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Blame Regulation, Not Capitalism

More and more is written arguing that American middle class standards of living have now stagnated for a number of years. Last year there was Frenchman Thomas Piketty’s book Capital in the Twenty-First Century, which using a massive amount of statistics, supposedly proved that free markets were no longer delivering economic growth for vast segments of the European and American populations. French capitalism is hardly anybody’s model of dynamism, opportunity or growth. So it’s only natural that Piketty and his followers [1] find inequality and stagnation. The same can be said for Pope Francis, who with a “capitalist” model of his native Argentina naturally thinks that free markets are unjust, cruel and poverty creating.

To combat this resurgent socialism, conservatives need to understand the reasons real incomes haven’t increased and why and where growth is stymied. Otherwise they will be unable to answer the Left’s clamor for more regulations, government spending and controls in the name of “equality.” It is in fact the allocation of money away from economic growth and proliferating government rules that cause stagnation and prevent the creation of new wealth.

First consider the impact of stymying regulations. When Obama first took office, he wanted to invest in new infrastructure to get the economy moving. But studies of the delays and consequent costs of simply rebuilding a bridge [2] indicate that often these projects suffer from 5 to 10 years of delay and 10,000 pages of government regulation. Blue collar jobs are particularly affected [3] by these holdups in permitting new construction. Very high-paying new mining ventures are virtually shut down by delays, costs, lawsuits and the exposure of investors to retroactive EPA and judicial rulings. The Competitive Enterprise Institute [4] estimates that regulatory compliance costs the American economy $1.8 trillion annually or $15,000 per family. The costs above don’t include all the uncreated jobs that excessive regulations [5] prevent from ever starting up.

Then there are government-created or sanctioned monopolies, particularly in the provision of health care. Just one monopolistic group, health care providers, have taken away what otherwise would have been a substantial increase in income for working and middle classes. It now costs a family of four some $22,000 for health care [6] (with ever increasing co-payments and deductibles); just imagine if we spent half as much (like most European nations) and could see an $11,000 dollar pay increase per family. That alone would substantially change the living standard stagnation statistics. Companies would surely rather pay that money to their workers than have it disappear into the maw of the health care system.

change_me

Lack of competition, unnecessary tests and operations, defensive medicine because of lawsuits, an opaque system of pricing (designed to obfuscate and prevent analyses of costs), and monopolistic drug companies all hold back the creation of more efficiency in health care. Recent news about incredible increases in formerly low priced but important medicines has finally instigated some real criticism of drug costs. (A simple solution would be to allow drug imports now prohibited under Obamacare.)

In responding to the resurgence of socialistic ideas, conservatives must also remember that cheap energy has been basis of human progress. When Shell Oil Company announced the ending of its multi-billion dollar Arctic drilling program after only one exploratory well, the Washington Post also reported [7] that Shell was denied permission from the Fish and Wildlife Administration for a one-time variance to allow its second well to be drilled nine miles instead of 15 miles from its first well as originally planned, as the four-month weather window for drilling was closing. The regulators argued that noise from the drilling might “harass” marine mammals. This in 5 million square miles of Arctic Ocean. Now all oil drilling has ended as other companies won’t even bid on new leases.

Socialists are now reinforced by extreme environmentalists whose agenda, using global warming hypotheses, is that America must “decarbonize” its economy by ending “the fossil fuel industry” [8]—oil, coal, and gas—in order to “save the world.” Whatever their stated goals, their plans would put an end to free market capitalism through new government regulations and taxes. Spending hundreds of billions on global warming (now called climate change) will cause a substantial decline in living standards. As burning coal is prohibited, rising electricity prices will result. In Germany, for example, electricity now costs three times as much as in America because of its government subsidies of windmills and solar cells—infrastructure that is built even where the weather is mostly cloudy.

Not all the damage comes from the Left. On the Right there are calls to increase military and security spending beyond its current trillion dollars a year [9]. Most of this money is wasted, when it could be growing our standard of living.  

Economists also discount or ignore what they are unable to measure, and productivity growth is particularly difficult to quantify. The advent of Uber taxis, smartphones, dependable cars that don’t break down, free international telephone calls—all are mostly beyond measurement yet surely reflect a rising standard of living.

When it comes to damaging regulations, there are solutions. To alleviate delays for construction permits, there are reform proposals [10] in Congress to create “one stop regulatory shopping” whereby one lead agency would have responsibility for applications. Deadlines could be established, with agency approvals becoming automatic unless they concluded their objections within a particular time limit.

Americans should understand who and what influences are responsible for our declining growth—not blame our economic system. Rather they should know that it is Washington’s misallocation of resources that causes our problems, not freedom and free markets.

Jon Basil Utley is publisher of The American Conservative.

33 Comments (Open | Close)

33 Comments To "Blame Regulation, Not Capitalism"

#1 Comment By SaltandFire On October 29, 2015 @ 12:58 am

Not sure when this was written but the part about energy and arctic drilling isn’t looking particularly prescient given the low pil/gasoline prices in recent months. Yes, these are bound to go up somewhat, but hardly to levels that would necessitate or mandate potentially problematic drilling locations

#2 Comment By Fran Macadam On October 29, 2015 @ 1:15 am

And then, if only capitalists would behave honorably… but not even a little bit, in a culture crazy with slaking whatever appetite, from the lowest to the highest, along with a concomitant loss of good judgement.

#3 Comment By Winston On October 29, 2015 @ 2:07 am

Umm..no. Just see how low taxes and RTI has kept low wages in the South.

#4 Comment By KD On October 29, 2015 @ 2:21 am

Adam Smith distinguished between the fraction of price that went to pay wages, profit, and rent.

Things will continue to roll downhill until we distinguish between the actual production of goods and services (resulting in economy) and rent (which is parasitic on wages and profit).

Opposition to the English Corn Laws was in part based on the fact that protecting English markets resulted in higher corn prices which created a windfall in terms of rent to Landlords.

The primary sources of rent in the American economy are in the sectors of Finance, Insurance, and Real Estate (especially resource extraction). The first two sectors aggregate money and pay it out (in loans or in claims), the second profits off natural conditions that precede European discovery of North America (gas, oil, natural harbors, etc.–you didn’t build it, God built it).

These sectors don’t produce anything (natural resource extraction requires capital investments and labor to extract a product) and therefore, the more rent they extract, the more they diminish the real productive economy. In the case of banking and insurance, the actual service provided is administrative (taking money in, paying out to the right people), and the lower the administrative cost, the better off the public. Given programs like Medicare operate with administrative costs of 1.5 percent or so, the more popular social insurance programs that can be administered by the government, the cheaper. (In contrast to programs like TANF or food stamps, basically charity which should be dealt with at the local level.)

One of the major problems with the American economy (besides equating the FIRE sector with real economic activity) is that we favor debt–allowing interest deductions for corporation taxes, home mortgage interest deductions for individuals, etc. We favor capital gains, even though the overwhelming majority of capital gains are not related to financing new businesses or capitalizing actual new investments (rather they fund economically useless activities like stock buy-backs).

We need to start favoring earned income over unearned income in our tax code, and eliminate the indirect subsidies to banks. We need usury laws consistent with Adam Smith’s recommendations, and put an end to securitization of mortgages and crazy derivatives markets that threaten to de-stabilize the world economy. I would defer to Pat Buchanan on tariffs and immigration. But mostly, we need to shift from finance capitalism back to industrial capitalism.

#5 Comment By EliteCommInc. On October 29, 2015 @ 6:43 am

I am going to make one observation and then a source for what I believe is becoming an increasing fixture on the downward pressure on growth and most importantly — exports, the truest sign of real growth.

I think the above onservations are valid. However, none of yor references attached work to a private sector agency. Which may be my oversight. But is probably telling of how much tax payer money associated with government is actually governing our understanding of the problem.

Note the WS rally — on the heals of a “no limit defiicit” spending by the federal government.

Speaking of capitalism here is the title of an article I read this morning in Mauldin Economics which i think is key descriptor orf what is happening with respect to capitalism.

“The Financialization of the Economy”
Joan McCullough, Longford Associates
October 21, 2015

“Yesterday, we learned that lending standards . . .”

I am never sure if I am crossing the line if sharing data from Mr. Mauldin and company or I would provide the article in full.

#6 Comment By Kurt Gayle On October 29, 2015 @ 8:56 am

KD gives a perfect analysis of what ails the US economy:

“Things will continue to roll downhill until we distinguish between the actual production of goods and services (resulting in economy) and rent (which is parasitic on wages and profit). The primary sources of rent in the American economy are in the sectors of Finance, Insurance, and Real Estate (especially resource extraction)…These sectors don’t produce anything…and therefore, the more rent they extract, the more they diminish the real productive economy…We need to start favoring earned income over unearned income in our tax code, and eliminate the indirect subsidies to banks. We need usury laws consistent with Adam Smith’s recommendations, and put an end to securitization of mortgages and crazy derivatives markets that threaten to de-stabilize the world economy. I would defer to Pat Buchanan on tariffs and immigration. But mostly, we need to shift from finance capitalism back to industrial capitalism.”

But, KD, where do we go with the clarity and insight that your analysis brings to the US economic mess? Both major parties are owned by finance capital. The US media and most universities are now controlled by finance capital. There is so little discussion of the ideas you outline that could save the US economy.

What would you do, KD? What would you do?

#7 Comment By KD On October 29, 2015 @ 10:44 am

Kurt Gayle:

You can look at Peter Turchin’s work, or study the last century of the Roman Republic if you want to see how it all plays out. What we are witnessing are structural changes, and if we understand what is happening, we may be able to shift things in a constructive direction.

The current order is unstable and self-destructive. That means it will not survive in its current form, whether you or I do something. But my prediction is that, because of the overproduction of elites, and the limits on political influence (there can only be so many billionaires that have influence on the President, the Senate, etc.), you will have billionaires running or funding anti-establishment campaigns, which will only get more radical as the people sour on austerity, mass immigration, and outsourcing jobs to the developing world. (Economic integration of the world means economic convergence of the populations–the poor nations will get richer and the rich nations will get poorer–but there are more poor, so we will end up more 3rd world.)

So I think we just have to wait for the right power-hungry billionaire, and the right self-induced financial collapse, and hope our Caesar is more like FDR than Stalin or Hitler.

#8 Comment By EliteCommInc. On October 29, 2015 @ 10:46 am

“The primary sources of rent in the American economy are in the sectors of Finance, Insurance, and Real Estate . ..”

I think you’ll find this book,

The Financialization of the Economy”
by Joan McCullough, Longford Associates, to your liking.

That is her thrust.

#9 Comment By libertarian jerry On October 29, 2015 @ 11:02 am

Mr.Utley’s thesis is completely on target. Except for the minor but important role of government in refereeing the market the government should stay out of the economy. Now the government and it’s crony capitalist partners wish to set up a fascist style economy in which the elites,through the regulatory and tax systems,control the market place to the detriment of the economy and the majority of the American people. If this level of regulation and taxation had been in place in the last years of the 19th and the early years of the 20th Century,the period of America’s greatest economic growth,today America would still be a 3rd world economy. Its as if the predictions in the novel Atlas Shrugged,which was written almost 60 years ago,has come to fruition.

#10 Comment By Johann On October 29, 2015 @ 12:04 pm

Great article.

KD, I agree with most of what you say except “…and hope our Caesar is more like FDR …”

FDR kept the country in economic depression the entire time he was in power. He’s the guy that sent government teams around the country buying up farmers cattle for $1/head and then killing them, but not allowing the meat to be sold or used. This at a time when people were starving, and doing a lot of similarly absurd things to make prices go up. Central planning at its worst, and still going on today. Uhg, deflation bad, inflation good, uhg uhg.

#11 Comment By Illierati On October 29, 2015 @ 1:05 pm

The point made that regulation is stifling business growth is clearly true. It’s also timeless and universal.

I’m afraid the hypothesis that regulation held down median incomes is much further from being proved infact its laughable. I think its clear that one area where US regulation is clearly not a hinderance is employment law which as a european i see as barbarically lax. Worker protections have been eroded since the 60s ‘co-incidentally’ the same period wages stagnated.

#12 Comment By KD On October 29, 2015 @ 1:12 pm

Well, I think we have to be honest that America is ungovernable. With the filibuster, you need 60 senators to pass a law. You will never do that on a bill that is in the national interest with all the lobbyists in DC.

We have had deregulation, especially financial deregulation, privitization, tax cuts for the wealthy, “free trade” deals since the mid-70’s. The mass immigration started up again in ’65. If you look at growth rates between 1945 and 1972, and post-1972, our growth is lower, our wages are stagnant, our infrastructure is rotting, and basic services like public education have gone down hill. Our job creation is terrible, we had a massive finance induced bail out.

I wish the answer were simply to keep doing what isn’t working, but it’s not. Some has to talk about the political elephant in the room.

FDR was not perfect, but he put in place decent bank regulations that have been systematically undermined since the 70’s, which are leading to our accelerating decline.

#13 Comment By Jeff C-C On October 29, 2015 @ 1:20 pm

Mr. Utley,

The appliance efficiency standards in the 2007 Energy Independence and Security Act (signed by Pres. Bush) will save consumers $200 billion compared to what industry would otherwise have provided. This has the side benefit of making our appliances more competitive globally.

We all benefit from some governmental regulations.

#14 Comment By Martin Ranger On October 29, 2015 @ 1:26 pm

Government regulation and interference are responsible for stagnant wages, because it slows down building bridges and mines? Huh? Also the lack or Arctic drilling is ruining our economy. Nothing to do with oil prices. At all.
My favorite, though: Healthcare in Europe is cheaper because, what, the market?

Honestly, unquestioning belief in the religion of free markets exhibited here is embarrassing.

#15 Comment By Colorado Jack On October 29, 2015 @ 2:54 pm

Once upon a time we had Marxists who said that what existed in the Soviet Union was not really socialism. Mr. Utley seems to be saying that what exists in the United States is not really capitalism. Those old Marxists did not see reality clearly, and neither does Mr. Utley. Why? In both cases, blinded by ideology.

#16 Comment By EliteCommInc. On October 29, 2015 @ 4:32 pm

“I think its clear that one area where US regulation is clearly not a hinderance is employment law which as a european i see as barbarically lax.

I don’t have problems with worker protections, but, I am not convinced at all that I would embrace European model of government economies. The entire model has devolved into extravagant lending models available to cover — Basel I and II are not conducive real market growth.

You can ensure that employees have recourse without affording them a months paid vacation based on guarantees not covered by actual economic profits.

Our current trend toward minimum wage guarantees actually presses against the gains or economic growth and more improving employment in-house.

The only real hint at a serious discussion on the economy occurred after the debate, when Mr. trump noted the importance of sales. Without an improvement in exports above the three percent mark, growth will continue to remain in the top ecehelons of the economic ladder.

#17 Comment By Lenny On October 29, 2015 @ 5:00 pm

Low taxes less regulations.30 plus years of it
How did we end up with the financial crisis then?

#18 Comment By Stephen Gould On October 29, 2015 @ 5:29 pm

Thus Utley:It now costs a family of four some $22,000 for health care (with ever increasing co-payments and deductibles); just imagine if we spent half as much (like most European nations) and could see an $11,000 dollar pay increase per family.

Absolutely. But I wonder, who favours the European model and who opposes it, in the US?

#19 Comment By Fred On October 29, 2015 @ 5:44 pm

just imagine if we spent half as much (like most European nations)

Just to clarify: like most European nations with single payer healthcare.

defensive medicine because of lawsuits

Using government to arbitrarily limit tort liability is not exactly a free market solution.

Very high-paying new mining ventures are virtually shut down by delays, costs, lawsuits and the exposure of investors to retroactive EPA and judicial rulings.

I wonder where those regulations came from. Oh, right:
[11]
[12]

#20 Comment By Cynthia mae Curran On October 29, 2015 @ 8:07 pm

Well, lots of factory work is tied in with defense anti-war conservatives and libertarins don’t think of this. Granted, sometimes the defense spending gets too high but defense factory work usually pays better than making cars or toys or TV sets. In fact the ancient Romans and even the Byzantines economies could boost from the war economy. Pale-cons like the left don’t think of the damage the sequestian has done about 2 million factory jobs could come back by increasing the defense budget. Palmdale is a defense city town that is glad that the new air force project went there.

#21 Comment By John Jeter On October 30, 2015 @ 12:23 am

In a well ordered, or say rather, genuinely competitive economy, there would be no way for firms to consistently earn the levels of profit required by Wall Street. Or, even more, to “grow” these levels from period to period as the speculators demand. Any honest student of or apologist for Capitalism, or any real live Capitalist for all that, knows this. Why is it never mentioned?

#22 Comment By Neal On October 30, 2015 @ 4:37 am

An economic system that values the destruction of the environment and the sale of dangerous products is not particularly attractive. Since there are som many examples of what could happen: smog in China, deaths from smoking tobacco, massive fires in Indonesia… one wonders about the logic behind this article.

And think of the jobs associated with the work done to ensure these projects are properly vetted. Sure, some construction projects are dropped because they don’t really make sense overall. So what? That’s the point. We need to take other things into consideration sometimes. It is a balance and, judging from the amount of construction I see going on every day around me, very little is being held up.

#23 Comment By Johann On October 30, 2015 @ 12:54 pm

Defense spending is not a net economic stimulus. It takes some of our most productive people out of the real economy. Scientists, engineers, and factory workers spending their entire careers producing military hardware – planes, tanks, ships, etc., which are economic dead ends. And its not just some of the best human resources that are expended, but also material resources. If they are truly needed for defense, then yes, we need them so that we have a country. But it definitely detracts from the economy.

#24 Comment By Jonathan Marcus On October 30, 2015 @ 3:48 pm

Odd that the one concrete example of the cost of regulation is healthcare. Yes, Europeans pay a fraction of what we do for healthcare. And yet their system are much more heavily socialized that the US. The very evidence you cite undercuts your case.

Also odd that corporate profits are near record highs, even as we are supposedly buried under crushing layers of regulation.

#25 Comment By EliteCommInc. On October 30, 2015 @ 4:36 pm

“Thus Utley:It now costs a family of four some $22,000 for health care (with ever increasing co-payments and deductibles); just imagine if we spent half as much (like most European nations) and could see an $11,000 dollar pay increase per family.”

Hmmmmm, there are so many data points here to consider. Allow me to add to the minutiae with this. The reason that healthcare costs so much money in the US is because, out care delivery, supply (services) and technology has not seen a decrease in costs in more than 40 years. Regardless of what care plans are devised and none have actually impacted the cost of healthcare. Until, the real costs of healthcare are addressed. ie. a spit cup that costs $50.00 when I can get for .50 cents at the local five and dime — affordable healthcare is going to continue to plague us.

#26 Comment By Myron Hudson On October 30, 2015 @ 8:54 pm

KD says “We need to start favoring earned income over unearned income in our tax code, and eliminate the indirect subsidies to banks. We need usury laws consistent with Adam Smith’s recommendations, and put an end to securitization of mortgages and crazy derivatives markets that threaten to de-stabilize the world economy. I would defer to Pat Buchanan on tariffs and immigration. But mostly, we need to shift from finance capitalism back to industrial capitalism.”

Yep. And thank you. Elitecomm, for that book title. I’m a capitalist myself: construction engineering for 40+ years; I guess that’s industrial enough.

Our current Lords and Masters, though, are a piece of work. To my mind, they are the Takers. And like the Lords we left behind in England 200+ years ago, they seem intent on institutionalizing their advantages while keeping everyone else in their place.

Looking forward to that book.

#27 Comment By cka2nd On October 31, 2015 @ 11:50 am

“Stagnant wages and standards of living” are the completely predictable result of the union-busting of the 1980’s and 2010’s yet no one at TAC seems willing to even entertain this notion.

But then, controlling one’s destiny, individually or collectively, is apparently something to be reserved for business owners and entrepreneurs, not workers.

#28 Comment By AdamBacon On October 31, 2015 @ 3:28 pm

The nature of most of the responses to this article suggests that we’re doomed. If readers of this publication don’t understand the basic premise that our deteriorating economic performance is a result of excessive government intervention, what hope is there of convincing the rest of the country?

#29 Comment By Chick Dante On November 1, 2015 @ 6:22 pm

KD is exactly right.

Michael Hudson’s current book, Killing The Host, is a deeper dive. Paul Craig Roberts’ books, How The Economy Was Lost and also The Failure of Laissez-Faire Capitalism, all show us how deregulation, favored by the FIRE sector, and so-called Free Trade ( but more acurately called labor arbitrage) are both killing our economy.

Utley’s target (too much regulation) is a talking point not a reason for stagnation. We all hate and are bothered by rules. They are the low hanging fruit but not the roots of the problem. The solution starts with identifying the issue. The TPP and mobilizing against it is a good beginning.

#30 Comment By Sherparick On November 2, 2015 @ 10:12 am

Since most of the European countries, as well as Canada, Australia, New Zealand, Japan, Korea, and Taiwan all of some form of Government single payer or Government structured insurance Market (Germany, Austria, and Switzerland), I don’t think your argument based on health care costs is a very good one.

I am afraid I could not trust anything coming from the Competitive Enterprise Institute as start with their conclusions and try to fit cherry pick statistics to use them.

Finally, the decline of U.S. real wages and medium incomes, with the exception of the last six years of Bill Clinton’s administration has been going on for 25 years. It is linked to trade agreements and a strong dollar policy that encouraged the outsourcing of jobs and production to Asia and Latin America. [13]

#31 Comment By Gregory On November 2, 2015 @ 9:04 pm

It’s amazing to me that one could write about the moribund U.S. economy and not mention the pools of money sloshing around in completely unproductive places. Just look at the velocity of money in the past decade ( [14]). All that capital concentrated at the top, trading in high frequencies and engaging in speculation and inflating bubbles, harms everyone but a tiny rentier class.

You want job growth? Encourage local banks to loan to local businesses to produce local jobs. Make it easier for citizens to access capital through ownership of businesses. Let that money circulate in communities and produce multiplier effects.

But, yeah, let’s just eliminate the regulations against child labor and dumping toxins into watersheds and let the good times roll.

#32 Comment By Gregory On November 2, 2015 @ 9:10 pm

I should clarify my previous point about the velocity of money: we’re seeing the effects of too much money headed into speculative “investments”(and too much parked at the Fed) rather than into spending or productive lending.

#33 Comment By Tim D. On November 3, 2015 @ 10:07 am

American regulation is not the main problem, the main problem is that virtually every major sector of the American economy is monopolistic/oligarchic. Regulations were often brought about because of the necessity to curtail unethical/illegal behavior.

By 1890, Standard Oil controlled 88% of the refined oil flows in the US. The company controlled 91% of oil production and 85% of its final sales. Standard Oil engaged in discriminatory practices in favor of the combination by railroad companies; restraint and monopolization by control of pipe lines, and unfair practices against competing pipe lines.

Once upon a time, De Beers encompassed every aspect of the diamond trade. The company used its purchasing and stockpiling of rough diamonds in order to inflate prices by controlling the available supply. In 2004, De Beers pleaded guilty to engaging in price-fixing on industrial diamonds and by 2012, the company’s market share had plummeted to less than 50%, a far cry from the 90% share it had celebrated in the 1980s.

Luxottica is directly involved in the production of over 80% of the world’s major eyewear brands and has 7,000 locations worldwide. In 2012, 60 Minutes aired a segment on the company that asked whether the company was using its broad range of holdings to keep eyewear prices artificially high. People were curious about the company’s behavior since large disparities in the prices of eyeglasses occurred between two pairs of glasses manufactured by the company in the same facility.

With a burgeoning monopoly on the seed market, nearly 80% of the corn grown in America is trademarked by Monsanto. The company has gone as far as prosecuting farmers who used patented Monsanto seeds gathered from neighboring farms. In fact, at one point the company went so far as to design “Terminator” seeds that would sterilize plants and render them incapable of producing fertile seeds. In the end, Monsanto erred on the side of sanity and scrapped the project but not before it created a requirement that farmers sign contracts agreeing to not use any seeds produced by their plants.

Contrary to what businesses say, they LOVE regulation, as long as it puts their rivals out of business. New York City attempting to ban Uber is just one example of how businesses produce artificial barriers to competition. Another example is the Sarbanes-Oxley Act. The act fails to actually curtail the behavior that led to the Enron scandal, but it’s a great way to protect the market share of major finance companies. A third example is how Medicare is prohibited from negotiating for lower prescription drug prices, unlike the VA and Medicaid. This keeps the prices of said drugs artificially high.

You mention stagnant wages. Workers were protesting the low wages of the textile industry during the 1830s just as workers are protesting the low wages of the retail industry today. The growth of monopolies over the past several decades also reduces the bargaining power of labor. In fact, the [15] published a paper detailing how the decline of the agents of collective bargaining, unions, lead to lower wages.