"Crushing, Hidden Tax of Federal Regulation Soars" — as reported by CEI's Wayne Crews in his annual report on this topic.
Details on the Costs of Regulation
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"Crushing, Hidden Tax of Federal Regulation Soars" — as reported by CEI's Wayne Crews in his annual report on this topic.
Previous post: Smith Understood This Reality
Next post: What's working
{ 29 comments }
Kinda puts teeth in the statement that there is no escaping taxes, eh?
The best we can do is not heap on the voluntary taxes.
OMG! I just figured out how to finance universal health coverage! Cut back on other government activities! OMG! Do you think our elected officials will listen to me?
I thought only Congress had the power to tax and make laws.
Regulations do both, and the writers of these regulations are not elected.
How does this pass Constitutional muster?
John,
The cost of regulation can be rightly called a tax, without actually being one.
It is your cost to comply with all the hoop jumping and belly crawling that Congress demands of you as a businessman. you have to hire extra people to do the paper work (think Sarbanes Oxley), or do the inspections, or whatever it is; or, you have to demand your workers do extra work in order to get up to compliance. Either way you pay.
Then you add the cost of that compliance in to your product price so that you can recoup it, thus it becomes a defacto tax.
I think however, your question was more rhetorical, so if I am answering out of line, I apologize.
vidyohs,
My question is only partly rhetorical.
Regulations have the power of law in that harsh penalties can be imposed if they are not followed.
However Congress does not write them.
I guess I'm hoping some defender of the state can give me an adequate explanation, because I just don't see it.
"Federal regulations impose a whopping $1.17 trillion last year in compliance burdens on Americans,…."
Wayne Crews
And just removing one or two major regulations on finance have cost us $5 trillion and more and ruined the economy for years to come. So I say good regulation pays for itself and this author has not made any case at all against the value of good regulation. Much as he might like to think his big number is impressive.
When talking about the downside of too much regulation there is a good argument to be made on the upside of good regulation.
muirgeo,
I am consistently amazed by your ability to ignore reality.
It has consistently been shown on this blog that the forces of regulation, not de-regulation, conspired to create this mess.
You may continue to trust that Barney Frank and Chris Dodd will save us.
I will look to businesses that have their own skin in the game to get us out.
Good regulation comes about as participants in markets bear their true nature; being self-interested.
I wonder how the government is going to lower vehicle safety regulations enough to allow GM to sell golf cart death traps and still manage to exclude the competition from selling their golf cart death traps…
Veritas said, "It has consistently been shown on this blog that the forces of regulation, not de-regulation, conspired to create this mess."
I've noticed that this blog, by careful cherry-picking and sleight of hand, lays most of the problems of the world on government interference. Excuse me if I'm skeptical of many of your claims.
Thank you very much for posting this. I'm going to read it now.
I hate to push it, but I have one more request: is there any way you can get Congress to act sensibly?
It has consistently been shown on this blog that the forces of regulation, not de-regulation, conspired to create this mess.
Veritas, I have not had a long history here, so are you refering to Gramm-Baily?
The language in that is very strange. Off the top of my head, it's the only act I know of that forbids the regulation of specific items. In this case, credit and interest rate swaps and their derivitives.
I am convinced that IAG, rather than go out with a wimper, strapped on an explosive vest of unhedged CDS contracts and threatened to take a bunch out with them. It was a shortcut to systemically important.
err AIG.
Kind of OT, but there was a post on the Cato blog about marginal tax rates on corporate profits in Q1:
http://www.cato-at-liberty.org/2009/05/30/marginal-tax-on-corporate-profits-was-742-in-the-1st-quarter/
And these are only the regulatory taxes… what then about the regulatory subsidies to the government. A bank if it lends to a normal citizen is required to have 8 percent in capital against that loan but, if it lends to the government, it needs not to hold any capital at all. How much does that subsidy of governments and paid by the financial markets amount to?
Implied in that statement is dishonesty of the two professors who blog here. It is one thing to say that you are not convinced, another to accuse of cherry picking and sleight of hand.
Could you give a few instances of cherry picking and sleight of hand? Also, tell us why it is cherry picking and sleight of hand.
John,
I am the last one to defend congress on anything; but, I do believe I understand it fairly well.
But the issue is not understanding it particularly, it is understanding responsibility.
Congress creates the agency and gives it reglatory authority, which include the power to punish and fine as well. However, the congress can not escape the responsibility of what they have done, the agency created is acting in their name, therefore congress can rightly be held for to blame for the regulations, the cost of compliance, the punishments, and the fines.
It is like my saying to my subordinates in the Navy, "you can substitute someone to perform your duty, but you can not escape the responsibility for that duty. In other words if the substitute screws up, I am not coming after him, I am coming after you." They learned to chose their substitutes well.
I hold congress to the same standard, and believe we all should.
A Ackerman: There is a vast amount of literature out there which explains how our government officials acted in ways which, is taken together and with some added paranoia, might convince someone that this crisis was in fact intentional. Starting all the way back to the Great Depression and the founding of Fannie Mae and Freddie Mac, the government has been urging banks and other lenders to offer mortgages to people they considered to be poor risks. There was Carter's Community Reinvestment Act, and Clinton's National Homeownership Strategy. Even Bush Jr. weighed in with his Amercan Dream Downpayment Act. But all these would have been inedequate to cause the problem without the Fed bringing interest rates down to 1% in 2003 and pumping massive amounts of cash into the mortgage industry, inflating housing prices and encouraging more bad loans. Things like credit default swaps and derivatives were the market attempting to deal with the risks that the government was encouraging and sometimes forcing businesses to accept.
On top of that add the moral hazard caused by federal deposit insurance and past bailouts, and other malinvestments caused by the low interest rates, and you have the recipe for exactly what we have.
Have you read up much on the Austrian business cycle theory? "The Austrian Theory of the Trade Cycle and other essays" is a good introduction.
OK Saul… I will walk you through this.
Why would a lender make a stupendously bad loan to some one of incredibly bad risk?
Why would a lender make a stupendously bad loan to some one of incredibly bad risk? – Yasafi
Because the government told them either:
(A) That they had to.
or:
(B) That government would guarantee the loan.
or
(C): All of the Above.
Saul, I have read a bunch of stuff that came out of Mises, but if you have the name of a book you think is the best, then I am all ears.
As for my original question, it was mentioned that regulation, not deregulation was the cause, and I was asking if that was code (or intent) with regards to a specific piece of legislation which prohibits the regulation of instruments that blew up in our face.
We have to be careful with blanket assertions on regulation. When you dissect many of them, they turn out to have useful purpose. I think a sunset clause mentioned here the other day would be very smart, because many regulations go stale.
Even Milton Freeman readily acknowledged the need for regulations. He correctly positioned it as a need to protect the 3rd party affected by a transaction between 2 parties.
Things like cleaning up a toxic spill, etc. He even specifically states the inequality problem is a 3rd party problem that should be dealt with by the government.
Not being able to regulate swaps has been a mistake, IMO. Even at the most basic level, swap are potentially dangerous. Just because someone hedges risk with a swap doesn't mean they will get paid. You think you are hedged only to end up in an auction because there was no transparency on the company writing the swaps. Now they are hoping two companies don't go belly up.
When a company writes swaps with a notional value far in excess of the company's worth, that should be a problem limited to that company. When the company then warns that their failure will bring down the economy unless they are bailed out, then we become the 3rd party. We paid out $150 billion in swap settlements for AIG because they wrote more then they could cover (and knew it).
CDS contracts are between two parties as long as the contract can be paid and the underlying security delivered. If not, then there is a 3rd party (us), and that party ends up bearing all the risk without receiving any benefit. That is grounds to invalidate the contract, IMO.
Thinking that swaps are used only to guard against risk is wrong. Because of their unregulated nature and liquidity, they are used on a host of transactions which cannot be looked at. Swaps are used to get around taxes and reserve requirements. Equity swaps can be used to launder ill-begotten money. It is how I hide my money when I am paid for a contract hit.
Regulations control the bankruptcy process so that some semblance of order is kept while determining who has claims to what assets. Regulated instruments participate in the orderly process, swaps don't.
In fact, when a bondholder owns swaps protecting them, then you can take the option of debt restructuring right off the table, because the bondholders stand to make immediate money instead of having their debt holdings restructured. It's more profitable to yell "Jump!" than to talk him down.
Ackerman: On another thread, someone mentioned a need to carefully dwfine the difference between regulation and interference. A free market regulates itself. What the government has been doing is interfereing with such self-regulation. There is also a need to define the difference between government action to protect the market, and interfere with it. Defense of private property rights, and figuring out who actually owns what, as it does in a bankruptcy, is a legitimate function of government. So is protecting the property rights of a third party, such as when one company dumps toxic chemicals that damage someone else's land or water rights. (I think this was a weakness of Milton Friedman's, his different and mistaken understanding of freedom.) Such actions are not regulation or interference, but protection against force and fraud.
And none of what you, muirgeo, or placebo said changes the fact that the government did meddle a LOT in the real-estate and mortgage markets, and before most of that meddling, there was no such thing as a subprime mortgage. As a matter of fact, most people on the left tended to accuse banks of only lending to people who didn't need the money, in other words, they acted responsibly by demanding that the borrower be able to afford a down-payment and have a steady income that ensured that they could make the payments. You say a lot of regulation has usefull purpose. That WAS the purpose, to get banks to lend to people who were bad risks by the standards banks used to maintain, to get the banks to ease their standards.
Well said, Saul.
Because the government told them either:
(A) That they had to.
or:
(B) That government would guarantee the loan.
Posted by: brotio
Not true for almost all of the very bad loans made. Why else would you make a terribly bad loan?
Be honest. If you think your first two answers where correct or honest they require documentation… yo will find none supporting your claims.
Not being able to regulate swaps has been a mistake, IMO. Even at the most basic level, swap are potentially dangerous. Just because someone hedges risk with a swap doesn't mean they will get paid. You think you are hedged only to end up in an auction because there was no transparency on the company writing the swaps. Now they are hoping two companies don't go belly up.
Swaps are potentially dangerous for the same reason lending is dangerous – risk of default. That's one reason banks will only do business with certain counterparties and that's why Goldman Sachs hedged its exposure to AIG. I'm assuming that by "regulating swaps" you mean creating a clearinghouse. That won't solve the problems you think it will.
Regulation doesn't control bankruptcy. Bankruptcy law and judges control bankruptcy.
Equity swaps can be used to launder ill-begotten money. It is how I hide my money when I am paid for a contract hit.
I'm assuming you're joking. However, almost anything can be used to launder money whether it's a regulated product or not. That's why bank employees have almost monthly money laundering meetings where they are taught how to look out for money laundering.
The bottom line, Ackerman, is that smart people in the industry will continue to create more opaque and more exotic products designed to evade the heavy hand of regulation. It is human nature. It is the reason black markets exist.
Here's food for thought….heavily regulated, standardized and regularly traded derivatives have the potential to blow up the entire system. Without them, we will have a third world financial system.
ill-begotten
Ill gotten. Sorry, I know it's rude, but that's a pet peeve of mine. :p
>>Not true for almost all of the very bad loans made. Why else would you make a terribly bad loan?
Be honest. If you think your first two answers where correct or honest they require documentation… yo will find none supporting your claims.<<
Run along, now, to your own blog where I've already answered your question a few months ago, troll.