INSIGHTS: FEWER REGULATIONS, MORE ENERGY, LOWER EMISSIONS
Guest Columnist: Marlo Lewis, Jr., Senior Fellow, Competitive Enterprise Institute
The Trump administration had cheery news to report this week about deregulation, U.S. energy production, and greenhouse gas emissions.
The Department of Interior reported on its progress in implementing President Trump’s Executive Order 13771 on Reducing Regulation and Controlling Regulatory Costs. Interior’s fiscal year 2018 regulatory reform actions have cut regulatory burdens by roughly $2.5 billion. Since January 2017, Interior has withdrawn more than 150 proposed rulemakings from the regulatory agenda and finalized 19 deregulatory actions in fiscal year 2018.
Interior also recently held a record-breaking lease sale on federal lands in New Mexico, which generated close to $1 billion, with nearly half the revenues going directly to the state.
“These regulatory reforms coupled with historic tax cuts and other factors have grown the economy and helped United States energy production hit historic highs,” the department’s press release stated. During President Trump’s time in office, total U.S. oil production has increased from 8.8 million barrels per day to 11.2 million barrels a day.
In related news, Interior’s Bureau of Safety and Environmental Enforcement (BSEE) announced that in 2017, U.S. offshore production reached a record high of 621 million barrels. Currently about one in five barrels of oil produced in the United States comes from the U.S. Gulf of Mexico.
BSEE director Scott Angelle credited President Trump’s pro-growth energy agenda for the record-breaking production: “Let us be the generation that inherited energy dependence and transformed it into energy dominance,” Angelle said. “When President Trump issued his executive order, titled, ‘Implementing an America First Offshore Energy Strategy,’ he changed America’s direction offshore.”
In a broader look at President Trump’s “regulatory freedom agenda,” the Office of Management and Budget (OMB) reported this week that in fiscal year 2018, the administration saved $23 billion in overall regulatory costs, and has achieved $33 billion in net regulatory savings during Trump’s first 21 months. In contrast, federal agencies increased the regulatory burden by $245 billion during President Obama’s first 21 months.
In fiscal year 2018, agencies across the government eliminated 176 outdated, unnecessary or duplicative regulatory actions while issuing 14 significant regulatory actions—a ratio of 12-to-1. The administration withdrew or delayed 648 regulatory actions in fiscal year 2018, and has delayed or withdrawn 2,253 regulatory actions since January 2017.
For those who worry about greenhouse gas emission trends, there’s good news for them, too. Environmental Protection Agency’s Office of Air and Radiation announced this week that U.S. emissions declined by 2.7 percent during President Trump’s first year in office.
“These achievements flow largely from technological breakthroughs in the private sector, not the heavy hand of government,” stated acting EPA Administrator Andrew Wheeler.
Reported emissions from large power plants declined 4.5 percent since 2016 and 19.7 percent since 2011. Under EPA’s proposed Affordable Clean Energy Rule (which replaces the “Clean Power” Plan), carbon dioxide emissions from the U.S. power sector would continue to decline, with a projected decrease of 34 percent below 2005 levels. For perspective, the Obama EPA’s “Clean Power” Plan aimed to reduce power sector emissions 32 percent below 2005 levels.
ON THE ECONOMY: FOUR HORSEMEN
John Dunham, Managing Partner, John Dunham & Associates
Well they were given the grapes that go ripe in the sun. That loosen the screws at the back of the tongue. But they told no one where they had begun. Four horsemen. They were given all the foods of vanity, and all the instant promises of immortality. But they bit the dust screamin’ insanity! Four horsemen. The song Four Horsemen, written and released by the Clash (Joe Strummer, Mick Jones, Paul Simonon and Topper Headon), on their 1979 album, London Calling, is one of many songs written about the Apocalypse of St. John.
To think about an Apocalyptic economic event brings to mind something like the Great Depression; however, a truly apocalyptic event would be even worse. More like the fall of Rome, or the conquest of Constantinople, or maybe the Black Death. An apocalypse would be exogenous to the economy itself, because historically economies are self-adjusting. But as the last recession and the recessions of the early 1980s show, a deep downturn can feel almost apocalyptic when it is happening.
So who or what are these four horsemen, and how should those of us in business and government affairs look at them?
1) Labor Force Participation Rate: The President has been taking a lot of credit for the good unemployment numbers as of late, and in fairness, the Administration’s policies have led to a spurt in hiring. During the 8 years of the Obama presidency, employment grew at a compound annual rate of 1.0 percent. Since President Trump took office, employment has grown at a rate of almost 1.5 percent annually, so 50 percent faster than under the prior administration. There are reasons for this, not least of which has been a deregulatory culture and the tax reform legislation.
While employment has indeed picked up, the unemployment rate has fallen to unheard of lows due in large part to a shrinking of the labor force. Remember that reported unemployment is a ratio of employed people, divided by the labor force. This ratio can fall when employment rises, or when the labor force declines. Both have been happening. During the Obama Administration the labor force participation rate fell by 0.58 percent per year. This decline has continued under the Trump Administration, albeit at a slower rate of 0.15 percent per year.
Unless or until factors like wages, population mobility, education, and societal norms change enough to attract more people into the labor force, there will be downward pressure on economic growth as businesses struggle to find workers to operate their factories, stores, restaurants and farms. Understaffed enterprises simply cannot produce to their full potential leaving plants and equipment idle, and encouraging more imports into the United States, both factors that deter growth.
2) Capital Spending: Capital spending is necessary to ensure that the most productive technology and systems are in place to create goods and services. Capital spending has been growing at an annual rate of over 5 percent for the last decade. During the Obama Administration it grew at a compound annualized rate of just under 5.7 percent. This has actually fallen to 5.1 percent under the current President. This was the opposite of what the tax reform package was supposed to do.
One problem has been that the expectation of a huge influx of unrepatriated earnings would help jump start investment has not come to fruition. There were estimates that as much as $2.6 trillion in capital might flow back to the US economy due to lower tax rates and tax reform. Our own estimate was that about $1.3 trillion could be repatriated. Recently the Tax Foundation published new figures from the Bureau of Economic Analysis showing that in the first two quarters of 2018, repatriation has significantly increased from an average of about $40 billion per quarter to $294.9 billion in the first quarter and $169.5 billion in the second quarter. This would suggest that in the first half of the year, tax reform led to about $384 billion in additional repatriation. This money is not showing up in the investment figures since a large amount went toward stock repurchases. Unless or until this money starts flowing into either new investment or the pay-down of debt, it will not have a sizable effect on growth.
3) Interest Rates: Interest rates reflect both the supply and demand for capital. As the economy grows, and businesses and consumers make investments, demand for capital increases. Supply is controlled partly by the Federal Reserve, partly by savings rates, and partly by repatriations. It had been expected that repatriations of capital held abroad would help to offset the higher demand for capital brought about by tax reform, keeping a lid on interest rates. Recently, yields on the benchmark 10-year Treasury Bond have risen by about 40 basis points (roughly 14 percent) from 2.85 percent to 3.26 percent causing some panic in stock markets. This is still a very low rate considering the level of debt in the United States, and the recent spurt in economic activity.
As rates continue to increase, there will be a dampening effect on economic activity.
4) International Trade: Finally, for the first time in many years, trade issues have been in the news. This is mainly due to the Trump administration’s insistence on the use of tariffs for a range of actual and perceived problems with the current trading system. Most notably, the Administration has imposed tariffs on steel and aluminum imports, and has increased, or plans to increase, tariffs on every good imported from China. Other countries have responded by instituting new tariff provisions of their own. In spite of this the OECD projects that international trade overall will continue to grow at about the same pace as it has since the last recession, or by about 4.5 percent per year.
More trade is generally beneficial for the economy, so if a trade war erupts, one could expect that economic growth will fall as well.
Were all of these four horsemen to rear their heads in the coming year, there would surely be a recession, and while recessions are painful, they are far from apocalyptic. True, the government will not be able to respond in the aggressive manner that it did following the last recession, but Western Civilization will not likely fall, and recession alone will not bring forth plagues and pestilence. Without government propping up zombie firms, and bad debt, there is potential for the next recession to begin to clean up some of the vestiges of the financial imbalances that still remain – and all the instant promises of immortality will bite the dust screamin’.