Yesterday, the U.S. stock market tanked in large part due to the eurozone crisis. Yet today, U.S. employment numbers, as Bob Stein noted earlier in the Corner, defied expectations and offered glimmers of hope about U.S. growth.
The two events illustrate the proverbial fork-in-the road at which the U.S. economy has arrived. Our work force is talented and entrepreneurial and our government, in the debt-ceiling deal, took a first step toward fiscal discipline (or fiscal discipline relative to Europe, at least). We can avoid Europe’s fate and even benefit to some extent from the euro crisis, but only if we move away from European-style corporate tax policy and regulation.
And indeed, just this week, there was a big boom in Treasuries. As Arnold Kling noted yesterday, the debt ceiling aftermath’s restoration of “the dollar’s status as a safe haven in the eyes of the world’s investors” ironically started the cycle that led to the selloff in Europe, which spilled over to the U.S. stock market. Meanwhile, the Bank of New York Mellon on Thursday took the extraordinary step of charging large clients, including foreign depositors, for holding cash in the bank.
But the reason this influx of international cash hasn’t resulted in investment in new firms and job creation is that tax and regulatory policies have reduced our competitive advantage over Europe, by making us more like Europe. As a result of this Europeanization, we are more tied than ever to its woes. The good news is there is still time to let America be America again and break the chains tying us unnecessarily to the euro crisis.
The hundreds of pending regulations from the Dodd-Frank financial overhaul last year cause further uncertainty, and the Sarbanes-Oxley Act of the supposedly deregulatory Bush years still makes it difficult for smaller firms to raise capital by going public due to its the cost-prohibitive accounting mandates.
Regulations cost the U.S. economy roughly $1.75 trillion per year, according to the Small Business Administration’s Office of Advocacy. The 2010 Federal Register, which spells out all new government regulations, stands at an all-time high of 81,405 pages, as counted by the Competitive Enterprise Institute’s annual study, “Ten Thousand Commandments” by Wayne Crews.
And then there is the destructiveness of some of the individual pending rules. Under somewhat normal circumstances, the competitive reaction to the fees charged by Bank of New York Mellon could have some good results. Rich foreigners may wish to deposit part of their cash in regional banks and credit unions on Main Street, where they wouldn’t get charged a fee and may get a slightly higher yield. This in turn would enable these financial institutions to make more loans to entrepreneurs in their communities
But a proposed rule by the Internal Revenue Service would discourage this by making the all U.S. banks the tax collectors for the word. The rule would force banks and credit unions to report interest paid on foreign accounts — interest that by law is not even subject to U.S. taxation — to the IRS. The IRS would then share this truckload of data with their home countries, even if the U.S. does not have a reciprocal tax treaty with that nation.
In addition to privacy and human rights concerns involved in data sharing with regimes such as China and Venezuela, the rule would reduce U.S. competitiveness in attracting foreign capital. As I noted in my testimony to the IRS in May, accounts of foreign nonresidents “have been estimated to represent as much as one-third of all bank deposits in Florida.” Yet the cash from these accounts could vanish, harming the safety and soundness of many banks in the state, as nervous Latin American depositors pull out their money because they don’t want sensitive financial data shared with strongmen or drug gangs close to their home governments.
Fortunately, Sen. Marco Rubio (R., Fla.) has introduced a bill to block these IRS rules that has bipartisan support from other House and Senate members. There are also other bipartisan initiatives to reduce onerous regulations and tax rules.
“Where do we go from here?” liberal blogger Ezra Klein asks in the headline an unusual front-page editorial in the print edition of today’s Washington Post (here’s the online version). The answer to that question is simple, but achieving it will not be easy. (As Ronald Reagan said, “There are no easy answers, but there are simple answers.”) We go away from the Europeanization prescriptions of pundits like Klein and back to the free-market ideas that made America great and can restore’s American prosperity and freedom.