Spending Cuts Caused Economy to Contract? How About Regulatory Cliff

WASHINGTON, Jan. 30, 2013 — Today, the government reported the stunning news the U.S. economy actually contracted by .1 percent in the fourth quarter of 2012. The Washington Post sent a news bulletin shortly thereafter that blamed the problem on “cuts in government spending, fewer exports and sluggish growth in company stockpiles.”

John Berlau, Senior Fellow in Finance and Access to Capital at the Competitive Enterprise Institute, had the following to say in reaction:

Exports may have dropped, and it’s unclear what was meant by sluggish growth in company stockpiles. But spending definitely did not decline in the fourth quarter of 2012. According to the U.S. Treasury Department, government expenditures actually increased by more than 10 percent from the previous quarter.

A more likely cause of the economy contracting was the very real threat – and realization – of the “regulatory cliff.” If there’s one thing worse than uncertainty, it is the certainty thousands of pages of new regulatory policies will go into effect. It’s far more likely the contraction was caused by entrepreneurs and investors seeing this future of shackling regulations and pulling back their investment in response.

President Obama’s re-election made it highly unlikely job creators would get any substantial relief from costly new provisions of the Affordable Care Act or the Dodd-Frank banking overhaul that hits many community banks and non-financial businesses.

In addition, government entities that faced bipartisan criticism for being out of control, such as the EPA and Department of Labor, now had free rein. Indeed, a torrent of new regulations that had been on hold for more than a year suddenly were released – in President Obama’s Unified Regulatory Agenda and elsewhere.

In addition to the domestic rules, the Basel III international banking accord that was scheduled to go into effect this year threatened to severely constrict banks of all sizes from making loans even to high-quality borrowers. Under the regime, banks would have been forced to hold two to three times as much capital against most mortgages and small business loans.

The good news is slow growth – or even negative growth – can be dramatically reversed if the regulatory onslaught is reversed or at least significantly reduced. For instance, the first quarter of 2013 may be better because Basel III was delayed and somewhat revised to allow banks to hold different types of capital. To get growth going again, President Obama and Congress’ first priority should be to reduce or reverse the “regulatory cliff.”