The Bear’s Lair: Slaying or at least winging the regulatory dragon

The COP-21 global climate talks ended this weekend, with a treaty that won’t have much practical effect. Yet regulations to combat “climate change” have already inflicted trillions of dollars of economic damage and there seems no prospect of ending their depredations. In other areas, the regulatory state set up since the 1960s expands steadily, with only modest rollbacks likely if an anti-regulatory President is elected. Since our entire future prosperity depends on not sharing Laocoon’s fate from the regulatory serpents, it is thus worth pondering how we might defeat them, and to what extent it is truly impossible.

In general, the U.S. and many global regulators have used the last seven years of pro-regulator government to entrench themselves. U.S. EPA Administrator Gina McCarthy is confident that they are elimination-proof “You’re going to lose and you might as well get over it” she told a Congressional hearing last week. Under the Dodd –Frank Act of 2010 regulating the banks, the Consumer Finance Protection Bureau was put inside the Fed to prevent Congress overseeing it properly. The statutory and theoretical prohibitions against Congress meddling with the Fed are strong, so the idea was they would protect the CFPB also, even though the authors of Dodd-Frank knew the CFPB would spend its life imposing costs on the financial services industry and impeding the operation of the free market.

As well as the regulators, the years of regulation have produced an appalling group of crony capitalists who benefit from it. This is clearest in the banking sector, where regulation has raised the barriers to entry to prohibitive levels – new bank formation has slipped 97% since before the crisis, from about 100 year before 2007 to THREE a year, in the entire United States, since 2010.

The combination of regulation and foolish Fed monetary policy, allowing banks to receive interest on $2 trillion of reserves kept at the Fed, and granting a permanent 2% yield curve differential between deposit rates and long-term government bond rates, has made the lives of all but the very largest banks very easy indeed. As for the largest banks, they have been subsidized in their investment banking operations, which have made trading profits based on ever-rising asset prices and huge swathes of money sloshing around the system. So when the banks and their top executives turn out to be among the largest donors to Hillary Clinton, who regularly denounces them, they are not turkeys voting for an early Christmas, but fat, corrupted, unhealthy pigs voting for the endless subsidy swill to keep flowing.

Crony capitalists have however spread well beyond banking. Elon Musk, for example, whose Tesla empire depends almost entirely on government subsidies of one kind or another is certainly more plausible than the people who ran the failed Solyndra solar panel company, but his business has yet to be tested by recession or – more difficult still – by an environment in which massive taxpayer handouts to wealthy eco-conscious consumers are no longer available.

Needless to say the crony capitalists, through massive political donations, have bought at least a substantial minority of politicians. When allied with the “green” lobby or the politically correct liberals of the big coastal cities, they are practically unstoppable. We saw their power in the U.S. Eximbank disaster, in which that crony capitalist haven died for more than five months, to the mass cheers of ordinary taxpayers, before mysteriously rising again without significant reform, its survival guaranteed for another four years.

Finally, there is the international dimension. It has now become clear from experience that international bureaucracies are much more dangerous than the domestic kind. They are responsible to nobody, so can allow their instincts for politically correct self-aggrandizement and waste full rein. They are also perpetual. I am not aware of any such body ever having been abolished; there are still League of Nations bureaucracies in Geneva, which have had no real purpose since 1945, but have continued to draw handsome salaries and allowances.

A U.S. President can refuse to fund them, but in an era of massive liquidity such as the present that is no problem; at most they slim down a little, funded by the remaining countries that still support them and possibly by a little low-cost borrowing and wait for the swing of the U.S. political pendulum, after which their full funding will be restored, probably including the arrears. Thus international regulation, especially in areas such as the environment and refugee questions, is even more unstoppable than domestic regulation.

The forces preventing significant pruning of regulations are thus very powerful. Even to consider countering them we must assume a President dedicated to doing so, a Congress in which he has safe majorities in both houses, and eight years in which to operate, during which he is able to maintain his House and Senate majorities for at least six of them. It is a lot to ask, but let assume some miracle brings this lucky combination in the fairly near future. What should this miracle President and his miracle Congress do?

The most important set of regulations to eliminate is that surrounding global warming, and the environment in general. The reality behind global warming is difficult to establish amid all the fog. A New York Times article as far back as 1956 quoted an estimate by the British climatologist Guy Callendar that carbon dioxide emissions were warming the atmosphere by about 1.1 degree Celsius per century. That now looks a little high; the warming since 1900 is only about 0.8 degrees; in any case it does not suggest that by 2100 we will have suffered anything like the 3-4 degrees Celsius rise from present levels at which damage to our civilization could become significant. Two important factors making global warming less dangerous are that the effects of increased carbon dioxide are asymptotic, not exponential, and that plant feedback also dampens the warming effect.

Global warming is real but the “global warming” hysteria is a leftist and crony capitalist scam. Apart from doctored “hockey stick” graphs of temperature rises and now even doctored temperature observations, it includes such intellectual dishonesties as defining the temperature rise as dating from the beginning of industrialization, a period when we were in a Maunder minimum temperature phase and would thus have had significant warming even if the dinosaurs still roamed. The new Paris treaty that wants to limit warming to 1.5 degrees Celsius from the beginning of industrialization is limiting us to warming that has already happened; if there is any warming effect of carbon at all we would have to shut down civilization completely to comply with her absurd benchmark.

The best way of ensuring that global warming and other environmental dishonesty doesn’t embed itself in U.S. policy is probably structural: abolish the EPA and embed the environmental regulatory function within the Department of Commerce, whose main function is the promotion of American business. With a suitable Commerce Secretary like the 1980s Malcolm Baldridge, environmental regulations that caused economic damage would be severely pruned back. Add a requirement for proper, non-fudged estimates of regulations’ benefits and costs, and a separate audit by the Government Accounting Office before they were put into effect, and you would probably have a system of environmental regulation that could survive even the return of a Democrat administration.

Another step we could take would be wherever possible to abolish regulations, state investment handouts and research subsidies, and to replace them with the price mechanism though simple undiscriminating taxes. A carbon tax, if set at reasonable rates, would raise much-needed revenue to offset the current $400 billion budget deficit and could replace the whole morass of environmental regulation, while still incentivizing energy companies to produce less carbon-intensive technologies. Similarly, the CAFÉ standards for automobile emissions, which have so much damaged the U.S. automobile industry and automotive safety, could be replaced by a higher gas tax, which would again go far to reduce the budget deficit.

The rises in costs which both these taxes would impose would be reflected in the consumer price indexes and therefore, with a 1-year lag, in welfare and social security payments, which would mitigate their impact on our poorest citizens. The overall improvement in efficiency produced by regulatory abolition (and the savings from laying off thousands of bureaucrats, at federal and state levels) would make everyone richer and reduce the appalling regulatory drag on productivity of the last half decade.

A similar price-mechanism approach should be taken in the banking sector. The most effective corrective to the last decades of banking excess would be high interest rates, a nose-bleed Federal Funds rate of 4-5% above the rate of inflation. That would deflate asset bubbles throughout the economy and make the banks automatically reduce their leverage as loan after loan went bad. Much of the Fed’s regulatory bureaucracy would then become superfluous, as banks would shrink back to their natural percentage of economic output, reducing economic risk as they shrank. Provided there were no bailouts (other than of depositors) the result within 4-5 years would be a reformed banking system, without many hedge funds, and with private equity funds reduced to their proper venture capital function of funding genuine innovation.

A further regulatory reform would be legislation by Congress “de-delegating” the legislative functions they have allowed to fall into the hands of regulatory bureaucracies. To the greatest extent possible, new regulations should require new legislation, passed by both Houses of Congress and signed by the President. That’s the way the Founding Fathers designed it; we need to reverse the damage to the system carried out during the regulation-crazy Progressive era.

These actions would not end the regulatory leviathan; that requires eliminating its supra-national element, which appears almost impossible. But it would least cut it back a bit, allowing the U.S. economy to enjoy a surge in productivity and genuine wealth creation that would make us all richer. It is at least worth a try.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)