President Obama delivered to House Speaker John Boehner this week a list of just seven regulations Federal agencies proposed to impose, each of which would cost over $1 billion and the total cost of which would be $109 billion. If you contemplate the latter number, you will come to realize why U.S. economic growth is currently unexpectedly slow, leaving millions of people sunk in the mire of long-term unemployment.

Regulations are playing an especially important economic role this year because of the political cycle. After Obama’s inauguration in January 2009, he appointed a cadre of very able but very politically committed, academically trained officials to the heads of the regulatory agencies, and they gathered around them teams of like-minded individuals. Getting key officials confirmed by the Senate took the rest of 2009 and the early months of 2010. Then once in place these officials began drafting the regulations that would put their ideas into practice.

Only this year have those regulations begun appearing in large numbers. Their flow has been increased by two further factors. First, substantial legislation, in finance and healthcare in particular, was passed in 2010, which left much of the detailed contentious work up to regulatory agencies, which the Obama administration and the congressional Democrat leaders knew would be staffed by like-minded ideologues. Then the Tea Party victory in November 2010 showed Obama’s supporters that they would be unlikely to get much contentious legislation through the new Congress, so their energies were redirected towards the executive agencies, where progress would be much easier.

Historically, even under leftist administrations, regulatory agencies have played a much smaller role in the economy. In the 1930s, legislative activities under the New Deal, notably the Wagner Act that tilted labor relations towards unions, played a major role in slowing the incipient economic recovery, but most such actions resulted directly from Acts of Congress rather than being designed by agencies themselves (although the National Labor Relations Board, formed in 1934, played a significant role.)

The New Deal certainly messed up the capital market, for example, causing issue volume in the late 1930s to fall far below its level at the bottom of the 1920-21 recession. However this was not the fault of the SEC, under Joe Kennedy, who certainly understood the importance of capital markets, or even of William O. Douglas, who didn’t but was whisked away to the Supreme Court in March 1939 before he could do too much damage. The true destroyer here was the Glass-Steagall Act of 1933, splitting commercial and investment banking. This may have been a good idea in principle but when instituted at the bottom of a recession it left the investment banks hopelessly undercapitalized for the necessary risk-taking of underwriting.

Thus when a GOP victory in 1938 put the social engineers in the legislature out of business, there were few agencies independent of Congress that could continue the economic experimentation – and hence economic recovery in 1939-40 was vigorous.

In the 1960s and 1970s, the agencies mushroomed. The Food and Drug Administration had existed since 1906, but was given life and death powers over the drug industry only in 1962, after the thalidomide scandal. The Department of Housing and Urban Development was formed in 1965, and took over the relatively modest Federal Housing Administration (FHA), while the Equal Employment Opportunity Commission (EEOC) was formed the same year. The Daddy of all economically damaging agencies, the Environmental Protection Agency (EPA), was formed in 1970 under the Republican (but economically confused) President Nixon, as was the Office of Safety and Health Administration (OSHA). The Federal Emergency Management Agency (FEMA), source of slush funds every time a wind blows, was a 1978 creation, while the Federal Energy Regulatory Commission (FERC) was greatly expanded in that year.

Evidence of the agencies’ effect on economic activity is limited in the 1960s and 1970s, although the overall slowdown of economic growth after 1966 is certainly significant. However, whereas by GDP statistics the first severe slowdown took place in 1969-70, several years after the agency expansion of the Great Society years, when you look at Gross Private Product a sharp slowdown is visible in 1967, when GPP growth slowed from 5.5% in 1966 to a mere 0.4%. This slowdown was noticed in the stock market but was heavily disguised in GDP figures by the Vietnam War expenditure buildup.

Then a more severe slowdown occurred in 1974-75, as the EPA and OSHA geared up and the ailing Nixon administration was no longer able to offer resistance – GPP fell 5.6% from the last quarter of 1973 to the first quarter of 1975, significantly more than the 4.6% drop in the 1982 recession although less than the 7.1% decline in the recent (2007-09) unpleasantness. The Arab oil price shock of 1973 and the surge in government spending certainly contributed to the depth of the 1973-75 recession, but it’s likely the surge in EPA and OSHA regulation also played a substantial role.

As in the early 1970s, the current administration is producing a surge of regulations, most of which are exercising a drag on the economy. These would include the following:

• The financial services sector has been landed with legislation of more than 1,000 pages, including instructions to SEC and other bureaucrats to write regulations (undefined) in all sorts of areas, plus a consumer finance bureaucracy set up by an ideologue determined to cut the big banks down to size. In addition, the mortgage business, one of the banks’ major profit drivers in normal times, is subject to endless regulatory harassment and what’s worse lawsuits in respect of every soured deal in the last decade. It’s tough to sympathize with bankers, but it’s also tough to imagine how they can grow their business and flourish under these conditions.
• The combined over-regulation and coddling of banks, together with Ben Bernanke’s misguided and anti-market monetary policies, has suppressed small business lending to a level 25% below its pre-2008 plateau, about $400 billion below its natural level. Bang go more jobs.
• The EPA is intending to regulate carbon dioxide emissions, under the misguided global warming theory. The first tranche of these regulations represents most of the $109 billion of costs that President Obama identified to Speaker Boehner.
• Not only have very few permits been issued for offshore Gulf drilling in the last year, but offshore exploration in the rest of the country has been shut down. The EPA also wants to restrict the development of the new oil and gas extraction technique of “fracking” while even the normally sensible New Jersey Governor Chris Christie has got in to the act, imposing a 12-month fracking moratorium. It appears to me that fracking has the potential to create more value, more national security and a hell of a lot more jobs than all the dubious toys of Apple, Google and Facebook combined. A policy of “drill, baby drill,” and “frack, baby, frack” could alone speed U.S. growth into a brisk trot, but it’s not being allowed to happen.
• The NLRB is attempting to impose sanctions on Boeing for opening a new plant in South Carolina rather than the unionized Washington. As a result, more billions in investment is being delayed while lawyers are deployed. It’s also attempting to tilt the playing field artificially towards unions in representation elections.
• From December, we are to be prevented from buying the light bulbs that we have used for a hundred years, and instead forced to buy inferior, much more expensive and foreign-made light bulbs, all for the benefit of a “crony capitalist” manufacturer, GE, which has closed its US light bulb plants and moved manufacturing to China.
• Automobile manufacturers are being forced to increase fleet economy, not merely to 35 mpg, as was previously the case, but to an engineering-impossible 62 mpg, all in pursuit of the global warming chimera. They are also being forced to manufacture electric cars that almost nobody wants and that don’t work properly. Meanwhile energy prices are being forced upwards, while hopelessly uneconomic energy sources such as bird-slaughtering windmills, earthquake-causing geothermal power and famine-producing ethanol are being subsidized.
• A healthcare law of over 2,000 pages has been enacted, imposing immense new costs and regulations on business, many of them avoidable with better legislation, widening the budget deficit and bringing huge new uncertainty in the lengthy run-up to its implementation.

You should remember one further factor: that cost estimates for regulations are developed by the same agencies as are attempting to introduce the regulations; accordingly they are hardly likely to be overstated.

Even the $109 billion cost of the seven largest regulations currently under discussion is 0.7% of a year’s GDP. When you add in the myriad of smaller regulations, in banking, energy and the environment in particular, it becomes clear that as in 1974-75, U.S. economic growth is being massively retarded by the Obama administration’s wave of regulation. Fiscal and monetary policy are also out of kilter, but may not be responsible for the current sluggishness in growth, which in the private sector is running at about 1.5% per annum instead of the robust 5-6% rate one would normally expect coming out of such a deep recession. Needless to say, this sluggishness is largely responsible for the current 9% plus unemployment rate.

Regulation is the most insidious cost imposed by government on the economy, because unlike taxes and tariffs its costs are largely invisible and in the case of such monstrosities as the CAFE fuel economy standards may be more or less unlimited. Even without making the obviously necessary changes in monetary and fiscal policy, we could restore much of the U.S. economy’s natural robust health by reversing the regulatory tide.

-0-
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long ’90s boom, the proportion of “sell” recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)