firms,” which was produced for the Small Business Administration by Nicole V. Crain and W. Mark Crain, both of Lafayette College. Their summary finding is that “in 2008, U.S. federal government regulations cost an estimated $1.75 trillion, an amount equal to 14 percent of U.S. national income.”

The Crains note that they have not traced all costs, but the regulatory burden as measured is clearly substantial. It rivals the burden of U.S. federal tax receipts, which equaled 21 percent of national income in 2008. This gives a combined federal tax and regulatory burden of 35 percent of national income. That is more than a third of people’s earnings.

Comparing the burdens of different types of regulations on companies of different sizes and activities, they find that regulatory compliance costs fall disproportionately on small businesses. For firms with more than 500 employees, the estimated cost per employee was $7,755. But for firms with fewer than 20 employees, the cost per employee was $10,585.

Small manufacturing firms are the hardest hit sector with per employee costs of $28,316. This is more than double the per employee burden on large firms, which can spread the fixed costs over a larger base.

The average cost over all firms was $8,086 per employee. The largest share of this cost was categorized as being due to “economic” regulations. The next most burdensome category was “environmental,” followed by “tax compliance” and others.

The total regulatory cost burden on the typical U.S. firm is about $161,000, which corresponds to about 19 percent of payroll expenditures. This burden is greater than the combined payroll taxes paid by employers and employees for Social Security and Medicare, which take 15.3 percent.

Measuring the burden on business is important for our understanding of the regulatory effects on economic growth and employment. The Crains emphasize that, although regulations might initially be incident on businesses, “ultimately all costs must fall on individuals.” We are all consumers, workers, stockholders, owners, and taxpayers.

The regulatory burden per household in 2008 was $15,586. When combined with the tax burden, that total burden is $37,962 per household.

From 1995 to 2008, the regulatory burden per household rose at an average annual real rate of 4.8 percent. This is cause for concern, given that this is higher than the real economic growth rate in the U.S. during the same period.

When we make choices between more or less government involvement in our lives, we are also making choices about the size of the burden that we must bear for any benefit.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays.
E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean

Sunday, October 03, 2010

Democrats’ election strategy is to evade responsibility

Published in The Tennessean, Sunday, October 3, 2010

Democrats’ election strategy is to evade responsibility

by Richard J. Grant


House Majority Leader Steny Hoyer, D-Md., has found a way to blame President George W. Bush for future tax increases. He says that because President Bush’s tax-rate cuts were not permanent, but were set to expire at the end of 2010, it is actually President Bush who is responsible for the coming tax increases.

The trouble with Hoyer’s attempt at logic is that President Bush has been retired for almost two years and the Democrats have all the power they need to prevent the tax rates from rising at the end of the year. They have that power now. They are supposedly in charge right now. But with an election looming – and their ideology clashing with economic reality and voter sentiment – the responsibility is too much for them to handle. So they evade it.

Like the Ancient Mariner who shot the albatross, Democrats have used their majorities during the current session to ram through economy-killing legislation, and they now wear the dead bird of economic stagnation around their necks.

The recent financial reform legislation, they claim, will protect consumers from financial misinformation and predatory lenders. Perhaps voters need some protection against predatory legislators.

Few would suggest raising tax rates at a time of slow and hesitant business activity and high unemployment. But that is what Democrats have chosen to do. They say they won’t raise all the rates to the pre-Bush levels, but they do intend to raise some tax rates.

The intention is to raise rates on “the rich.” By that they mean anyone who has a high income or who leaves a large estate. It also includes anyone who earns dividends or capital gains.

But intentions are not the same thing as outcomes. And those who bear the tax incidence are not necessarily the same people who bear the tax burden. A tax on capital is a tax on our productive capacity. A tax on our productive capacity reduces the demand for labor, thereby reducing wages and employment.

“Tax the rich” might be a popular leftist slogan, but it comes at a high, undisclosed price.

Those with higher levels of either wealth or income tend to be the most adaptable to changes in the business environment, whether commercial or legal. If Plan A is more productive than Plan B before tax, but Plan B leaves more after-tax income, then Plan B gets the go ahead. Plan B might even require shifting operations overseas. Or it might simply offer more leisure.

Those with lower incomes might believe that they are escaping the effects of taxation when only “the rich” are taxed. But they are not. Plan B means lower incomes for everyone on the productive side of the tax equation. When the tax rates on capital gains and dividends rise in January, the burden will be borne by everyone.

Some Democrats recognize this, but their chosen leaders do not. Republicans have offered to support a motion to stop all the scheduled tax increases. But rather than accept this offer, House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid have chosen to take no action before the November elections. Rather than face voters cleanly, they will probably sneak their tax increases through during the lame-duck session after the election.

Evasion of responsibility might be clever politics, but it is not clever governance in a free republic. It is an old, but contemptuous, political game to extract resources from the people without disclosing the full cost of government.

Rather than reduce the burdens on people, the Democrats have used their time and power to impose on us the highly flawed health-care and financial “reform” bills. Federal regulatory compliance costs already use up more resources than we now spend on health care. But the new health care law has not only increased those compliance costs, it also contains its own tax increases.

For what happens next, voters are responsible.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean