Regulatory Uncertainty Weighs Heavily on Business
Subscribe today for Free Enterprise Updates
- Latest business trends and best practices
- News about legislation and regulation impacting business
- Business how-to articles from industry experts
- Commentary and interviews with newsmakers in business and politics
Over the last few years, the federal government has issued regulations that will cost the U.S. private sector more than $380 billion over ten years, according to the U.S. House of Representatives Committee on Oversight and Government Reform. But perhaps even more frightening to business owners and job creators is what is yet to come.
As the regulation-producing machine cranks up, business owners unsure of what expensive and far-reaching regulations Washington will mete out next are reticent to expand and hire new employees.
“This administration is churning out significant new rules and regulations at a breathtaking pace—many designed to accelerate an ideological agenda,” says U.S. Chamber President Tom Donohue. “The flood of new regulations is weakening the labor market as employers, grappling with economic uncertainty, are forced to freeze hiring.”
Though President Obama issued Executive Order 13563, Improving Regulation Regulatory Review, in January 2011 to review federal rules that hurt job creation and American competitiveness, this “look back” order by the president applies only to rules already long in the books. Rules that are in the process of being formulated, like those pertaining to the 2010 health care and the financial regulatory reform laws, for example, are exempt from the executive order.
A study by the House Committee on Oversight and Government Reform, Broken Government: How the Administrative State has Broken President Obama’s Promise of Regulatory Reform, found that there are more than 200 “economically significant” regulations in the pipeline that if finalized will cost the U.S. economy an additional $21 billion over the next decade.
The trouble is that there is little indication of what these final rules will look like and when they will be implemented. For example, of the nearly 450 rules called for in the 2010 Dodd-Frank financial regulatory reform law, 259 of them are mandatory, and 240 must be completed by the end of the year. To date, just 86 have been finalized.
“What are the rules of the game going to be in the long term?” asks True Value CEO Lyle Heidemann. “What our retailers would like to have is consistency and predictability. We can handle decisions we don’t agree with, but that’s easier than not knowing what the decision is going to be.”
Mounting Evidence Uncertainty Hampers Hiring
In a 2011 study, Measuring Economic Policy Uncertainty, Stanford University and University of Chicago scholars created an index of policy-related economic uncertainty and used it to measure the relationship to business output, investment, and employment. Through their quantitative analysis, the scholars revealed that policy uncertainty “foreshadows large and persistent declines in aggregate outcomes, with peak declines of 2.2% in real GDP, 13% in private investment and 2.5 million in aggregate employment.”
The Cleveland Federal Reserve followed on this study with its own to determine that the effects of policy uncertainty on small businesses. The study found that the correlation between policy uncertainty and small business expansion plans is “strong enough to reject the argument that policy uncertainty is irrelevant for currently weak small business expansion plans.”
Gallup’s survey of small business owners provides further evidence. Asked, "What is the most important problem facing small-business owners like you today?" 22 percent said "government regulation." These findings were consistent with an October Gallup Poll, where 14 percent of Americans said reducing government regulations is the best way to create jobs.
The Most Important Metric
Not everyone is convinced regulatory uncertainty is an impediment to economic recovery and growth. Assistant Treasury Secretary for Economic Policy Jan Eberly calls uncertainty’s impact on business and job growth “commonly repeated misconceptions.” She cites a Wall Street Journal survey of 53 economists, 14 of whom indicated uncertainty about government policy is a major reason businesses are slow to hire new employees. Eberly dismisses these 14 respondents (although they represent 27 percent of the group surveyed) and instead focuses on another reason cited by many of the economists—weak demand.
“If regulatory uncertainty was hurting companies, why would corporate profits be at record levels,” President Obama’s top economist Alan Krueger asks Business Week. “Companies themselves rarely cite regulatory burdens as a reason for layoffs.”
This last claim is called into question by survey research. In the U.S. Chamber’s third-quarter Small Business Outlook Survey, more than 50 percent of respondents indicated economic uncertainty was a major obstacle to hiring new employees. Nearly 40 percent said the problem was “uncertainty about what Washington will do next.”