April 6, 2011 — Is America’s economic recovery being stymied by the “uncertainty” associated with new or changing federal regulation? Are businesses standing on the sidelines while they wait for the rule-making whirlwind to settle? Remapping Debate recently set off in search of real-world confirmation of this oft-heard claim — one made, over the past year or so, by a multitude of public officials, pundits, academics, and corporate leaders and lobbyists.
Judging by the results of more than a dozen interviews and a similar number of phone and email inquiries, it appears that few of those asserting a link between regulatory uncertainty and diminished business investment or hiring are prepared to provide any specific evidence of such a connection (see box). Even in conversations with business managers and owners who have publicly made this claim, it soon emerged that what truly concerns them, in most cases, is stronger regulation rather than uncertain regulation. And even among the uncertainty theorists whose own companies have been downsizing or holding back of late, most ultimately agree that it is the bad economy, not regulation, that accounts for a greater share of their current reluctance to take investment chances.
It’s the economy, not regulatory uncertainty
Consider, for example, the title companies that have voiced concern in recent months about the provision of the Dodd-Frank financial reform law authorizing the new Consumer Financial Protection Bureau to craft rules and procedures for real estate closings — a duty previously divided between the Federal Reserve Board and the Department of Housing and Urban Development.
In a phone interview, Justin Ailes, government affairs director of the American Land Title Association, insisted that his industry had questioned this shift of authority, not because it objects to the prospect of fuller disclosure for consumers, but because of the “uncertainty” introduced by yet another rules change just when title companies were getting used to the procedures instituted by HUD at the beginning of 2010. Ailes did not suggest, however, that the issue has any great bearing on the industry’s business fortunes; those fortunes have been bad ever since the mortgage meltdown of 2007-08, and will likely not improve much until the real-estate market does.
Indeed, most economists would say that overall private sector investment is depressed for a reason that has nothing to do with regulation: the greatly reduced demand of an economy suffering from shrunken household assets and soaring unemployment. Over the past four years, the combined total of Americans who are unemployed, under-employed, or too discouraged to think about employment has nearly doubled, rising from 8 to 15.7 percent of the working-age population. That fact alone, according to Mike Konczal, a research fellow at the Roosevelt Institute, comes close to being a complete explanation for America’s investment shortfall.
Industry-specific employment trends appear to cast further doubt on the theory. If regulatory uncertainty had a chilling effect on business, Konczal said, the health care and financial sectors (the areas of the economy most directly affected by the implementation of last year’s two huge regulatory reform laws) would be logical places for the phenomenon to manifest itself. Instead, finance and health care are two of the hot zones of today’s economy: health care has been one of the few areas of reliable job growth, Konczal noted, while the banking industry has surged back to pre-crisis levels of profitability.
No certainty, no building the plant
Formosa Plastics, a giant global petrochemical manufacturer, is one company that does claim — loudly and insistently — to be holding off on investment because of a problem of regulatory uncertainty.
Formosa Plastics has been warning Texas politicians that it may have to abandon a $1 billion plant expansion and upgrade on the Texas Gulf coast (a potential source of more than a thousand temporary construction jobs and 125 permanent manufacturing jobs) if a dispute between state and federal regulators over which has the authority to issue the necessary permits under the Clean Air Act is not resolved.
In a phone interview, Steve Rice, a company spokesperson, emphasized the “uncertainty” of a situation in which “the rules can change six days, six weeks, six months from now, and all of a sudden [it’s], ‘Oh, we can’t do that,’ or ‘That’s a bad decision,’ or, ‘It isn’t as appropriate as we thought.’” Rice compared his company’s predicament to a Texas hold ‘em poker tournament: Formosa Plastics was being asked to put its $1 billion on the table without understanding the rules that would decide “the winning hand.”
The company has pushed ahead with some of its advance planning “and a lot of little things around the edges,” Rice said, while postponing its “real go-in decisions…because we don’t know how this is going to turn out.”
Rice cited regulatory uncertainty — involving the question of federal versus state authority and the development of the Environmental Protection Agency’s “permitting process, procedures, and requirements” — as the company’s sole reason for holding back on the project, which, in addition to other applicable emission standards, may be subject to the greenhouse-gas rules now under development at the EPA.
Formosa Plastics presents itself as a neutral bystander when it comes to the rights and wrongs of the EPA’s efforts to address the greenhouse-gas problem, efforts that would supplant Texas (and other states) as the chief pollution-permitting authority for a subset of large facilities. That’s “not our fight,” said Rice. “We’re on the sidelines, waiting for certainty.”
In the course of Remapping Debate’s conversation with Rice, however, it developed that Formosa Plastics is one of the companies lobbying on behalf of an effort in Congress to delay any EPA action until at least 2013. By calling for a two-year postponement, Rice was asked, isn’t Formosa Plastics contributing to the very uncertainty that it professes to be concerned about?
The company is seeking a delay, Rice replied, to allow the courts and the relevant state and federal authorities to work things out in an orderly fashion. Meanwhile, Formosa Plastics would be in a position to secure the necessary permits from Texas, he said, adding that with Texas “we know the rules, we know the requirements, we know the procedures.”
And with Texas, does the company know that it can expect looser emission standards? Is uncertainty a cover for an effort to get by with less regulation?
“For us, it’s not about emission limits,” Rice responded. “It’s about the uncertainties surrounding the permit program process and procedures — that’s what makes it so difficult to make sound long-term, significant capital investment decisions.”
David Arkush, director of Congress Watch, an arm of the Ralph Nader-founded consumer group Public Citizen, said the distinction sounded disingenuous to him. “When you’re trying to argue in a policy debate, you rarely want to say: we want this because it’s good for us and that’s the only reason,” Arkush said. “You try to stand on some sort of public-interest principle.”
“The principle they’re trying to evoke is that uncertainty is bad for business,” Arkush continued. But the certainty that companies are generally after is a “certain kind of certainty,” he continued. “They want what they want. They wouldn’t necessarily be happy with lower emission limits.”
Remapping Debate asked Rice if his company had considered an entirely different way of dealing with the problem — an attempt to get out in front of the nation’s effort to control greenhouse gases by taking steps to lower its emissions to levels that would be sure to fall within the official limits, regardless of where and when they end up being set?
“The issue isn’t the emission levels,” Rice repeated. “It’s the process and the requirements. It’s not the amount. It’s the uncertainty.”
And what would Formosa Plastics do, he was asked, if the EPA gained unambiguous permitting authority and went ahead with its plans for tighter emission standards? Would the company drop its project if that happened? Rice said he “really couldn’t speculate,” because the question contained “far too many ‘what ifs’?”
“They won’t just go ahead with plans that they’re pretty sure would meet any standards, or plans that they could easily modify depending on the possible contingencies that they could imagine,” Arkush said. “It is exceedingly unlikely that the likely range of actions that the EPA would take is unknowable. There isn’t that much uncertainty here. There’s a range of possibilities for what happens, and they can plan accordingly.”
“If they just got out of our lives”
Many of the public laments over faltering investment have focused on small businesses. And small businesses have been the source of many of the complaints about regulatory “uncertainty.” Remapping Debate sought out a number of small-business owners who had submitted statements of that sort to the House Committee on Oversight and Government Reform at the time of a February hearing on “regulatory impediments to job creation.”
For Jack Buschur, an electrical contractor based in Minster, OH, uncertain regulation appeared to be synonymous with a lot of regulation. At the hearing, Buschur recalled a run-in with an OSHA inspector over a nursing-home renovation job. The inspector insisted on a $10,000 lead-paint survey that, according to Buschur, turned out to have been unnecessary. “OSHA came in and just shut the damn thing down,” Buschur said. “And yet, when it came up that it wasn’t a factor, it wasn’t a problem, we were out $10,000 — well, my general [contractor] was out $10,000, I was out $3,000.”
In a recent phone interview, Buschur blamed his OSHA travails partly on the EPA, which had developed the lead renovation and painting rule that caused him so much distress. “They’re just like God, they’re a level up,” he said. But Buschur went on to talk about an array of other forms of regulation that were making his business life difficult, including OSHA rules, health care reform, the Family and Medical Leave Act, and the prevailing-wage rules that bar non-union companies, like his, from bidding on many public projects. The Obama administration is “in bed with the unions,” he said.
The political polling and framing firm Lake Research has been studying the views of Americans, including business managers and owners, about regulation. Small business owners, according to Daniel Gotoff, a Lake partner, generally view regulation as heavy-handed and laid down by people lacking knowledge of particular business realities. By and large, though, they do not bring up uncertainty as a concern, Gotoff said.
Buschur’s company is down to 18 employees from 30 two years ago. Even if business improves markedly, Buschur said he would refuse on principle to go over the 50-employee threshold that would make him subject to the employer mandate of the new health care law; even though he has provided health insurance for more than thirty years, he explained, he objected to the idea of the government telling him what kind of plan was acceptable.
As a general rule, Buschur continued, small businesses would be better off “if they [the government] just got out of our lives.” On further questioning, though, Buschur made it clear that the main reason for his current, lower volume of business is the economic downturn, not regulation. “That was huge — no question about it,” Buschur said.
Yearning for the “good old days”
William Nash runs a commercial-soundproofing company in San Marcos, California. In a letter to the House Oversight and Government Reform Committee, Nash said that “uncertainty” had led him to consider downsizing his business. But a follow-up interview suggested that his fundamental complaint, like Buschur’s, is with the nature and amount of regulation that his company faces — and with the attitude of an increasing number of workers who, he said, are “taught that you’re owed this and you’re owed that.” That message, Nash went on to say, seems to come “from the government schools, what they teach in the schools now.”
By way of illustration, he told a story about a warehouse worker coming to work recently with a letter from his chiropractor saying that he shouldn’t lift more than sixty pounds. Nash had hired this employee because “he’s a big brute of a guy…like a horse, and he works out,” making him ideal for lifting and moving heavy rolls of material. But who will lift them now? “We’ve got two ladies. Then there’s me — I’m 73,” Nash said. “And two other guys, one of which is 68, the other guy just had a hernia operation for a double hernia. He was in the hospital for a week and a half. So who’s going to help this dude, you know? So this is the uncertainty that you get into.”
Although his employee has not yet identified his injury as work-related, Nash said he is braced for that. Then, he said, he will be required to report the incident to the state labor board. Ninety percent of his employees leave with a disability, added Nash, contrasting his current vexations with the less-regulated “old days” when his company had been more of a “happy family.”
Uncertainty versus American business savvy
The evidence may be sketchy, but the claim lives on. Last week, for example, in a press release entitled “Regulation is Killing Jobs and the American Dream,” Rep. Tom Latham (R-IA) described a pattern of “businesses wait[ing] to find out how they will be impacted by new rules before making decisions to hire new workers or buy new equipment.”
But businesspeople “live with uncertainty all the time,” said Rena Steinzor, professor of law at the University of Maryland and a leading critic of what she regards as reckless deregulation. “Uncertainty about global energy costs, labor costs, natural events, the stock market, the future of investment. [There’s] a long list of things that seem to me to be more uncertain and more significant than regulation.”
Generally speaking, business leaders don’t complain about uncertainty, said David Arkush of Congress Watch: “You don’t usually get answers like this — you know, people standing around, scratching their heads, saying ‘We don’t know what to do, so we’re not going to do anything.’ That’s not how you build a successful business, [or compete] with others in the marketplace.”