Fear The Regulatory Cliff, Not The Fiscal Cliff

by Hans Bader on December 20, 2012

in Economy, Legal, Regulation

Economist Bruce Bartlett notes that by cutting the federal budget deficit, the much-feared fiscal cliff will actually increase the size of the economy in the long run, even though it will reduce “short-run” economic growth: “It’s too bad that misplaced fears about the fiscal cliff have taken off the table the option of simply letting all the automatic tax increases and spending cuts go into effect. While this would indeed reduce short-run growth, the Congressional Budget Office says the reduction in projected deficits would actually raise growth in the medium- and long-term (see pages 24-25 of the report).” The fiscal cliff is the combination of large tax increases and automatic spending cuts that will take effect next year unless they are canceled by Congress and the president. These measures will cut the deficit roughly in half.

Canceling these deficit reductions would be bad, leading to increased national debt service costs in the future, which will crowd out private investment. While canceling them would “prevent disruptions to the economy in the very near term, it would lead to higher debt over the long term,” thus reducing the size of the economy, notes the GAO.

The tax increases contained in the fiscal cliff will be painful (they are large enough that they have been called “Taxmageddon”), and will reduce economic growth slightly over the long run, especially any increases in investment taxes on the middle class (although most of the tax increases will help shrink the deficit).

But the automatic budget cuts contained in the fiscal cliff are essential and economically valuable. Those budget cuts will grow the economy in the long run, in addition to reducing the staggering size of America’s national debt, and their negative impact on economic growth in the short run is exaggerated. The budget cuts are so valuable that they should not be canceled even as part of a deal to eliminate the tax increases. “The whole notion that federal cuts is going to push us into recession is nonsense,” Cato Institute budget policy expert Tad Dehaven says. “All that money that the federal government spends was taken or borrowed out of the economy to begin with.”  Spending cuts have helped the economy in the past – such as when America experienced an “economic boom” after our government slashed spending in 1946, and when Canada’s economy boomed after it slashed government spending in the 1990s. To get the deficit under control, we need to cut skyrocketing welfare spending, eliminate agricultural subsidies, trim unnecessarily high Pentagon spending, and reduce wasteful education spending. America can reduce military spending significantly without sacrificing national security. The Cato Institute has identified billions in readily achievable savings at the Pentagon.

It is the regulatory cliff that will really reduce economic growth over the next four years, and beyond. It, not the fiscal cliff, is what we should fear most. The regulatory cliff includes a vast array of costly regulations that the Obama administration delayed until after the election to avoid wiping out jobs and thus costing Obama reelection, like EPA ozone rules that Obama delayed after critics argued that they could cost millions of jobs. (EPA rules dealing with global warming are also expected to wipe out more than 800,000 jobs after they go into effect. The EPA’s annual regulatory cost is already estimated at $353 billion.)

As the Associated Press notes,

For months, federal agencies and the White House have sidetracked dozens of major regulations that cover everything from power-plant pollution and workplace safety to a crackdown on Wall Street.

The rules had been largely put on hold during the presidential campaign as the White House sought to quiet Republican charges that President Obama was an overzealous regulator who is killing U.S. jobs. But since the election, the Obama administration has quietly reopened the regulations pipeline.

In recent weeks, the Environmental Protection Agency has proposed rules to update water-quality guidelines for beaches and other recreational waters, and deal with runoff from logging roads. The National Highway Traffic Safety Administration, meanwhile, has proposed long-delayed regulations requiring automakers to include event data recorders — better known as “black boxes” — in all new cars and light trucks beginning in 2014.

The administration also has initiated several rules to implement its health care overhaul law, including a new fee . . .Some GOP lawmakers fear the worst.

Mr. Obama has spent the past year “punting” on a slew of job-killing regulations that will be unleashed in a second term, predicted Sen. James M. Inhofe, Oklahoma Republican. With the election over, it’s now “full speed ahead” for federal rules limiting greenhouse gas emissions . . . and putting controls on drilling for oil and natural gas, said Mr. Inhofe, the senior Republican on the Senate Environment Committee.”

The Obama administration has created a political climate that discourages businesses from expanding and hiring new employees. Obamacare, which has already caused layoffs in the medical device industry, will wipe out as many as 800,000 jobs and turn other jobs into part-time jobs. The Dodd-Frank Act has also wiped out jobs and driven other jobs overseas. The Obama administration has discouraged investment by imposing costly, harmful new labor and employment rules on American manufacturers. Steve Wynn, a disenchanted liberal businessman, called Obama “the greatest wet blanket to business and progress and job creation in my lifetime.”

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