8/9/16

Politicians on the conservative side of the political divide and most economists on both sides flag the issue of tax reform as one of the issues that could kick-start growth in the moribund economy.

On the conservative side there is also a mention of regulatory reform. It is a meek mention, secondary always to tax reform. Usually it focuses around limiting future regulations. Trump in his economic speech yesterday did say in passing that he will reduce regulations, but it was just a comment without any details and a one-time mention in a speech that was entirely dedicated to tax reform.

On the progressive side there is zero mention of any regulatory reform other than more, more, more, and more.

There is also as close to a consensus between all economists and lip service paid by all politicians that small businesses have been badly hurt over the last 8 years and need to be assisted. Everyone agrees that small businesses are an important engine of growth and that the serious reduction in activity in that segment of the economy is one of the main reasons why the economic growth over the last 8 years is so slow.

In fact, Obama has the dubious distinction of being the only president since statistics have started being collected (probably for the last 100 year or so) of marshaling over 8 years of an economy where more businesses closed their doors than started, not only overall for his two terms but in EACH and EVERY year.

In one of the usual disconnects and proof of lack of understanding of how the real world actually works you hear nothing from anyone—politicians, pundits, media, economists; no one—about the relationship between … wait for it . . . no, not tax reform, but regulations and the dearth and, indeed, death of small business (Note: While originally writing this post on August 9th, it took some time to finalize and edit it before posting. On August 12th I heard Stephen Moore for the first time mention it is a big issue).

You see, for a small business, either existing or about to be started, the cost and nuisance of regulations is much, much more onerous and relevant than how high the tax rate is. For tax to matter, one supposes that one will make a profit. A small business worries about even getting to the stage of making a profit, due partially to the huge costs of handling the regulatory onslaught. When you sit before your bank manager to beg for a personal loan to start a business you are not worried about how much tax you will pay on the profit that you will make, but whether or not you will even be able to make a profit given the cost of running a business—a cost driven higher and higher all the time due to government regulations.

A real reform in the economy should put regulatory reform on par, and actually ahead of, tax reform. It is much easier to achieve, as in most cases it does not require an act of congress. Most regulations are simply an executive power issue. The only effective regulatory reform is one that will not only stop the new regulations but also cut existing ones massively.

A serious presidential contender who understands what real business life is would have vowed to cut regulations by 50%. This is not an exaggeration or an arbitrary number. I am absolutely sure that at least half of the regulations on the books are obsolete, not being enforced anyway or—and that is the important part—cost more to adhere to and enforce than they are worth. Only by creating such a hard and firm goal for deregulation can one shake the behemoth that is the government bureaucracy. This bureaucracy has survivalist self-interest in maintaining these regulations and adding more as any such regulation creates government jobs and enhances the bureaucracy.

Only a massive rout of regulation would kick start the small business sector and the startup of new business, which is so essential to elevate the growth levels in the overall economy.

One must draw a line and state that the least important and least beneficial bottom 50% of the regulation on the federal government books will be eliminated and that effort will be made to get state executives to do the same.

That is a far more important reform than a tax reform (which is very important too) and one that can be achieved fast with immediate and significant positive effects on growth.

Yet, hardly anyone ever speaks of that other than the lip service that comes after a full-blown discussion of the benefit of tax reform. All true, but secondary in importance.