Playing the "regulatory uncertainty" card
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.
So where’s the evidence?
“Sorry, I don’t have any info on this,” Randall Forsyth, the editor of Barrons.com, replied to an email inquiry. Reminded of a July 2010 column in which Forsyth had written about “real, live entrepreneurs and managers… sitting on cash instead of investing in capital equipment and, especially, hiring new workers” due to the uncertainty of “massive regulatory and tax changes,” he sent a followup email. No, he said, he couldn’t supply any “hard current data” (or evidently any hard past data); he could, however, attest to the fact that this was “what CEOs were saying last year.”
Forsyth was more forthcoming than others who have written or spoken along the same lines. Several phone messages produced no reply, for example, from Patrick Tyrrell, the Heritage Foundation research coordinator who had blogged in late February about companies “remain[ing] on the sidelines, biding their time, and waiting to expand… and hire new workers” because of “unprecedented levels of uncertainty…about the level of future taxes and increased regulations.”
No answer was also the upshot of repeated emails to the communications department of Verizon, whose CEO, Ivan Seidenberg, warned last year of government actions “injecting uncertainty into the marketplace and making it harder to raise capital and create new businesses.”
Also mum on the subject was the office of House Speaker John Boehner, who, during a Cincinnati radio interview last month, spoke about how “all the uncertainty” over health care, financial reform, and greenhouse gas regulation was making “investors and business people sit on their hands and wait for the picture to clear.”