Economy & Business

Real Middle-Class Economics

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What the people need is regulatory relief.

‘The verdict is clear. Middle-class economics works,” President Obama proclaimed in his triumphalist State of the Union address. But real middle-class economics, the kind that gives people the freedom to become entrepreneurs, invest, and make their own choices about purchases and saving, has yet to be practiced in this administration (and wasn’t in its recent predecessors, for that matter). In fact, Obama’s stated endorsement of the notion that “everyone plays by the same set of rules” is belied by his administration’s record.

The president has threatened to veto any future changes to the Dodd-Frank financial “reform” law that was rammed through the Democrat-controlled Congress in 2010. Under Dodd-Frank, the biggest banks’ status as “too big to fail” has become even more entrenched through their designation as “systemically important financial institutions” to be bailed out if they stumble. And, under Operation Choke Point, the Justice Department has been harassing “politically incorrect” businesses, from guns to sweepstakes to payday loans, by putting pressure on their banks to deny them access to the financial system.

And in cases where everyone is subject to the “same set of rules,” regulations have vastly different impacts on businesses, depending on a business’s size. For big corporations, a bevy of new rules could mean products or jobs forgone owing to costs of lawyers and accountants. For small firms with low profit margins, they could make the difference between survival and shutting down.

As a nation, we simply can’t go on like this much longer. So what can be done? The Competitive Enterprise Institute offers some ideas in Free to Prosper: A Pro-Growth Agenda for the 114th Congress, published just this week. In finance and other areas of public policy, it is chock-full of the real middle-class economics we need — an economics of opening up opportunity by rolling back regulatory overreach.

Some policies to empower aspiring investors and entrepreneurs were introduced in the last Congress with bipartisan support. But even when these bills passed the House, they never made it past the desk of then–Senate majority leader Harry Reid. Now that Reid can no longer cause this gridlock, President Obama will have to decide whether he will stubbornly veto the much-needed regulatory relief, or work with lawmakers from both parties to move the nation’s economy forward.

The possibilities for the middle class to prosper are seemingly endless, if government gets out of the way. For example, crowdfunding websites such as Kickstarter and Indiegogo allow people to raise funds for everything from producing shoestring-budget films to making a new type of potato salad. Yet if those same individuals want to open a restaurant or help their neighbors open one in exchange for an ownership stake, rather than a token gift like a T-shirt, they have to comply with the kind of red tape (under Sarbanes-Oxley, Dodd-Frank, and other securities laws) that one would expect for a Fortune 500 company.

The real victims of Dodd-Frank have been on Main Street, rather than Wall Street. The law’s “qualified mortgage” and “qualified residential mortgage” provisions have prevented community banks and credit unions from lending to creditworthy customers. In fact, some have found compliance with these provisions so costly that they’ve gone out of the mortgage business altogether, leaving homeowners — and aspiring homeowners — with higher costs and fewer choices.

Then there’s Dodd-Frank’s Durbin amendment, which imposes price controls — championed by the nation’s retail giants — on the fees that card issuers, such as banks and credit unions, may charge retailers for debit-card transactions. This forced loss of revenue from retailers has shifted the costs of the debit-card payment system almost entirely onto the backs of consumers. As a result, free checking with low-balance accounts has shrunk dramatically. And since these fees can eat up accounts with small balances, more than 1 million Americans have joined the ranks of the “unbanked.”

Congress also has an opportunity to end government support to Fannie Mae and Freddie Mac, the government-sponsored enterprises that were the two biggest culprits in the mortgage crisis. And even as Fannie and Freddie are wound down, the property rights of their private-sector shareholders must be protected. That means ending the Obama Treasury Department’s policy (known as the Third Amendment to the GSEs’ Senior Preferred Stock Purchase Agreement) of seizing all of Fannie and Freddie’s profits, even after taxpayers have been paid back.

President Obama is right that “middle-class economics is about building the most competitive economy anywhere, the place where businesses want to locate and hire.” But he and others need to recognize the regulatory walls that keep middle-class Americans from reaching their economic potential. Lawmakers of all parties need to work together to knock these walls down. Free to Prosper offers some good ideas to start.

— John Berlau is senior fellow for finance and access to capital at the Competitive Enterprise Institute.

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