INSIGHTS: HOW REGULATION LEADS TO INFLATION
Milton Friedman famously observed that inflation is always and everywhere a monetary phenomenon. That is why Janet Yellen’s ascension to Federal Reserve Chair has re-sparked fears of runaway inflation. While she will likely prove to be more of an inflation hawk than her reputation suggests, there is another source of inflation that, contrary to Friedman, is just as worrisome, though it gets far less press. That source is regulation.
The scope of the problem is enormous.
Federal agencies issue more than 3,600 new rules every year, and total compliance costs now exceed $1.8 trillion per year. Regulations make it more difficult to get new products to market and create jobs, they stifle competition and make life especially difficult for start-ups, and they distract entrepreneurs from doing what they do best: actually innovating. Here is how they also cause inflation.
Imagine a simplified economy that consists of just two things: 100 dollars and 100 apples, with the price of an apple being one dollar each. If new regulations pass that make it harder to produce apples, the next year there are only 90 apples produced. Their price goes up from $1 to $1.11.
In this model, regulation’s effect on price is exactly the same as printing more money to have 111 dollars in a 100-apple economy. In this case, regulatory inflation is actually more pernicious than monetary inflation. Not only are apples pricier, there are fewer of them.
Many regulations reduce the amount of wealth that people can create. Other rules prevent wealth from being created in the first place. In general, regulatory spending creates less wealth than market-directed spending. That means the nation’s supply of dollars is chasing less wealth than it otherwise would, making prices unnaturally high.
What is the total magnitude of this regulatory inflation? While a precise answer is impossible, we can come up with a ballpark figure, by a simple calculation.
America’s GDP is currently about $16 trillion, according to the St. Louis Fed’s FRED database. Federal regulatory costs of about $1.8 trillion per year artificially raise prices by about 12.7 percent — our $1.00 apples actually cost $1.13 because of regulations.
Some regulations do have net benefits, so regulation’s total inflationary impact is less than that full 13 percent. The problem is that benefits are notoriously difficult to calculate because many of them are subjective and defy quantification. Compounding the problem, a lot of cost-benefit analysis relies on self-reporting by agencies, which have an interest in, ahem, inflating those benefits to justify their authority and budgets.
However their impacts are calculated, federal regulations almost certainly cause an inflationary tax between one and ten cents on the dollar, over and above out-of-pocket compliance costs—and regardless of what monetary policies Yellen might pursue at the Fed.
Perhaps some regulatory deflation is in order.
ON THE ECONOMY: CAMPAIGN STORYTELLING
This month I was invited to be a guest columnist on GettingElected.org, a website devoted to helping political candidates get elected. While my column, Happily Ever After: An Economist’s Perspective on Campaign Storytelling was targeted at candidates, I think it’s worth sharing with the overall government relations community. Whether running for office or running an issue driven campaign, the same principles apply.
“Tell me a happy ending story. Is there a happy ending story? Is there, is there? Tell me a happy ending story. Oh tell me the story.” So sang Courtney Love on the bonus track to the 2010 album Nobody’s Daughter, the fourth and final studio album by the band Hole. Ms. Love did not have a particularly happy story, having been addicted to drugs for most of her adult life, but claims to have been sober since 2007, so maybe will have a happy ending to her own story. Stories are an important part of politics. A good politician is really a good storyteller. Storytelling is, in fact, one of the most important communications techniques used in both government and business. It is an important method for dealing with conflicts and for influencing others toward constructive action.
Campaign Storytelling to present complex ideas
Storytelling is preferred to abstract statistical and legalistic arguments, particularly when communicating about complex situations. Simply put, great leaders are usually also great storytellers. This is why some of histories best politicians are also among its best storytellers. Abraham Lincoln was able to tell the story of the entire Civil War in just 2 minutes and 272 words in one of the greatest stories in American politics, The Gettysburg Address. Ronald Regan, concluded the story of the Cold War in a personal, and human context when he said; “General Secretary Gorbachev, if you seek peace, if you seek prosperity for the Soviet Union and eastern Europe, if you seek liberalization, come here to this gate. Mr. Gorbachev, open this gate. Mr. Gorbachev, tear down this wall!”
In the darkest hours of the Second World War, Winston Churchill, with the survival of the civilized world at risk, brought forth the power of his people when he told the story the upcoming battle for Britain by stating that; “if the British Empire and its Commonwealth last for a thousand years, men will still say, This was their finest hour.”
The title of the Hole song brings up something very important about each of these stories, no matter how horrible the situation these leaders were in, their stories always had a happy ending. It is the need to have a happy ending that makes political storytelling both a powerful tool for persuasion, but that also can lead candidates and office holders down a terrible path.
Make sure your stories are true
In fact, one reason why Congress is consistently less popular among the American people than even, root canals, colonoscopies, head lice or even Genghis Kahn (though it has ranked higher in opinion polls than the ebola virus, meth labs and gonorrhea), is that politicians end up telling happy stories even when they simply are not true.
This is particularly common when candidates or incumbents are discussing issues related to finance, economics and taxation. Simply put, if a politician’s story is supposed to be true, it better be. For example, when President Obama famously said, “If you like your plan, you can keep your plan”, he very well may have been reading talking points that his staff prepared, but the statement was found to be false. The same was true when President GHW Bush said he would never raise taxes. In both of these cases, it is doubtful that the President was blatantly lying, just that they were trying to tell a happy story when reality simply was not the case.
Complex issues, such as tax policy require complex analysis, and that analysis needs to be translated into truthful and realistic stories that can then be shared with voters. In telling these stories, politicians must know which points to highlight to make their case, as well as what points the opponent will use to make their case. This is why properly scoring economic and tax policy proposals is so important. Every economic proposal will benefit some people and companies and harm others. A good story will recognize both of these facts, promoting the benefits, but at the same time discussing why the costs are important to those who are harmed.
Those proposing changes to the tax code or to economic regulations should be able to quantify these changes prior to telling a story about their proposal. For example, has President Obama not tried to force the happy story if you like your doctor, you can keep your doctor, but rather said, something like, insurance coverage will change for the better, but you should discuss the plans with your doctor to make sure that they continue to accept it he would have still told a happy story, but put the onus on the doctor to continue to accept plans. By properly scoring proposals, candidates will have the information necessary to formulate a proper story and will be well prepared to ensure that they do not misspeak. They will set the story line rather than their opponent. They will be able to show how reductions in a corporate tax increase wages in their District, or how a tax increase on a certain population will lead to more programs that eventually benefit that same group.
Economies are not simple and often proposals have serious unintended consequences. Candidates should be aware of these when then formulate their positions, rather than being forced to react when problems arise. By having the best research and information good politicians will find themselves being compared to Reagan, Lincoln or Churchill, rather than to Genghis Kahn and head lice.
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