Regulation vs. Prosperity... America goes gently into that good night

Thanks to the Founding Fathers, in 2013 the United States has built the wealthiest nation in history on free markets and the rule of law. (And thanks to their more recent successors, we’re simultaneously the poorest… but that’s another discussion.) While the Founding Fathers were remarkable for much, what is perhaps their greatest legacy is their recognition that Americans, like all men, are imperfect.

In 1787 after almost a decade of the greatly flawed Articles of Confederation, the 2nd Continental Congress was formed and would eventually produce the Constitution we have today. What was so amazing about the document was the fact that it had built into a wide variety of it limitations and strictures intended to both delineate and restrict power. The overarching idea that powered the construct of the Constitution was the fact that an unfettered government would become tyrannical. The founders understood that limited government was supposed to act only in those areas that citizens could not on their own – think national defense, courts, treaties – and, importantly, only based on the powers granted to it under the Constitution.

Fast forward to today where their work has proven itself well placed with a prodigious American prosperity been built on its foundations of free markets and the rule of law. More than any nation in history, we have benefited from the fact that virtually any American citizen or resident has had the opportunity to start a business. Sometimes they invest their money in a neighbor’s plan to start a sandwich shop and other times they roll up their sleeves and start something on their own. More than anything in the world, that freedom of opportunity has set America up for success and driven us to achieve the greatest level of wealth ever created.

Unfortunately, that freedom of opportunity is rapidly disappearing… In an effort to ameliorate every problem that might befall a citizen, the federal government has passed laws and created regulations that touch virtually every aspect of our lives. This Sisyphean exercise has not only failed, but it has laid the foundation for the undermining of the freedom and opportunity that made America the wealthiest nation in the world.

Economic growth comes largely from small businesses. 70% of all new jobs come from small businesses. Small businesses are where innovation begins. Think about it. You’re probably not surprised that the PC revolution was not driven by the behemoth IBM but rather by two upstart companies named Apple and Microsoft. You’d probably not be surprised to discover that ESPN was founded by an unemployed sportscaster rather than one of the three major networks. You’re also probably not surprised that it was Google, a company started by two college students, that figured out how to effectively harness the opportunity in online advertising while America’s mega media companies stumbled from one failed business model to the next. Big companies always start out as small ones.

Small business is where new ideas get to play themselves out and figure out what works. This is because small companies are typically nimble, they don’t have legacy products or services they are concerned with undermining, and perhaps most importantly, owners and investors are usually very close to the action. They normally are right in the mix of where everything is happening so they can observe and react quickly to the needs of markets. Big lumbering, billion dollar companies with tens of thousands of employees and multiple levels of hierarchy rarely have the insights or quickness to see opportunities ahead.

And of course starting a business is risky. You never know if customers are going to like your product or service. Suppliers can be unyielding in their financial terms. Employees can be fickle and unreliable. Competitors abound. And of course it can be incredibly expensive. Nonetheless, some intrepid Americans do venture forth to hang out their shingle and pursue the dream of turning an idea into a flourishing business. They might get rich, but they might go broke too… but to them it’s worth the risk.

And as if it were not hard enough to find success as a small business, it’s becoming far more difficult in one respect that the entrepreneur has very little control over: Regulation.

The nearby chart shows the growth in federal regulations over the last 60 years. That growth is set against a GDP growth chart for the same period – measured by average rate of growth over the decade. The correlation is crystal clear, and painful to behold.

Each page of the Federal Register represents dozens of byzantine regulations that must be administered by millions of bureaucrats, often with draconian consequences for violations. For small businesses such regulations are nothing short of a nightmare. Not only do they have to navigate the equally challenging state and local government regulations, but they must increasingly deal with mandates crafted in Washington by bureaucrats who are professional pencil pushers with no experience in actually running a business, nevermind an awareness of the unique challenges faced by small businesses.

The Federal Register is the catalog of all federal regulations. In the 1950's it would see an average of 10,400 pages per year published.  During the decade the US economy grew at an average rate of 4.2% a year (inflation adjusted). In the 60's it would see 16,800 pages per year on average while GDP would average 4.44% growth per year. That was the last decade of treading water. By the 70's Register pages would be 48,000 per year GDP growth dropped to an average of 3.75% per year. The first decade of the new millenia there would be 77,000 pages published per year and as one might expect, the decade’s growth was an anemic 1.73% per year on average.

As regulation has increased GDP growth has decreased. That is no coincidence. Perhaps the greatest way regulation cuts growth and hinders prosperity is that it smothers small businesses and benefits large ones. Unlike big businesses, small businesses can’t generally afford lobbyists to influence legislation nor armies of lawyers and accountants to figure out how to minimize its impact. The result is less innovation, fewer jobs and at the end of the day, smaller GDP growth and less prosperity.

And if you think this discussion of the correlation between GDP and regulation is just a game of semantics, think about it this way. Take your income… How would you like to double it? At the 4.4% average annual growth rate the experienced in the 1960’s, it would take you 16 years to double it. Not quick, but not horrible. At the 1.7% rate experienced during the first decade of the 21st century, it would take you 41.6 years. And that’s not an anomaly, it’s 50 year trend. More regulation means less growth, which means less prosperity.

With the regulations spawned by Obamacare only now making their way onto the books we can expect even more slowing to come. This is not a Democrat vs. Republican issue… this is a conservative vs. liberal issue. As the liberal progressives have sought to use the force of government to create a perfect world where everyone lives in a state of bliss unencumbered by the sometimes harsh vagaries of life and protected from the consequences of choices, they have in fact destroyed the fount from which emerged the American prosperity that allowed them to focus on frivolous things in the first place. Here’s an analogy: In order to guarantee every passenger is comfortable and that a plane could never crash, liberals have loaded the plane up with so many pillows and so much safety equipment that it can’t get off of the ground in the first place. As anyone stranded on the tarmac for seven hours inside a JetBlue plane could probably tell you it doesn’t take long for dystopian conditions to begin to emerge.

Just as aerodynamics of flight can’t support a plane that can’t get off the ground, free market economics can’t drive an economy that is so constricted by regulation that it can no longer be called a free market in the first place. Welcome the America of the 21st century, where prosperity becomes but a distant memory and a once great people go gently into that good night…

Maybe it’s time to drop the picket signs and pick up a copy of The Road to Serfdom

It was with great interest that I watched Facebook catch fire with support of the calls for picketing and sick-outs at Wal-Mart stores across the country on Black Friday. From what I could tell, most of those supporting the calls were liberals who attacked the company with claims that it doesn’t pay “a living wage”, “exploits” its workers, or owes its workers health care. I even saw one fantastical claim that a majority of Wal-Mart employees are on food stamps. The suggestion was that Wal-Mart should be forced (via government itself or indirectly via unions) to change completely how it deals with its employees in terms of salary and benefits.

To set the record straight, according to Business Insider, Wal-Mart pays its workers an average of $11.75 per hour, just slightly below retail’s national average of $12.04 and well above the federal minimum wage of $7.25. The company itself states that the average non-manager employee earns between $10 & $12 per hour.

Those wages are at least sufficient to make Wal-Mart the largest employer in the country, with a current headcount of over 1.4 million employees. And no one forced those employees to take those jobs. One of the beauties of freedom is that employees are free to work at Wal-Mart or they can take their labor and sell it to someone else… or better yet, they could start their own businesses.

I couldn’t help but think back to the nonsensical Occupy Wall Street protests of a year ago. Many of the participants were carrying around signs decrying Wall Street for its profit mongering and the harm big businesses were inflicting on small businesses and the little guy. Of course their solution of choice was more regulation. Naturally.

Both of these instances reveal more about the protesters than it does about the companies being pilloried. The very regulations they seek are one of the reasons big businesses are so successful verses small businesses in the first place.

It’s a simple example of liberals either not knowing or ignoring basic economics. Take economies of scale. One of its benefits is that you can spread fixed costs out over a larger volume. It works for rent as well as for regulations. Let’s imagine there are two widget stores operating next to one another with identical rents of $10,000 per month. With everything else being equal, the store selling 2,000 widgets a month can build a $5 cost per widget into his prices, whereas the store selling only 1,000 widgets per month has to build in a rent cost of $10 per widget. As such, the store selling more widgets will likely be more profitable, successful and eventually may be able to buy out the second widget store and start its journey to becoming a hated big business.

The same holds true for regulations. Frequently large businesses not only influence regulations to their benefit, but they can also absorb the costs of such regulations far more easily than can their smaller brethren, even if they were unable to influence their writing. Take the tax code for example. At 75,000 pages, a five billion dollar company can easily afford to hire a phalanx of lawyers to find ways to reduce its taxes or lobby for changes. Such luxuries are rarely feasible for small businesses.

According to the Small Business Administration, big businesses with more than 500 employees pay about $7,755 per employee to comply with federal rules each year, while small businesses with fewer than 20 employees pay $10,585 per employee. That is almost 50% more that small businesses have to pay per employee than do large businesses. All because of regulation.

This push for regulation is simply another example of the left using the cover of populism to disguise its real agenda: more government control over business. Whether using the fig leaf of environmentalism to further the nonsensical, inflation causing ethanol mandates or the lie of “the rich don’t pay their fair share” to push for higher taxes, the left rarely lets facts get in the way of their pursuit of a socialist, statist agenda.

Which brings us back to the Wal-Mart protests of Black Friday. The real goal of liberals is not to improve the lot of Wal-Mart employees, it’s control of the company via unions and their government enablers. In doing so they would be able to use government regulations to not only take money out of the pockets of Wal-Mart workers, but more ominously, they could harness the power of the NLRB to impose a wide range of costs, controls and dictates on the company.

To put a cherry on top, take Wal-Mart’s misguided and calculating support of Obamacare – calculating that it would impose greater costs on its small competitors – that has now resulted in the company itself dropping healthcare coverage for many employees while drastically raising the premium costs for others. By pushing such utopian, economically illiterate regulations as Obamacare, the Community Reinvestment Act, ethanol mandates and higher taxes for the rich, liberals not only fail in their stated objectives, but they also invite a wide range of unintended consequences, none of which ever seem to be good. Maybe it’s time to drop the picket signs and pick up a copy of The Road to Serfdom.

The November Choice: An election of historic proportions.

As I think about the election in November, I can’t help but think about Matt Ridley and his outstanding book “The Rational Optimist – How Prosperity Evolves”. In it he chronicles the evolution of human society and demonstrates a perfect understanding of why nations fail:

“Empires, indeed governments generally, tend to be good things at first and bad things the longer they last. First they improve society’s ability to flourish by providing central services and removing impediments to trade and specialization”.

But then “governments gradually employ more and more ambitious elites who capture a greater and greater share of the society’s income by interfering more and more in people’s lives as they give themselves more and more rules to enforce, until they kill the goose that lays the golden eggs.

From Ancient Egypt to the Roman Empire to the Ming Dynasty to the Soviet Union, these and countless other entities collapsed under the weight of their own regulation, either from the state or the church.

One has to wonder where is the tipping point that harkens the descent of a nation into the chaos that inevitably leads to its end… and more importantly, where the United States is on that scale. If you imagine a spectrum with tyranny on the left and anarchy on the right, the Constitution of the United States was crafted so that the government be a fulcrum balancing the state between the two. It worked that way for a while.

For its first 125 years the government of the United States was largely reluctant to take over the lives of its citizens. Over the last century it has become far more enthusiastic in that pursuit, with a particular emphasis in the fifty years. As Ridley points out, this is not particularly unique among nations. The United States is unique however. It is the only nation that was established for the specific purpose of allowing its people to live in freedom. The Declaration of Independence clearly articulates that the rights of men are natural and are not bestowed by any government. The Constitution sought to codify limitations on the government’s ability to infringe on those rights.

As we all know, those Constitutional limits seem to resemble paper tigers more and more each day, from everything from Obamacare to ethanol mandates to eminent domain abuses. The question as it relates to November is, must the United States go the way of the Roman Empire or can it figure out how to save itself from the seemingly inevitable fate of states?

Rarely are voters presented with two so clearly different paths ahead. On the one hand you have Mitt Romney who is an unabashed fan of the markets and market solutions. While Romney may be tin eared in some respects – read RomneyCare – he has become an avowed advocate of government restraint. His selection of Paul Ryan demonstrates his intent to address the growth of government while that’s still possible.

While Romney may not have the libertarian leanings that many of us would like, he stands in stark contrast to the man he faces in November. Romney seeks to move the lever (the board that sits on the fulcrum) rightward to balance the scale of freedom closer towards the center, Barack Obama seeks to slam it to the left where government takes over every aspect of a citizen’s life and freedom and free markets become little more than a distant memory.

Not sure about that? A few points should demonstrate the truth of that statement.

More than one third of the American households receive income based welfare assistance from the United States government – that doesn’t even include Social Security! Barack Obama has actively sought to increase that proportion, including gutting the 1996 welfare reform that reduced welfare rolls by half, and embarking on an advertising campaign to increase food stamp rolls.

At the same time fully half the population pays no income taxes while the President suggests the rich are somehow taking advantage of the system. This despite the fact that the top 1% of income earners pay 37% of all income taxes yet take home only 17% of all income. At what point do the people in that 1% or 5% or 10% decide to take their money and play somewhere else? If just the top 10% of taxpayers emigrated, they would take with them 71% of income tax revenue.

Then there is the notion of success. The President famously told businessmen that “If you've got a business, you didn't build that. Somebody else made that happen." That gets to the core of what Barack Obama counts as success. To hammer the point home, a week later he held up General Motors as a stellar example of success, going so far as to suggest “Now I want to do the same thing with manufacturing jobs, not just in the auto industry, but in every industry.” Of course this success that Obama is so proud of was bought by pouring tens of billions of taxpayer’s dollars into the company.

Then there is the regulation. In his first three years in office Barack Obama issued 106 major regulations that will impact the economy by more than $100 million or more. This compares with 38 (a still too high number) by his predecessor. A President Obama not constrained by another reelection campaign will likely increase that number dramatically.

Whether in the form of the Ming Dynasty, 18th century France or modern Greece, Spain or California, history demonstrates clearly that when government grows to the point that it overwhelms the citizenry’s ability to operate with even the most basic level of freedom, particularly economic freedom, the house collapses. Romney was not my first choice for the next president, but at least he’s mostly committed to the notion of individual liberty and economic freedom. Compare that to the cleptocratic and authoritarian Obama and the choice is simple. One wonders if the Romans had the opportunity in 180 AD would they have been smart enough to put someone other than Commodus on the throne. We are at that same point in 2012. The difference is, we have a choice. The question is, will voters understand what’s at stake when they walk into the booth in November?