Posted by: theoptimisticconservative | April 7, 2011

The Fiscal Problem We Don’t Talk About

I appreciate Jazz Shaw’s point in the Hot Air Green Room today that – in addition to the Paul Ryan budget plan – the federal tax code needs an overhaul to yield revenue more effectively.  I also agree that subsidies to agriculture and ethanol are fine things to cut from the discretionary budget.  The oil industry is not actually subsidized; it receives some tax breaks, and bargain rates (including fee holidays) on drilling leases; but as long as there is a simultaneous overhaul of the tax code, I can certainly see eliminating those cost breaks.

The oil industry is one of many good models, however, for examining the point that much of our revenue problem today is caused by regulation that actively inhibits revenue-producing economic activity.  A key reason why the federal government has given cost breaks to the oil industry is that they help offset the costs of regulation that would otherwise make drilling and refining in the US prohibitive. Drilling and refining here don’t have to be economically infeasible at the prevailing market price of oil, but the government has the power to make them so – and it does.

This is just one of many examples.  The problems of the US federal debt are discussed almost entirely in accounting terms – revenues and outlays – as if the only way to change either quantity is to directly “raise taxes,” cleverly “increase revenues,” or “cut spending.”  What no one talks about, except when the EPA issues new carbon regulations that go well beyond its original 1970s-era charter from Congress, is the labyrinth of regulations in which we now operate, each of which imposes a cost on economic activity.

The core price of everything, including gasoline at the pump, has been driven up by regulation.  We agree with the original purpose of much of the regulation, such as building codes, worker safety codes, pollution abatement, and emission requirements for motor vehicles.  But we also now see the content of the regulation going well beyond what we thought we were agreeing to in the past.  And when the compliance costs are cumulative and unmitigated, economic activity starts to shut down.

American workers have been put out of job after job in the last 20 years by the fact that the market won’t tolerate the heavily regulated cost of their services – much of which the workers don’t receive as income.  Consider all the mandatory expenses an American employer has to carry for each employee. Social Security and Medicare contributions, unemployment contributions, worker compensation insurance premiums, health insurance contributions.

Now think about the fact that the average American worker is living for the whole year on what he is paid from mid-April to December.  He is also paying taxes – at three levels of government – and making contributions.  In many industries, a worker sees only half of the amount of his worth to his employer going into his own bank account each month.

The government mandates that the rest of his productivity be funneled off into the programs and expenses of its choosing.  For many kinds of work, the market simply won’t bear the cost of employing an American today, and/or running a business under the burden of other American regulations.

Americans have also been put out of work quite directly by regulation, as with the scheduled outlawing of the incandescent lightbulb in 2012, and the new 2012 emission standards that will put small trucking firms out of business in California.  Other obvious examples are the drilling moratorium in the Gulf of Mexico, the state-level decisions by California and Florida not to renew offshore drilling permits, and the prohibition on drilling in ANWR.  Regarding the oil and gas industry, we should also not forget the jobs and revenues forgone when activists and federal judges prevent the retooling of old refineries and the exploitation of shale oil and tar sands.

The number of industries affected by economically prohibitive regulation is growing.  Coal is coming in for its share of regulatory suspension.  Farmers and ranchers are worried about the impact of new environmental regulations (see here, here, and here).  The cost of transportation would be increased by the EPA’s new carbon regulations, affecting literally everything in the economy.  Ditto the cost of utilities.  We shouldn’t forget that US regulation of the auto industry’s product is a market-hostile cost factor for the American automakers, along with their labor and benefit costs.  A lot of people would buy a $7000 car that came without many of the features mandated by federal regulations, but it’s illegal to make or sell that $7000 car in the US.

It’s useful to ponder these facts.  If employers could pay a worker $45,000 a year, instead of paying the government and insurance companies $18,000 and the worker $45,000, there would be a lot more jobs available in the US in April 2011.

Regulation affects the economic status, meaning, and viability of everything we do today. No economic effect can be explained properly without considering the regulation that affects the activity.  Regulation, by stifling economic activity, drives down revenues for the government.  It guarantees the continuation of more unemployment than we would have otherwise, adding to the cost of government.  Regulation does something even more insidious, moreover:  it depresses the amount of discretionary income workers have – regardless of their productivity – while increasing the cost to them of the necessities of life.  Regulation is the main reason “real wages” have not increased for the American worker over the last 40 years.

Some regulation is necessary, desirable, and inevitable.  Every sensible person understands that.  It is sophomoric to pretend that pointing out regulatory excesses is a way of saying there should be no regulation.  But we have already reached the point at which we will have to choose between levels of regulation, on the one hand, and levels of economic prosperity and public revenues on the other.

With a less regulated, better performing economy, we might be able to work off the unfunded entitlements debt more incrementally.  If we didn’t have the entitlements crisis looming, we might be able to sustain more of the ever-increasing regulation favored by some domestic constituencies.  But we face these two politically induced economic dysfunctions at the same time.  What is quite certain is that we cannot sustain them both on their current paths.

J.E. Dyer blogs at Hot Air’s Green Room and Commentary’s “contentions.”  She writes a weekly column for Patheos.


  1. Nice to see you have discovered where the real action is.

    There are no precise estimates of the cost of Federal regulation, and readily available estimates (such as those produced annually by OMB) are highly unreliable. When I worked there, my order of magnitude estimate of the cost was 1/3 of budget outlays. (I believed it was less than 1/2 but more than 1/4; hence 1/3.) One reason is that the Anti-Deficiency Act forbids an agency from spending money that has not been appropriated, but there is no analogous barrier to compelling the private sector and households to spend money they don’t have.

    It is possible that the denominator of this fraction is gong down, what with SarBox, ObamaCare, Dodd-Frank, and the like. And there are other federal agencies whose regulatory effects hardly anyone ever thinks about, such as the Patent Office. I’ve recently been introduced to this hidden regulatory tar pit, and it is truly amazing.


  3. when I read Bret Stephens column on Israel’s oil shale in the WSJ, my first thought was that the Federal government should use eminent domain to seize the entire state of Colorado in order to access the one trillion+ barrels of oil shale that run through Colorado’s aquifer. Relo Coloradans elsewhere instead of allowing them to whine endlessly about their aquifer. That is so much oil that the US can become totally independent of imports for more than 100 years.

    as to the impact of high cost of regulation in general, I would like to know why Germany, even more regulated, and more high-cost unit labor cost than USA, has not lost their manufacturing, export-dominant economy.

    my idea for reducing Defense costs is to start charging the rest of the world for American global policing, especially for the US Navy.

    Wall Street started monetizing America’s industrial base in 1978 – the lost jobs are primarily due to that bipartisan project, not over-regulation. Employer-paid health insurance is a bigger cause of manufacturing job loss than over-regulation.

    Not that “conservatives” can think out of the box any better than the left.

  4. K2K — employer-paid health insurance and its burdensome cost (the central economic problem) are both the product of regulation. You understand why it exists in its current form, right?

    I’m sure you understand that writing an article about regulation doesn’t mean that someone thinks regulation is the ONLY thing affecting the economy or the cross-border flow of jobs. The US tax structure is another big one. I would disagree that the US jobs lost (or, equally importantly, not created here but abroad) in the last 20 years were a result of the monetization of the US industrial base that started in the 1970s. We felt the effects of that in the 1980s, and by the mid-1990s were already on a different economic footing.

    Richard Belzer — actually, I’ve written about the regulation problem quite a number of times before. There have been some independent studies done of the cost to the economy of regulation (typically expressed as an annual dollar amount per household) — I don’t know if you’re referring to those, or just to the OMB estimates, as unreliable. CATO has one for federal regulation that they update periodically. A California-specific study from 2009 got a lot of attention as well.

    I’d be very interested in hearing some of your best stories about the Patent Office. I’ve heard it pretty much is a regulatory tar pit, but have only the odd Forbes article or other stray data point to go on.

  5. “Employer-paid health insurance is a bigger cause of manufacturing job loss than over-regulation.”

    K2K, isn’t that just another form of govt imposed regulation? It might not be “regulation” in the usual sense of the word, but since WWII when companies, to entice workers, worked their way around what politicians decreed, wasn’t it the same essential result – just in different packaging? The govt said X and then the private sector had to do Y in order to not be in violation of X.

  6. I’m all for drilling if the oil-industry pays the full economic cost of cleaning up its mess. Recent events in the Gulf suggests it hasn’t quite got its head around this idea yet.
    I agree that the burdens on US employers are an impediment to job creation. The expectation that an employer should be responsible for insuring employees against ill-health is particularly onerous and unfair. Employers in competitor economies like Germany and Japan don’t have to carry this burden. Health insurance should be the responsibility of the individual, not the employer. Payroll taxes are also far too high. Worst of all, most Americans fail to realize that taxes on corporations are far higher here than in the so-called high-tax economies of Europe. Effective corporation tax in countries such as Ireland, France, and Poland are less than half that endured by our corporations at home. No wonder so many of them are now looking abroad to expand their operations.
    I do realize however, that the bills have to be paid, and that civilized society has its costs. We need to take a hard look at where our taxes are going. I am not one of those who believe that the country is bankrupt, but neither do I believe that the best way back to fiscal health is the traditional combination of taxation and inflation. We need to take a chainsaw to unnecessary public expenditure. The idea that public servants (including the military) should have uniquely priviledged pensions is unsustainable.
    Much of the present mess is recent and is down to the cost of keeping the banking system alive and bailing out the ‘Masters of the Universe’ who believed their own vast compensation was the ultimate measure of economic health. However, this is the fruit, not of regulation, but of deregulation. Nothing can be done about this other than to try and ensure it never happens again. Sadly, this Congress, by listening to its fat friends on wall street who paid for their campaigns rather than the people who elected them, is doing its best to ensure we will have a repeat sometime soon.
    The other big drain on the productive economy is our military and foreign wars. You only have to look at the size and cost of our military in comparison to the armed forces of our competitors (even in relation to so called threats like China). Our military is at least twice the size it needs to be to defend the US. Our military capability is actually defining and driving our foreign policy decisions. The vital interests of the US should be driving our foreign policy. If our military was the proper size, we would likely not have gotten ourselves into Iraq, Afghanistan, and (now) Libya. Necessity being the mother of invention, we would have discovered that foreign policy issues are best fixed by cheaper means, and that the internal arrangements in foreign countries are not our business as long as they sell us their oil at a fair price. In fact, we are now getting involved in foreign adventures to counteract the malignant consequences of earlier military meddling. Another area we should include for the chop is foreign aid. We don’t give money to the nations that share our values, and we shouldn’t be giving a cent to those that don’t. I’m not against properly targeted foreign health programmes, disaster relief, or the peace-corps, but the rest needs to stop. There is not a bit of evidence that any of it has done any good in obtaining compliance with US interests in countries which have contrary agendas. Military aid only helps foreigners butcher each other more efficiently with state of the art weapons. If they want them, let ’em pay the full market price.
    I must disagree with your presumptions about what we may refer to as green technologies, and the environmental regulation that is driving it. Whether some of us in the US like it or not, the world beyond our shores is changing, and climate-change denial risks the US being left behind in the technologies of the future. The wind-generators that are springing up across Europe like daisies are German and Dutch technology. I am told that we were once ahead in the area of power-generation. Now we are playing catch-up. We have long ago lost our lead in nuclear energy to the French. The Germans and Japanese are leading the way in the new automotive technologies. Change is happening, and like most change it is creating opportunities for those who will grasp it. It is also a fact that energy efficient is ultimately cost-efficient too.
    The idea that the demise of the incandescent light-bulb manufacturing-industry is symptomatic of the malevolent influence of ‘green’ policies is sheer comedy. Long before anyone considered replacing these things with energy-saving bulbs, most of this industry had moved to low-wage countries. The demise of domestic light-bulb manufacturing had nothing whatsoever to do with ‘green’ policies. The more significant thing is that the flourescent tube was developed here, but the Japanese took up the R & D running in an area where we once had the lead, and the royalties on the new generation of quick-start energy-saving bulbs are going to Japan. The bulbs themselves will presumably be made in China like their soon to be obsolete predecessors.

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