Undoing President Obama's Damage Will Take Time

Undoing President Obama's Damage Will Take Time
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Ronald Reagan once said, “No government ever voluntarily reduces itself in size. Government programs, once launched, never disappear. Actually, a government bureau is the nearest thing to eternal life we'll ever see on this Earth.”

Reagan said that in 1964. The underlying point still holds true some 53 years later.

But there’s more. Not only do government programs and bureaucracies seemingly achieve eternal life, but they grow bigger with failure. Failure in the private sector means trying something different or going out of business. Failure in government usually leads to bigger budgets, more staff and an expanded reach. Just think about public schools and LBJ’s “War on Poverty” programs.

That’s why it’s so critical to kill costly and misguided ideas for bigger, more intrusive and controlling government before they ever become reality. Consider the current challenges in trying to roll back two massive expansions of government imposed during President Barack Obama’s presidency – ObamaCare and Dodd-Frank.

ObamaCare inflicted a host of mandates, regulations, and taxes. Predictably, health insurance and related costs have increased and continue to skyrocket for taxpayers, businesses, individuals who have lost their insurance, those facing fewer choices in the government-run exchanges, and those who do not receive government subsidies, as noted in a new Bloomberg report. Republicans railed and ran against the many ills of ObamaCare since it was signed into law in 2010. Yet, during the first year of Republicans controlling the House of Representatives, the Senate and the White House, the effort to repeal and replace ObamaCare has stalled. That, in part, has been due to an ObamaCare constituency protecting its turf.

Indeed, another reason to oppose new government undertakings is that each creates groups that benefit from or become dependent on such endeavors, and therefore possess strong incentives to protect and expand those benefits no matter how costly or destructive they might be.

And then there’s the Dodd-Frank financial regulation legislation, also signed into law in 2010. As a knee-jerk reaction to the credit mess of 2008-09, Dodd-Frank failed to deal with actual causes of the meltdown. For example, nothing was done to stop the federal government from pushing a dubious “affordable housing” agenda through, for example, Fannie Mae, Freddie Mac, and the Community Reinvestment Act, passed by Congress in 1977 and revised in the 1990s. In summary, federal lawmakers for decades pushed a political agenda that de-coupled swathes of mortgage lending from economic reality. That very much continues today.

Dodd-Frank actually doubled down on misguided government intervention and regulation. As noted by Hester Pierce in a report titled Revisiting Dodd-Frank published early this year by the Mercatus Institute at George Mason University, “Rather than addressing the regulatory failures that led to the crisis, Dodd-Frank’s core solution was to shift decision-making from the private sector to regulators—the same regulators whose lapses had contributed to the crisis. Dodd-Frank has been costly in the short term, as any major regulatory overhaul would be. The financial industry and regulators have poured countless hours and dollars into implementing the new law. Of greater concern than these short-term implementation costs are Dodd-Frank’s potential long-run costs. Rather than averting crises, Dodd-Frank’s rejiggering of the financial system has created the preconditions for a future crisis, while inhibiting economic growth and dynamism.”

On that last point, Pierce highlights the machinations of how this regulatory monstrosity has and will continue to undercut innovation and growth. She wrote, “The law calls on regulators to step in where the rest of us—individuals, firms, and nongovernmental institutions—are supposedly destined to fail, namely, to identify and address all systemic and a wide array of nonsystemic risks… Financial regulators thus become central planners charged with carefully balancing the interests and risk-taking of all market participants, ensuring that firms do not fail, keeping the financial system functioning smoothly, and managing firms’ relationships with one another. This form of regulation turns regulators into allocators of credit: regulators decide who gets financed and who does not, which, in turn, affects how the economy develops, which consumer and business needs are met, and where innovation occurs.”

The contents of the first report on the U.S. financial system from the Mnuchin Treasury Department, published in June, echoed and expanded upon these points. It was noted, “The length of Dodd-Frank fails to respect fully its expansive scope as the legislation delegated unprecedented authority to financial regulators and mandated hundreds of new regulations. In total, implementing Dodd-Frank required approximately 390 regulations, implemented by more than a dozen different regulatory agencies. Dodd-Frank failed to address many drivers of the financial crisis, while adding new regulatory burdens.”

Among the results pointed out in the Treasury report were “a slow rate of bank asset and loan growth,” with small business lending being “one of the most anemic sectors, barely recovering to 2008 levels” while “origination rates for large business loans are at record levels.”

Another Mercatus analysis highlighted that Dodd-Frank is “associated with more than five times as many new restrictions as any other law passed since January 2009, for a total of nearly 28,000 new restrictions. In fact, it is associated with more new restrictions than all other laws passed during the Obama administration put together…” And that’s saying something.

In addition, regulations targeted at so-called big businesses – in this case, “big banks” who always seem to be targets of both Progressives and populists – usually wind up hitting small enterprises hard. That has been the case with Dodd-Frank. As pointed out in the Mnuchin report, “[R]egulation has proven to be insufficiently tailored to depository institutions based on the size and complexity of their business models. Requirements in Dodd-Frank are overseen by multiple regulatory agencies with shared or joint rule-making responsibilities and overlapping mandates. This complicated oversight structure has raised the cost of compliance for the depository sector, particularly for mid-sized and community financial institutions.”

For good measure, more regulation raises obstacles to new entry into the regulated industry. It’s no different in the bank business. A March 2015 report from the Federal Reserve Bank of Richmond noted that the number of community banks from 2007 to 2013 declined by 14 percent, and this falloff was not just about community bank failures, but “an unprecedented collapse in new bank entry.” It was noted: “This collapse in new bank entry has no precedent during the past 50 years, and it could have significant economic repercussions. In particular, the decline in new bank entry disproportionately decreases the number of community banks because most new banks start small. Since small banks have a comparative advantage in lending to small businesses, their declining number could affect the allocation of credit to different sectors in the economy.”

Central planning via hyper-regulation never works. Regulations limiting new bank entry, and hitting small and regional banks hard wind up restraining small business growth, new business creation and innovation.

As for actions by this Republican White House and Congress, the effort to roll back Dodd-Frank is under way. The U.S. House of Representatives has led the way. The Financial CHOICE Act of 2017 (HR 10), which would repeal significant chunks of Dodd-Frank, passed the House by a vote of 233-186 in early June. Senate action on such a sweeping measure, however, is a question mark, providing another reminder of the difficulties of undoing big policy mistakes that expand big government.

One smaller measure worth taking note of is the Systemic Risk Designation Improvement Act of 2017, which has sponsors from both sides of the political aisle – Democrat Claire McCaskill in the Senate and Republican Blaine Luetkemeyer in the House, both from Missouri. It’s an effort to lift some of Dodd-Frank’s most onerous regulations from the backs of smaller regional banks.

As Daniel Press from the Competitive Enterprise Institute has written, the bill “directs the Federal Reserve to look at interconnectedness, cross-border activities, and complexity when assessing their regulatory requirements, not just size. Currently, the $50 billion limit is an arbitrary designation that subjects medium-sized regional banks, which range somewhere between $50 billion and $250 billion in assets, to the same standards as large, multi-trillion dollar banks. This change makes sense, as regional banks that predominately take deposits and have little exposure to derivatives or trading are clearly not ‘systemically important’ as defined by Dodd-Frank.”

Will this bit of bipartisan regulatory restraint and common sense prevail? It clearly should serve as an opening legislative accomplishment in a much-needed rollback of financial over-regulation. However, the defenders of central planning via regulation, such as Senator Elizabeth Warren (D-MA), stand opposed. Warren continues to peddle the idea that the 2008 crisis was about not enough government regulation, as opposed to government policies pushing resource allocation in the housing/mortgage market according to political preferences rather than sound economics.

The struggle of denying eternal life to government programs and bureaus continues more than a half-century after Ronald Reagan so prominently drew national attention to this daunting and destructive challenge.

Ray Keating is an economist and a novelist, with his latest thriller being Lionhearts: A Pastor Stephen Grant Novel, as well as being new to the world of podcasting with Ray Keating’s Authors and Entrepreneurs Podcast and Free Enterprise in Three Minutes.

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