Since World War II, recessions have typically resulted from the Federal Reserve Board raising interest rates to choke off growth. Once a recession is under way, the Fed reverses course and lowers interest rates to lead the economy to recovery. Now, however, we are poised for the first regulatory recession for which monetary policy has no cure.
Many, including the President and his advisers, believe it is timely for the Fed to boost the economy now by lowering interest rates. However, the current slowdown, which many believe is turning into recession, is the result of regulatory excess, and lower interest rates cannot compensate for the sand that ill-considered regulation has thrown into the economic gears.
The U.S. Chamber of Commerce recently noted that in the short time since George Bush became President, “real (annual) GNP growth has fallen dramatically, from over 4% to just above 1%.” This slowdown long precedes Iraq’s invasion of Kuwait, and there has been no radical change in Federal Reserve policy. But there has been a burst of new regulatory legislation and aggressive enforcement of destructive laws already on the books.
Among the culprits are the Superfund legislation, which was intended to clean up the environment, the 1989 S&L; legislation, which President Bush said would place the thrift industry on a sound basis, the disabled rights bill, the pending clean air bill, which has passed both houses of Congress, and the pending racial quota bill known as Kennedy-Hawkins.
Superfund permits retroactive liability for environmental cleanups to be assigned to banks that lent to companies deemed to have polluted ground water or a landfill. The legislation has spurred a credit crunch by stopping banks from lending to companies with potential environmental liability problems. It has also slowed or stopped many real estate transactions, because the potential for cleanup costs can exceed the value of the land. This has fed back into the S&L; problem, raising the cost of the bailout.
The 1989 S&L; legislation, which was supposed to strengthen the capital base of thrifts, instead turned a crisis into a debacle by destroying the value of an S&L; charter. The legislation made it impossible for S&Ls; to increase their ratios of capital to assets except by curtailing their loans, further fueling the credit crunch. Moreover, the law, by definition, doubled or tripled the number of insolvent S&Ls;, thus compounding the downward pressure on real estate values and spreading the problem into the commercial banking system.
Long-dormant bank regulators, panicked by the S&L; problem, overreacted and forced banks into excessive write-downs of their real estate portfolios. This, in turn, resulted in more downward pressure on real estate values and more troubled financial institutions.
Regulators are now turning their eyes to insurance companies. If the same standards are applied to them that have been applied to banks and S&Ls;, government regulation will have succeeded in damaging the entire financial system.
The disabled rights and clean air bills add enormous costs to businesses that will cut into their profits, raise their prices and curtail research and development and new product lines. Moreover, they subject companies to potential lawsuits that can bankrupt them or impede their ability to raise capital. The clean air bill has an interminable permit process that may grind capacity expansion to a halt. Even when a permit is granted, it can be challenged in court by environmental “citizen groups.”
The main purposes of the Kennedy-Hawkins bill are to overturn the Supreme Court’s ruling against racial quotas in employment and to subject firms without proportional racial mixtures to expensive lawsuits. If Bush signs this legislation, employment will be race- and gender-determined, with devastating impact on work-force morale and productivity.
Government hostility toward business is stronger than at any other time in the postwar period. Racketeering statutes designed to crack the mafia have been applied to legitimate businesses and used to destroy financial entrepreneurs. Accidents have been criminalized, as in the Exxon Valdez case.
A regulatory recession cannot be fought with fiscal and monetary policy or with lower oil prices. As the Wall Street Journal recently noted, the economy has stopped investing in the future because no sector of the economy has confidence that it is not going to be taken out and shot with higher taxes, regulation, lawsuits or other weapons in the government’s arsenal.