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Yes, Regulation Does Keep Unemployment High

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Yes, Regulation Does Keep Unemployment High

When regulations make hiring employees more expensive, companies won't hire as many of them. It's a simple truth. But it is an inconvenient one for many who work in politics.

One such political figure is Jan Eberly, a Northwestern University economist who in May was appointed to be the Treasury Department's Assistant Secretary for Economic Policy. Her new job is to defend Obama administration policies - good or bad, right or wrong, and whether she agrees with them or not. Something to keep in mind as you ponder her arguments.

In a recent (and lengthy) post at the Treasury Department's Treasury Notes blog, Eberly quotes her boss, Timothy Geithner, as saying: "I don't think there's good evidence in support of the proposition that it's regulatory burden or uncertainty that's causing the economy to grow more slowly than any of us would like."

Well, then. About that burden: Over 30,000 new regulations hit the books during the Bush years. President Obama is just as active on a per-year basis. According to the Small Business Administration, small businesses pay more than $10,000 per employee per year just to comply with the 165,000-page Code of Federal Regulations. State and local rules cost about $970 billion extra. That's a lot of money - and a lot of regulation.

And about that uncertainty: There are more than 4,200 new rules at various stages of the federal regulatory pipeline right now. Companies, especially the ones too small to afford a Washington office, don't know what's coming next. No wonder they are skittish about making long-term investments, whether in employees or capital.

In the wake of Dodd-Frank, the health care bill, and the over 7,000 new regulations that passed in the administration's first two years, Eberly's job is to argue that, No, regulatory uncertainty doesn't cost jobs. She's got her work cut out for her, but she makes a brave attempt.

She does so on several fronts. One is a poll by the National Federation of Independent Businesses that finds that only 13.9 percent of businesses cite regulation as their largest problem. Compare this to 29.6 percent that cite poor sales as their biggest problem. Of course, Gallup released a poll this week in which 41 percent of small business owners say regulation is their biggest problem.

Which is right? Who cares! Public opinion cannot change the fact that when costs go up, demand goes down. Make hiring more expensive and fewer people get hired. That is a true statement regardless of how it polls.

Eberly also argues that regulatory uncertainty doesn't cost jobs because capacity utilization "remains 3 percent below its long-run average." That's economic parlance for "a lot of factories have a lot of idle machinery." She argues that if businesses are uncertain about the future, they will invest less in increasing capacity and instead focus on maximizing use of what they already have. Capacity utilization is low right now, so companies are not investing. Therefore, regulatory uncertainty is not a problem. QED.

This is not much of an argument. Capacity utilization is low because demand is low. That's what happens when the economy is weak. Companies don't usually respond to poor sales by increasing capacity. Capacity utilization goes up when the economy is hot, and it goes down when the economy runs cold - a trend that has held for over 40 years. Regulatory uncertainty can also have a chilling effect on production, which would also push capacity utilization down. So yes, regulatory uncertainty costs jobs.

Eberly was put in an uncomfortable position when she came to Washington. Just as a lawyer's job is to vigorously defend clients even if she knows they are guilty, Eberly's job is to vigorously defend policies that are obviously harmful to the economy. Try as she might, she cannot argue against the law of demand.

Regulations make hiring costlier and thus make jobs scarcer. And regulatory uncertainty makes companies reluctant to hire employees they might not be able to afford down the road. Case closed.