Common Sense in Congress?

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Congressman Mike Kelly from Butler, PA is a car dealer.  He has worked in the private sector his whole life and finds it harder and harder to do business every day because of the excessive regulation from Congress and State and Federal Agencies.  He is obviously fed up.  The five minute ‘rant’ in Congress shown below is obviously heartfelt.  He uses no tele-prompters.  He just speaks his mind.  I think what he says would be echoed by most people involved in private business where they have ‘skin in the game’.

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Would you rather have men like this passing laws in Congress or people like Nancy Pelosi who has always fed at the public trough?  Let me know what you think.

Notes on Previous Posts

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Please note that:

1.   Since the post, “How does Josh Earnest Sleep at Night?”, Mr. Earnest has been promoted from White House Deputy Press Secretary to White House Principal Deputy Press Secretary.  I take no credit for this.  It is clear to me that this is ‘principal’ as in “most important,” not ‘principle’ as in anything remotely related to ethical.  In fact I heard an interview with Mr. Earnest on the radio this morning.  He was praising Mr. Obama for his strong leadership, using Executive Orders to get around a dysfunctional Congress (that is no longer a rubber stamp).  Funny, isn’t that one of the ways Mr. Bush allienated much of the nation, by using executive orders to do things he couldn’t get done legally through Congress.  But then what President would let a little thing like the Constitution get in the way of being a ‘strong leader?’

2.  In re my post on “Useful Idiots“, James Taranto commented yesterday on the Occupy Wall Street or “We are the 99%” movement.  I always feel he is worth reading (Best of the Web Today). He quoted a New York Daily News piece about the fact that many homeless have found it convenient to move to the park where Occupy Wall Street ‘campers’ have been living.  Evidently that is a problem for the ‘real’ occupiers of the park – “We have compassion toward everyone. However, we have certain rules and guidelines,” says Lauren Digioia, 26, who belongs to the “sanitation committee” at Zucatti Park where the “Occupy” group has their camp:  “If you’re going to come here and get our food, bedding and clothing, have books and medical supplies for no charge, they need to give back,” Digioia said. “There’s a lot of takers here and they feel entitled.”  It strikes me as curious that the Zucatti occupiers don’t want the homeless in their midst, and, that they point fingers at those who are “takers” and those who don’t respect their ‘rules.’  It reminds me of a two year old who looks down on the 18 month old and calls him a baby.

3.  Recent examples reinforce my views stated in “Regulation – The Economic Straight Jacket” and “How Government Can Create Jobs – Three Suggestions.”  First, a friend wrote to tell me of his success in getting started building his new home after a 4-5 year application process which required an EIR (“environmental impact report” for those who haven’t tried to build anything in the U.S. in the past 20 years) of well over 1000 pages.  Second, another friend is just about finished building a new restaurant.  It is in a perfect location, one block from a Hospital, a community college campus and two hotels.  The only other restaurant for over a mile is a McDonalds.  So why, did it take so long to build and why after all that trouble and expense build a restaurant with only 56 seats?  It was all they could get permitted, after having to hire a lawyer to plead their case, even though the zoning was already permitted for a restaurant.  Maybe I should redo the “How the Government Can Create Jobs” post and merely say, “Get government out of the way!”

4.  My Post “Government vs. Small Business – the-Difference and a Challenge” included a challenge that has not yet been accepted by anyone.  The challenge was, “If you work for a government agency that has a smaller budget than it had in 2007, send me an email or comment to this post.”  That post was July 12, 2011, well over three months ago.  Here is the list of those agencies that are smaller today than in 2007, the start of the “recession:”   1.  None   2. None   3.  None  4.  None ………….      That’s right.  Still no single person has come forward to say they work for a government agency that has gotten smaller than it was in 2007.   I would still love to learn of such a government entity, but find it very unlikely I will.

Regulation – the Economic Straight Jacket

The EPA wrote in February that “in periods of high unemployment, an increase in labor demand due to regulation may have a stimulative effect that results in a net increase in overall employment.”  (http://www.investors.com/NewsAndAnalysis/Article/581555/201108151901/Regulatory-Agencies-Staffing-Up.htm)    If that doesn’t scare you, you must not scare easily.  Our government thinks that by increasing regulation  it can stimulate the economy.  That is both amazing and sad.

Mr. Obama claims to understand the plight of the business community.  Mr. Reid says his key goal is to create jobs.  When she was speaker of the House, Mrs. Pelosi said she would do whatever it takes to create good jobs for Americans.  Together, they passed the American Recovery and Reinvestment Act of 2009.  If you go to the ARRA website, you will find the first words on the page are these:

On Feb. 17, 2009, Congress passed the American Recovery and Reinvestment Act of 2009 at the urging of President Obama, who signed it into law four days later. A direct response to the economic crisis, the Recovery Act has three immediate goals:

• Create new jobs and save existing ones
• Spur economic activity and invest in long-term growth
• Foster unprecedented levels of accountability and transparency in government spending

Among the interesting features of the ARRA or Recovery Act was the huge emphasis placed on monitoring the money and regulating its use.  The plan includes $5.0 Billion for administration of the ARRA programs (the new government programs put into place by this bill) and for the Inspector General’s Office to ensure that funds are used according to the regulations enacted for these programs.  But that is not even the tip of the iceberg.  The authors of the ARRA paid no attention to the added costs to business from the additional rules and regulations created within this Act and its new programs.  It appears the authors of the ARRA, like the EPA think that more regulations will stimulate the economy and create jobs.

Want proof?  Go to the ARRA website and do a search for “regulatory costs.”  The result is 5 (five) hits and all are the same program.  Now search for “new regulations”  You will get 27 hits.  Next search for “rules.”  You get about 1,500 results.  Last, search for “enforcement.”  You will have over 18,000 places to look.  Not counting the raw cost of all that enforcement, the enforcement bureaucracies and the people who work at them, imagine the cost to the companies to comply with the ever increasing and complex regulations.

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So, just for fun, let’s take the spotlight off of Washington, D.C. and the Federal Regulations and their dampening effect on our economy.  Let’s look at state governments, for example, California.  Here is a state, which, like the United States, has a huge economy that has been hamstrung by overregulation.  A study done in 2009 tells all you need to know about how regulation impacts the economy.  Below is a reprint of the Executive Summary.  If you read nothing more than the Executive Summary, I think you will still be struck by the size of the anchor State Regulatory actions have put on the small businesses.  Federal Regulation is as bad or worse in most cases.

This study measures and reports the cost of regulation to small business in the State of California. It uses original analyses and a general equilibrium framework to identify and measure the cost of regulation as measured by the loss of economic output to the State’s gross product, after controlling for variables known to influence output. It also measures second order costs resulting from regulatory activity by studying the total impact – direct, indirect, and induced. The study finds that the total cost of regulation to the State of California is $492.994 billion which is almost five times the State’s general fund budget, and almost a third of the State’s gross product. The cost of regulation results in an employment loss of 3.8 million jobs which is a tenth of the State’s population. Since small business constitute 99.2% of all employer businesses in California, and all of non-employer business, the regulatory cost is borne almost completely by small business. The total cost of regulation was $134,122.48 per small business in California in 2007, labor income not created or lost was $4,359.55 per small business, indirect business taxes not generated or lost were $57,260.15 per small business, and finally roughly one job lost per small business. This study provides the most comprehensive and complete analysis of the total regulatory burden in California.  (underlining is mine)

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I think that if we want to ‘create’ jobs and improve the economy, more than anything else, we need to reduce the regulatory burden on business.  If we could cut back on over regulation and its cost by just 10% a year it would lower our budget deficit and increase the gross domestic product.

Want some strong evidence that this is an important step we need to take?  In an annual study of global competitiveness by the World Economic Forum, the US dropped from 4th to 5th (behind Switzerland, Singapore, Sweden and Finland).  Most of the factors that kept the US competitive were related to what I call ‘momentum’ – the size of the US economy being the single biggest factor.  However, the negatives which brought the US down a notch for the third consecutive year importantly are in the realm of ‘government activity’.  Quoting from the report:

“On the other hand, there are some weaknesses in particular areas that have deepened since past assessments. The business community continues to be critical toward public and private institutions (39th). In particular, its trust in politicians is not strong (50th), it remains concerned about the government’s ability to maintain arms-length relationships with the private sector (50th), and it considers that the government spends its resources relatively wastefully (66th). In comparison with last year, policymaking is assessed as less transparent (50th) and regulation as more burdensome (58th).”  (again, my underline).

Do you think ‘government activity’ has hurt or helped our economy in recent years?  I think the growth in government and government activity has been mirrored by a drop in productive economic activity.  Within a given budget, a business that must spend a few percent more each year on regulatory and bureaucratic mandates will have that much less for investment in future business opportunities.

How Government Can Help Create Jobs – 3 Suggestions

First, let’s be clear.  Government normally creates jobs that create nothing.  Real jobs are ones that add value and pay taxes from that added value.  Most jobs created by government fail that test.  So, the thought of Government creating jobs is one that must be understood as not actually creating jobs, but doing things that will encourage the creation of jobs in the private sector.  Without the private sector jobs that add the value that is taxed, there are no funds for the government jobs.

Government can be good at coordinating, organizing, regulating, and setting standards.  So what can Government do to help create jobs?

There is an old Bumper sticker that I have on my wall that holds one of the keys to answer that question.  It says, “Make Welfare as hard to get as Building Permits.”  Though a bit simplistic (like most bumper stickers) it points out the fact that businesses must endure a long list of barriers before they can go to work or before they can create jobs.  Many, if not most, of those barriers are Government-created.

Do you remember the teacher keeping the entire class after school because one person in the class failed to follow instructions?  Typically this was done by the teacher for two reasons.  He or she wanted the peer pressure of all those who complied to force the offender to fall into line.  He or she was also probably lazy.  The same result could be accomplished by the teacher spending an appropriate amount of time with the offender but that would not be easy.  It was easy just to make everyone do the same thing and the end result was that the offender usually bowed to the peer pressure.  The other 25 members of the class wasted a half hour or more but the teacher saved a few hours of working with the offender.

Much of the dreaded paperwork that government requires of businesses is just like that.  To control a small problem or to keep a very small group of scofflaws in line, government creates a program that punishes and wastes the time of all the others.  Need examples?  Just try to permit a small wine tasting room on your farm/vineyard.  Having done it, I have a list of requirements with which I was required to comply that wasted my time and my money, but, did nothing to improve the community anywhere close to time and cost involved.  Why should I pay for a traffic study (going price – about $1,500) for the 4 days a year that my tasting room will add about 25- 35 cars on our road?  Does the lady down the block who has a garage sale every weekend have to do that?   She generates far more traffic than we ever will. Does everyone who builds a home on a piece of raw land on our road have to do a traffic study?  A new home and the family who lives in it will certainly generate far more traffic in a year than our winery ever could.  Why should I be required to have my septic tank pumped (going price $300-400) and then have a county inspection (over $1000 for the inspector to come out an look at the system and issue a report)?  If my septic system is not up to the additional burden of 4 days of wine tasting a year, who is hurt by that?  Only me.  More wasted time and money.  No benefit to the community.

Suggestion Number 1 – Government at all levels should make an assessment of the number of people effected by each requirement with which a business must comply.  They should look at the revenue and see if the number of people required to draw up the requirement plus those to administer and enforce it are paid for by the fees collected.  They should look to see the size of the problem the requirement was made to resolve.  They should see how many are effected by the ‘problem’.   If the problem is one person playing his stereo too loud late at night, does that warrant a law that bans the playing of stereos after 10 p.m. for the entire community?  I think we could cut the paperwork barriers to new or increased business activity significantly.  That would encourage more business and more job creation.

It is often said that a successful journey starts with a well thought out plan or itinerary.  Imagine planning a trip for six months from now.  You get airline tickets, rental car reservations, book hotels, and line up special tours or events.  Each of these items in your plan is tied to the next.  If your plane is late, the car rental office may be closed.  If you can’t get the rental car, you can’t get to your hotel without more money for a cab, etc., etc.  But, you know most of these things and know they are not normal and you can handle such problems.  You are encouraged by your plan that you will have a successful trip so you invest in the tickets, car, and rooms.

Now how would you feel about your trip if the airlines often changed fares or schedules or destinations after you booked your trip?  What about if the car rental companies were known to offer a 5 passenger car for $50 a day and then often only had 2 passenger cars that they rented at $100 per day?  What if you booked and paid ($150 per night) for the Hilton and when you arrived they said the hotel was full and put you up in the Wally World Hotel down the street that had a sign saying rooms available by the hour, day, or week?   Would you go ahead and book your trip and make the investment even though you were uncertain any of your plans would work?  Not likely.

Business is much like that.  Business plans are made based on known and predicted conditions.  The more stable the conditions, the more likely a plan is to succeed and therefore, the more likely a business will find investors.  That bodes well for investments and job growth.  On the other hand, when things are not stable, investment drops dramatically.  Do you know if we will have inflation or deflation over the next five years?  Me either.  But, if I were planning a business or an investment, I would need to know or at least have a strong belief.  My guess is that Mr. Obama will be convinced by his advisors that we have to keep the bubble inflated at least until the election in November of 2012.  To me that means we will have another round of “quantitative easing.”  In other words, I would bet we will print more money and have more inflation.  But, I am not in the mood to make any investments with the amazing uncertainty that exists right now.  Will Congress and the President get serious about balancing our budget?  Until they do, I think investment will be depressed and job creation minimal.  Today the only stable things that seem to continue to get investment dollars are business plans tied to government growth/spending, medical care, and the aging population.  We seem confident that these things will continue to grow.

Suggestion Number 2 – Get serious about cutting Government Spending at all levels.  If the Federal Government had a strong leader who ordered all agencies under his control to cut budgets by 15% immediately, I think investments would swell.  If the Federal Government would stop changing the rules for employers (taxes, fees, requirements to provide health care or pay a fine, etc?), I think investments in business would increase.  If our governments committed to plans that would balance budgets, largely through cutting spending, I think investments would swell as would the job rolls.

Most business plans are highly complex and detailed.  People who seek investment or a loan to expand or start a business must lay out an argument for the business and how it will succeed.  First, it must define what success will mean.  Will it be a certain positive cash flow or a certain increase in profit margin to allow the payoff of the required loan?  Will it plan for a certain return on investment for the investors?  Once this definition of success is known, the business planner must show that the risks involved are within reason for the anticipated return.

They say that the marketplace will tell you the value of any asset.  I think that barring government intervention, that is basically true.  If for example, you look at corporate bonds, you will see that bonds that pay 5% today command a higher price than ones that pay 1% if you assume that both are of equal risk.  If Borders Books had a 20% bond offering today, I don’t think many people would buy it considering the state of affairs at Borders.  Or if they would, it would be at a huge discount.  Government bonds, like T-Bills are offered at 3% and people will buy them.  Currently, Banks will pay you less than 1% (passbook savings) to borrow your money.   The Feds are paying above market interest so they can attract enough investors to cover the ever increasing deficits.  As long as banks can borrow money for 1% and the Fed will pay them 3%, guaranteed, they need only ‘invest’ in T-Bills.  Why would they every lend money to a risky business when they have a guaranteed 2% margin when they buy T-Bills with their money.

Suggestion Number 3 –  The Federal Government needs to balance its budget and stop printing money.  If it would do this, they would not need to pay a premium to sell T-Bills, and banks would not have the guaranteed margin they now have when they buy T-Bills instead of lending the money.   Banks would again have to earn money the hard way, by studying business plans, evaluating risks and rewards, and then making business loans.  This would allow new businesses and business expansions, both of which would create jobs.  Banks ‘investing’ in T-Bills creates no new jobs.

Spending more money than in any previous time, borrowing more money than any time (other than World War II), and creating administrative and regulatory barriers to free enterprise will never help create a job.  Doing the opposite will.  Playing politics and saying that we threaten senior citizens and the poor if we don’t continue to increase spending will not create more jobs.  Leading the nation to reduce government involvement in our daily lives will help spur on more investment and more jobs.  I would love to have someone tell me anything that Congress and the Current Administration are doing that will help increase investment in U.S. business enterprises which will create jobs given the opportunity.