Shutdown #7 Responses

We thank readers for their serious comments in response to our “Shutdown #7” discussion of regulation. For those who missed it, the link is https://www.cumber.com/shutdown-and-markets-7/.
Market Commentary - Cumberland Advisors - Shutdown Responses
A wide range of views were articulated in the replies. Our theme that credited President Trump with deregulation success was bound to trigger intense responses from Trump detractors. It did. And Trump supporters were equally intense. No surprise here. A few leveled criticism at me for my condemnation of both political parties for failing our nation. In many cases the replies asserted that one side is worse than the other. Some faulted the “Demons,” others the “Repugs.”

We have selected some responses to share with our readers. We do this from time to time, a move that has been supported by readers, since they get to see a diverse set of views. So here goes. Remember, we name a writer only with permission. That is a requirement of our compliance officer, who is insuring that we follow the rules that apply to us.


Frederick L. Feldkamp wrote:

“Unfortunately, all arguments criticizing the ‘cost’ of regulation apply just to individual business units, at a ‘microeconomic’ level.  Standing alone, those ‘cost’ arguments hold no ‘macroeconomic water.’

“This is the converse of the inverse of the issue of trade restraints.

“Each and every penny of reduced trade revenue necessarily reduces income to some recipient.  Therefore, all trade restraints have a negative macroeconomic impact.  Thus, every economist worthy of the title understands that the Smoot-Hawley tariff law restrained trade in the 1930s and helped generate the Great Depression.

“At the microeconomic level, each business unit’s regulatory expense always becomes another unit’s revenue.  Even payments to government are, necessarily, spent to generate income for someone or to repay a debt owed to someone.  Everything spent increases the ‘flow’ of money, even when forced by regulation, and creates a macroeconomic benefit –increasing total output.

“Yes, the cost of regulation reduces each complying party’s ‘income’ (e.g., Dodd-Frank increased the expenses of all major financial institutions).  Each penny they spent on compliance, however, was always exactly offset, in macroeconomic aggregates, as being someone else’s penny earned.  While the microeconomic impact you note was very real, if the regulation had the effect of moving more commerce around, the macroeconomic impact was positive and eventually multiplied even the earnings of those that paid the cost of compliance.

“In the case of Dodd-Frank, it is safe to assume that the total regulatory ‘cost’ to institutions exceeded $100 billion.  By reducing investor fear, however, the expenditure contributed to an increase of about $100 trillion in the total size of the financial market where the affected institutions compete.  From record losses in 2008-9, those institutions saw record profits in 2017-8.

“Would they have enjoyed the record profits if they had not spent the money needed to reverse the destructive fear witnessed in 2007-8?

“The macroeconomic issue of regulatory compliance is not ‘cost,’ it is whether that ‘cost’ creates greater efficiency or confidence.  Trade-offs of revenue/expense between micro-economic units are irrelevant to the macroeconomic effects.”

Mourad Rahmanov said:

“1 – Do you know the historical perspective?

“2 – What’s the position relative to similar economies, say China, Japan, South Korea or Germany?

“3 – Do you know if regulations also lead to job growth and thus GDP growth? Net in net.

“Yes indeed, these are astounding numbers…”

Glenn Zetek said:

“Why is it that public speakers cannot bring themselves to lay blame at the feet of Republicans without having to preface it with the “…both sides are to blame…” caveat?  Unbelievable.”

Rob Arnott wrote:

“I confess that I was quietly applauding the shutdown, for this exact reason. Government has very useful roles in society, but government overreach and unfunded mandates (forcing people to spend money for compliance, without feeling any of the pain of those costs) are BIG problems. So, I enjoyed seeing how remarkably little difference the shutdown made.

“Getting GDP and CPI data late was obviously no big deal, and for 95% of us, the overall impact was slight. The difference between the shutdown under Trump and under Obama is that Trump sought to minimize the pain for the citizenry, while Obama sought to maximize the pain.

“I found it interesting that the press focused on how much the government workers were suffering (although they got their full pay after a delay), and paid no attention to how little most of us were affected.

“I think Trump caved because there was a risk that high-impact service cuts (notably air traffic control) were imminent, not because people were out of work, but because they were about to go into slowdown mode in retaliation for the delayed paychecks.

“Anyway, it was instructive to watch.”

Bob Loring said:

“Talking about regulations, isn’t it time for the government to eliminate regulations about marijuana so that money in that industry can go through the banking system instead of through an always criminal underground economy?”

An anonymous reader who gave permission to quote:

“I am not sure what you mean by ‘a more streamlined approach.’

“The current regulation reductions are, in my view, motivated by insider greed and not a desire to create a more efficient economy (other than by accident).

“The cutbacks in consumer protection, predatory lending, for-profit education, clean water, clean air, etc. are a massive value-shift from Americans as a whole to a small set of the current administration’s cronies.

“This is crony capitalism masquerading as reduced regulation.”

David Blond wrote:

“Interesting argument about regulations and their carefully calculated costs.  Let’s turn this argument around, ignoring the question of are the regulations needed, and look at the 30% estimated cost from the point of view of what would happen to the circular flow if I decided that all rules are no longer needed, i.e. you don’t have to comply with the numerous rules governing how you manage my money insuring that it is safe from predatory accounting or other transgressions, or that there is no need for lawyers as there are few laws.  My worry has always been that in a world of continuous filling of wants and the potential of satiating demand or running out of rooms to stash the next television set keeping the demand growing.  And against this we have the double edged sword of productivity improvements reducing the need for more labor and the unwillingness to pay higher salaries or hourly rates to compensate for the loss in terms of the circular flow in the economy.  Find me an alternative way keep the 30% of the workforce that exists to litigate or manage  or insure that wrongdoing is not allowed in our dealings or that health and safety are being maintained or accounting rules adhered to and I’ll be happy to reduce regulations.

“The history of economics has been a steady progression of new sectors absorbing the productivity gains of the earlier dominant sector.  Before the 20th century farmers were many and productivity on the farm significantly less and food sold to consumers less processed.  As rural agriculture became more efficient, then the share of farmers in the finished processed goods now made in factories and sold to workers who no longer lived on the farm fell and the share of manufactures increased as grinding your own grown wheat was replaced by packaged flour and packaged flour by processed bread.  The next stage saw manufacturing productivity stolen by services as the internalized management broke up the parts into specialized companies dedicated to advertising or even research and of course the new field of audit and accounting replacing the bookkeeper.  And now bookkeepers and accounting staff are being replaced by computer software, doctors by telemedicine with cheaper doctors overseas, and so the problem is now left unsolved – how to keep modern, nearly fully satiated economies spinning and growing without government intervention.

“So this leads to the only way to keep that process of stealing value-added going is to add regulations as onerous as they are sometimes stupid, but also possibly necessary or your friend may find that there’s a 1.3 trillion dollar hole in the US economy that can’t easily be filled by the next innovation in the iPhone or Android.”

David Teat wrote:

“One more cost that I can think of is reduction in competition, therefore higher prices to consumers because of less competition.  A prime example is the regulations of banks makes the smaller banks unable to shoulder the cost of compliance and therefore being sold or absorbed into larger banks.  The same can be said of independent doctors’ practices.  They’ve had to join large hospital networks that can handle the massive amount of paperwork to comply with the regulations.”

An anonymous reader who gave permission to quote:

“Holding parties – ‘both Democrats and Republicans equally as our targets’ is false equivalence. Here’s why

  • Senate unanimously passes funding continuation with around $1.5 Bil of border security; bill introduced by McConnell only because Trump expected to sign.
  • House Speaker Ryan on the sideline
  • Coulter et al. kick back and Trump says he will not sign without $5.7 Bil of wall funding
  • Shutdown
  • Democrats take over House; Pelosi passes multitude of continuation bills; McConnell hides on the sideline
  • Shutdown continues

“Can’t fathom ‘equal’ position on your part.”

Bob Bunting said:

“Wow… did not have any idea how bad the regulation thing is!  I guess that would be a prime area to cut, as I doubt we need that much overhead!

“I know they have slowed down the rate of new regs, but I am guessing there are many more in the pipeline.”

John Loewenberg wrote:

“Wow. Great article. Is there any way to get at the subset of the cost of regulation on almost 20% of our GDP, Aka Healthcare?”

An anonymous reader (who gave permission to quote) weighed in:

“Disagreement from this end. Also eliminate air, water, food, etc. controls?  Cancel Medicare? SEC?  Treasury?  Cut way back on foreign staff? Cancel all treaties? Education already cut.

“Trump cutbacks have been thoughtless. I just have no respect for that son of a bitch. My grandson could do a better job… At least he might ask for competent help.

“IRS has no personnel. I’d love to have parts of it privatized to collect money from bums like Trump, the litigation machine.”

Loren Scott said:

“Might add that since 1960, 7 of the 10 highest years of additions to the Federal Registry were during the Obama Administration.  And we were told 2.1% RGDP growth was the ‘new normal’!”

Michael Drury wrote:

“I disagree vehemently with your characterization of regulations as nonproductive. They are the cost of doing business in a protected democratic society.  They are the exact opposite of the arbitrary whims of an unelected centrally planned economy like China or Russia.  Consumers and employees knowing that their will is carried out by elected officials – no matter how unpalatable to the small constituency represented by entrepreneurs and businesses – is what gives them the confidence to spend more of their income, sometimes much more than they make by borrowing, sending market signals that let entrepreneurs maximize profits.  Every system has costs, and democratic capitalism is by far the most streamlined on the planet.  It comes at the cost of regulatory oversight by elected officials and secondary oversight by courts.  All other systems have proven to be less productive.  One simply has to look at the per capita income of all competitors to the US.  Even within the US, the level of government intervention is highest in areas where incomes are also the highest.  Clearly corporations did not vote for this level of oversight, but the employees they hire at the highest wages do want that level of govt intervention.  Jobs flow to less regulated areas as businesses seek to avoid cost – but regulation inevitably follows.  When I was young, New Hampshire was a bastion of freedom from regulation – but far below Massachusetts in income.  As workers followed jobs into the Granite State they demanded the same regulatory control they had left behind in Massachusetts.  Meanwhile, competition with New Hampshire led to a deregulation wave in Massachusetts that eliminated the name “Taxachusetts”.  Bean counters assign no productivity to government workers, which is of course ridiculous as no one would pay for a complete lack of output.  It is precisely the selection of the degree and form of government that dictates whether the private sector can be productive at all.”

Paul O’Brien said:

“The costs and benefits of government should be considered holistically.

“But, what are the biggest problems facing America today?

“Global warming?  Too much regulation or too little?

“The opioid crisis?  Too much regulation or too little?

“Unfunded public pension liabilities?  Too much or too little?

“How about Facebook and Google?  Are they over-regulated?

“Sure, there probably is too much petty regulating going on.  But the government fails to regulate big macro policy problems that in the end are highly costly.”


We again thank our many readers for replies. If you enjoy lively discussion around economic issues, please join Cumberland Advisors on Apr 11, 2019 for the Third Annual Financial Literacy Day: An Update on Financial Markets and the Economy. It’s a full day event held at the Sarasota-Manatee campus of the University of South Florida. It’s open to the public with topics to appeal to nearly anyone – from students, retirees and average investors to bankers, financial advisors and economists.

Panel & Featured Discussions Include:
• Outlook for the US Stock Market & Global
Economic Outlook
• Special Session: Health, Hunger and Philanthropy
• How the World Looks in Economics and Geopolitics
• Keynote Speaker: Gretchen Morgenson, The Wall Street Journal: Senior Special Writer, Investigations
Unit
• A Conversation with Susan Harper, Canada’s Consul General in Miami

Thank you. You may find more information about the event at this link: http://usfsm.edu/financialliteracy