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.