The Agenda

Jan Eberly on Regulatory Uncertainty

In a recent post, Jan Eberly addresses the argument that regulatory uncertainty has impeded employment growth:

If regulatory uncertainty was a major impediment to hiring right now, we would expect to see indications of this in one or more of the following: business profits; trends in the workforce, capacity utilization, and business investment; differences between industries undergoing significant regulatory changes and those that are not; differences between the United States and other countries that are not undergoing the same changes; or surveys of business owners and economists.  As discussed in a detailed review of the evidence below, none of these data support the claim that regulatory uncertainty is holding back hiring.

And I think Eberly makes a strong case against an argument that was never very well-crafted. It is simply not credible that regulatory uncertainty is the “primary” problem facing businesses, so it’s unfortunate that Eberly think it’s a useful exercise to “debunk” that notion. 

Eberly writes:

If regulation was a significant drag on business today, we would expect to see profits constrained after recent regulatory reforms were passed into law.  However, corporate profits as a share of gross domestic income have about recovered their pre-recession peak, and earnings per share in industries most affected by recent regulatory changes, such as energy and health care, have among the highest earnings per share of those in the S&P 500.  This growth is inconsistent with a corporate sector held back by regulation.

We might also expect that an increase in regulation might deter new entrants, thus increasing the profits of incumbent firms. This isn’t necessarily what is happening at present — there are many reasons why we’re not seeing lots of new entrants — but it is a possibility that should be addressed, at least in passing. Indeed, it is a familiar fact that incumbent firms often agitate for regulation to protect them from competitors who would otherwise threaten their profits. Wal-Mart executives didn’t press for an increase in the federal minimum wage out of the goodness of their hearts, though of course they’d want you to believe otherwise.

The role of regulation in protecting incumbents is particularly true among medical providers like large general hospitals, which have long sought to craft federal and state regulations that make it difficult for focused providers to “cream-skim” the most lucrative medical work. That is why it is particularly curious that Eberly cites health care to make her case. A familiar conservative talking point was that the passage of PPACA led to soaring stock prices for various for-profit private insurers, as there was a widespread expectation that the flow of public subsidies would redound to their benefit. Unrestrained cost growth is good news for them. It is bad news for taxpayers. To put this another way, high profits aren’t always a sign of a healthy sector. They can be the sign of an uncompetitive sector. It is slightly troubling that a senior official addressing the issues raised by regulation would not have at least considered this possibility in a public communication. 

Michael Mandel has offered a more sophisticated take on the impact of regulation


While regulators may have followed the letter of the executive order and rooted out a few old rules, some are ignoring the order’s spirit. Indeed, regulatory drag may be one reason why the past decade has seen few breakthrough products, outside of information technology and communications.

What’s more, some recent regulatory actions suggest that Washington may end up slowing innovation, investment and job creation in tech and communications as well. For example,  AT&T invested $19.5 billion in the U.S in 2010, more than any other corporation, at a time when most companies are hoarding cash. But instead of applauding AT&T’s willingness to spend and create jobs, regulators at the Federal Communications Commission have recently decided to slow down their reviews of both AT&T’s bid to merge with T-Mobile and the company’s earlier proposal to buy wireless licenses from Qualcomm, which has been pending since February. The Commission’s slowdown pace adds uncertainty to the marketplace and keeps investment plans from moving forward.

Or consider the Obama Administration’s attitude towards Google, a company whose innovative accomplishments are the envy of the whole world. Unlike many other large American multinationals, Google is investing billions in the United States and creating jobs here as well. The just-announced acquisition of Motorola Mobility is likely to mean a bigger pile of Google cash invested on the development of new smart phones and software, adding to the U.S. lead in this area.

But instead of congratulating Google for its domestic investments in innovation, the Federal Trade Commission recently opened an antitrust inquiry into the company—an inquiry which is likely to intensify after the Motorola announcement. To antitrust regulators, the close scrutiny of Google make sense—but how does it contribute to the economic recovery?

To be sure, sometimes more regulation is helpful to making markets work better; deposit insurance is a case in point, as are rules prohibiting various kinds of financial chicanery. In other cases, such as drug safety, everyone would agree that effective regulation is essential.

But absent some clear and present danger to public health or safety, and with America mired in an agonizing slow recovery, we need to put innovation and job-creation first. This means taking a light-handed approach to regulation, especially where the harm it is intended to prevent are still largely hypothetical.

The argument here is somewhat subtler than the one that Eberly chooses to address. It raises the question of the unseen impact of excessive regulation, which Mandel has elsewhere compared to congestion or pebbles in the stream: a slow and steady accretion of rules that make it difficult to generate new organizational capital by arranging production in new ways. Mandel has gone into some detail on how the FDA, for example, has constrained useful innovation in the life sciences. And he has also offered a roadmap for large-scale regulatory reform under the auspices of the center-left Progressive Policy Institute.

All that said, I happily acknowledge that some of our left-of-center interlocutors will be pleased to see a senior Treasury Department official join the ranks of feisty progressive bloggers.