Magazine | September 10, 2012, Issue

Energizing the Economy

Leash the regulators and unleash the oilmen

Conservatives dismayed by the fact that the United States is home to the highest corporate-tax rate in the developed world are welcoming Mitt Romney’s proposal to reduce it from 35 percent to 25 percent, but his biggest proposed tax cut has nothing to do with taxes as such.

Running well in excess of $1 trillion a year by most estimates — and closer to $2 trillion by the Small Business Administration’s reckoning — the cost of complying with federal regulations is a much bigger burden on American businesses than taxes are. The expense of regulation is in effect a form of taxation, but with an important difference: You can boot out your representative if he votes for a tax hike, but you can’t vote out executive-branch bureaucrats. The tax and regulatory climates have a great deal in common: Both are cumbrous and expensive, and both bodies of law are full of special-interest carve-outs that are the result of billions of dollars’ worth of lobbying by entrenched business interests, coddling market incumbents at the expense of start-ups and smaller firms. If General Electric is not particularly worried about the 35 percent corporate-tax rate, that is because it does not usually pay taxes at that rate and, indeed, in some years does not pay corporate taxes at all. Likewise, Goldman Sachs and similar large firms with 400 lawyers on staff and a dozen lobbyists on retainer are less disadvantaged by the Obama administration’s aggressive regulatory stance than are smaller and younger firms for which legal fees and compliance monitoring are heavy burdens, or even insurmountable ones: The estimated annual cost of regulation on a U.S. manufacturing firm is very high, about $700,000, meaning that small, specialized start-up enterprises without the cash flow to handle such expenses are out of business before they can begin.

Mitt Romney has proposed two initiatives for lightening the regulatory load on American enterprise. The first is a familiar one, if only because every presidential candidate promises it: a comprehensive review of federal regulations with an eye toward pruning them. Even the Obama administration undertook such a review — which, as the Romney campaign points out with a measure of well-deserved mockery, led to a reduction of regulatory compliance costs amounting to an underwhelming 0.1 percent of the annual burden, a load that is of course growing every day that Barack Obama and his associates remain in power. Here, Romney’s reputation as an obsessive scourer of data points and processes promises to serve him well: Unlike Barack Obama, he is the sort of guy who in fact desires to reduce federal regulation, and whose administration promises to be staffed by people sharing that outlook. Romney proposes to begin his review with the satisfying step of issuing an executive order repealing in toto the regulatory additions of the Obama administration. Prominent among them are several new mandates from the Environmental Protection Agency and the Health and Human Services rules handed down thus far to implement the Affordable Care Act, which Romney intends to repeal, assuming that he has sufficient congressional support to do so.

#page#The second and more interesting proposal from the Romney campaign is to establish a federal cap on total regulatory-compliance costs, something like the Democrats’ beloved Pay-As-You-Go rules but deployed to distinctly different ends: PAYGO was used mainly to interfere with tax cuts, but the Romney proposal would complicate the issuing of new federal regulations. The cap would require that the federal government identify regulatory-cost offsets before issuing any new regulation that imposed any burden on the private sector. The cap would be created by executive order and implemented at the agency level, and one must imagine that the cost-review process for determining offsets would be extremely combative. That is not a drawback to the proposal but a benefit: The more difficult it is for federal agencies to issue new regulations, the better.

Congress will of course have its say, but it is far easier to defeat bad proposals that require a vote in two houses of Congress than it is to defeat bad regulations that come from executive agencies with no vote and no accountability. Romney would further reinforce the legislative power by requiring that any major regulation (defined as one with an economic impact of $100 million or more) be voted on by Congress rather than enacted administratively. It is worth noting that Romney here is proposing to reduce some of the powers of the executive branch that he hopes to lead, constraining federal regulators’ ability to act independently of Congress. But doing this is necessary to the long-term economic and political health of the country.

The impact of regulatory overreach is not limited to those firms and industries targeted by the federal government, but rather ripples throughout the economy. While free-marketers may sometimes hesitate to acknowledge the fact, some industries are simply more important than others, inasmuch as an enterprise of any consequence finds itself involved in the real-estate industry (for office space, manufacturing sites, and warehousing), the financial industry (for credit and cash flow), and the energy industry (everything from utilities to transportation costs). The Obama administration is making life much harder for energy and finance, simply because those industries are unpopular with its political supporters, and by its attempts to reinflate the housing bubble it is extending the weakness and uncertainty in the real-estate market.

The administration’s favorite target is the energy industry, executives of which one of the wild men in Obama’s EPA promised to “crucify” — “like how the Romans used to conquer villages in the Mediterranean. They’d go into a little Turkish town somewhere and they’d find the first five guys they saw and they’d crucify them.” Green fantasies to the side, the energy industry means oil, gas, and coal, and domestic petroleum production means extracting products from shale formations through the process known as hydraulic fracturing, or “fracking.” Fracking is the new Alar, a source of terror (for environmentalists) with no basis in reality. Obama’s EPA has been making aggressive noises about fracking, which at the moment is regulated for the most part by competent state-level authorities rather than by the ideologically driven EPA. It is a reasonably safe bet that a second Obama term would mean severe restrictions on hydraulic fracturing, and thus the effective end of new oil-and-gas exploration in the United States, shutting down one of the few sectors of the U.S. economy that are producing real wealth and real jobs both for high-end professionals and for blue-collar laborers.

#page#Energy gets its own section in the Romney plan, beginning with the obvious first steps of maximizing the use of those resources we have readily at hand by approving the Keystone pipeline and by encouraging the construction of modern, relatively clean, coal-fired power plants by streamlining the permitting process. Rather than attempt to invest in individual firms such as Solyndra or in particular products such as Tesla electric automobiles, the Romney administration would support basic-science research as well as applied-science and engineering projects through a new agency, ARPA-E, which would be based on DARPA, the Pentagon’s highly effective research-and-development operation, which uses competitive bidding to focus the private sector’s best and brightest mad scientists on specific defense-related projects. This would not constitute a rollback of the federal government’s support for energy-related research and development, but rather a shifting of resources away from a process that has channeled billions of dollars to Democratic donors running firms destined for bankruptcy and directing them toward fundamental science, which is largely conducted at the university level, as well as toward competitively structured federal projects.

Among the specific regulatory initiatives that Romney proposes is revisiting the Clean Air Act, which was adopted to control the emission of pollutants but which the Obama administration intends to use to police carbon-dioxide emissions in the pursuit of its voguish and unproductive global-warming crusade. Romney intends to see that it is limited to its original purpose. One of the many ironies of this election is that Romney has a more aggressive global-warming proposal than Obama does, though he would never describe it as such: By modernizing and liberalizing the permitting process for new nuclear-power facilities, a Romney administration would take a very large step toward putting the U.S. electricity-generating infrastructure on a path that is more reliable, more economical, and, not incidentally, more environmentally friendly than the current system. Taken in the context of our generating infrastructure, those electric cars the president is so fond of are in fact coal-powered cars, the batteries of which simply store power from a coal-dependent power grid.

In terms of more conventional energy issues, Romney promises to open up the continental shelf, the Gulf of Mexico, and the Arctic to responsible drilling and to leave the regulation of shale extraction to the states, where it belongs.

It is important that we understand the real value of developing U.S. energy resources. For all of the silly talk about “energy independence” — and Romney has been known to engage in it, too — the United States will never be more “independent” when it comes to energy than it is when it comes to any other important product. Oil, gas, and coal are global commodities, and the United States cannot extricate itself from the global market — nor would doing so be desirable. Developing domestic energy resources is not going to cause the ayatollahs to pipe down or send the Arabs back to their caravans. Developing U.S. resources would of course be a decades-long project, and while beginning that project would send important signals to the world’s petroleum markets, various detestable Middle Eastern and South American regimes are going to remain big players on the supply side, and China et al. are going to remain big players on the demand side. Developing our oil-and-gas resources does not allow the United States to walk away from the world and its complications: It just makes us rich. Producers get rich by economically extracting wealth from the ground, refiners get rich by converting it into high-value products, traders get rich by connecting producers with sellers, and a lot of roughnecks and truck drivers get to buy new bass boats and cabins on the lake. Developing our domestic energy industry makes the United States stronger and more secure not by undermining the economic position of trans-Levantine miscreants but by making us wealthier and more confident in our prospects.

Putting a leash on the regulators and taking one off of the oilmen is not going to solve all of our economic problems — not in the next four years, not in the next 40. But it will send trillions of dollars’ worth of wealth flowing out of the ground and into the economy rather than out of the economy and into Washington.

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