Red Tape May Be Hamstringing Growth

Written by David Frum on Monday June 20, 2011

Corporate regulation has been mounting under the Obama administration and could be more responsible for the stalled recovery than taxes or the deficit.

Matt Yglesias ridicules economic Nobelist Gary Becker for suggesting that President Obama's policies might be to blame for the slowness of economic recovery over the 2 1/2 years of the Obama administration.

Soon after Barack Obama took office, investment bottomed-out and began to rebound. Neither Obama’s rhetoric nor his policies can possibly be responsible for the Obama-era drop in investment for the simple reason that no such drop occurred.

But take a second and closer look at that chart Yglesias embeds.

Business investment  does appear to have stalled since the middle of 2010, and at a level about three-quarters that of 2006-2007. Yglesias has a point that taxes do not seem the culprit. The Obama tax increases do not bite until 2014, and then they are more likely to bite personal consumption rather than business investment.

Becker suggests that fear of deficits and debt is the deterrent to business investment. He offers no evidence for this claim, just an intuition. And indeed it's hard to understand why fear of rising deficits should be inconsistent with business investment in 2011 when business investors shrugged off such fears in 2002-2007.

The answer may be located in Becker's own throw-away reference to regulatory changes. The headline debate over spending, deficits and debt diverts attention from the steady accumulation of burdensome regulation, which truly has been mounting in the Obama administration, so much so that Chief of Staff Bill Daley now apologizes for it.

"Sometimes you can't defend the indefensible," he told the National Association of Manufacturers this past weekend. (Daley's words should be remembered as one of the great Washington quotes. Notice the implicit spin-doctor confidence that at many other times, you can defend the indefensible!)

Doug Starrett, president and CEO of The L. S. Starrett Company in Massachusetts, told a story about a struggle his company has had with the government that he sees as just one example of “government throwing sand into the gears of progress.” Starrett has been trying to rehabilitate a hydroelectric generating facility -- the Crescent Street Dam Project -- on the Millers River in Athol, Mass. The facility, Starrett told Daley, reduces the local carbon footprint, will save energy, and create jobs. But in March 2009, the US Fish and Wildlife Service intervened, worried that the installation of higher capacity machinery would hurt migratory fish, and in May 2009 the Federal Energy Regulatory Commission stepped in, saying the dam falls within its jurisdiction. To protect the fish,the US Fish & Wildlife Service suggested that Starrett install up to $180,000 in additional equipment. Starrett has spent more than $100,000 fighting the government. On Wednesday night, Starrett’s celebration of the Bruins’ victory was ruined by a 1st Circuit Court of Appeals ruling for FERC, though the judge wrote that he did so “with great reluctance,” and only because the law “requires the result reached here, not that the result makes economic or realistic sense.”