Creative Destruction by way of Regulations

Do regulations kill jobs? On its face, it seems like a simple question that should lead to a simple answer. This is certainly how many opponents of government regulation see it…very simple, in black and white terms, often with anecdotal evidence to support folksy claims (take a look at this piece, for instance, published last week in the Wall Street Journal…see if you can find the “overwhelming evidence” that regulations kill jobs). I want to take some time here to complicate the matter for those that see it as straightforward.

When I was in graduate school, my Political Economy professor spent some time on the concept of creative destruction. My previous exposure to the term was in a Political Theory class earlier that year, defined as the sort of insidious effect capitalism has on existing social and political orders. In Political Econ, however, our professor developed a different theme: In capitalism, free markets are constantly being exposed to potentials for innovation. Sometimes, these innovations ‘threaten’ to overwhelm the existing order completely (where one sees threat, another sees opportunity), to the point where the original product is forever relegated to the museum or the vintage store. Where is my VCR anyway? In short, innovation happens, the demand for the product of innovation sometimes creates new markets, while sometimes destroying old ones in the process.

How does this relate to regulations? Let me complicate the anti-regulation argument with this scenario: For much of our modern history, coal-fired plants have produced a significant share of our electricity. Coal is a carbon-based product – when it burns, it emits gases and particulates that you wouldn’t want to spend too much time breathing directly. Older power plants, in particular, are responsible for much of the share of emissions that negatively impact air quality. For decades now, the ‘rascals’ at the EPA have issued rules meant to regulate the amount of poison these factories can emit, though some of these factories were exempted from the rules of the 1970’s for fear of adversely effecting existing jobs.

Since then, much has happened. Plants that were forced to comply with clean air rules invested in technology to keep them compliant and efficient, without the nation being thrown into a jobless depression. Why? Partly because engineers were hired to design the smokestack scrubbers which were made necessary by the regulations, craftsmen were hired to manufacture those scrubbers, new companies sprang up to service these and other needs which had surfaced…to the point, more jobs were created than were lost in the long run. An additional point not to be overlooked: coal-fired plants (cleaner coal-fired plants) remained competitive despite the ‘burden’ of regulation. Still, markets for alternative sources of energy have expanded, offering additional means of delivering power to the consumer, power that will one day be even cheaper and cleaner. In this way, regulations often reflect creative destruction tendencies similar to those celebrated by proponents of free markets…tendencies that, on balance, promote the general welfare, fulfilling one of the central tasks assigned to government by our constitution.

The current anti-regulation pitch you’ll hear in reference to the coal plants goes something like this: The Obama administration has planned or implemented an egregious number of new regulations, a hard-to-imagine (even for a Democratic administration) job-killing blitzkrieg set up to wreak havoc with private markets and industry. With these regulations, a number of plants are projected to close, costing a number of jobs, in a time when we need to worry about every job lost. Digging just slightly deeper, though, we find that most of these plants slated to shut down have been around for over 50 years, most were grandfathered out of the 1970’s regulations (therefore are the dirtiest), many were scheduled for closing in the coming years anyway, and, perhaps most telling, no plant operator surveyed say regulations are primarily to blame for the closing of these plants. Rather, the regulations seem to serve as the final bell.

In the end, the question of regulation isn’t as simple as it seems. I’ve spun it here in a particular way to illustrate that the world is indeed more complex than it is black and white. To be sure, there are plenty of regulations that show a negative cost-benefit analysis. I’ll make the case in a future post that many regulations are actually written by lobbyists to offer their industry protection against the threat of free market competition.

Election 2012 Ramping Up With Year-End Tax Fixes

The 2012 Presidential campaign is heating up, as are the politics which accompany it. It seems the Democrats want to win the battle of hearts and minds by framing this election in class warfare terms: defending the poor and middle classes against the Republican-favored rich. The Republicans, on the other hand, are in a tricky situation. In 2010 and 2011, they waged a spirited campaign against government spending, and appeared to move President Obama to the right, ruffling the feathers of many on the far left as Obama offered concession after concession. The President, reflecting his weak position at the time, even offered Speaker of the House John Boehner a deal this summer that included $3 dollars in spending cuts for every $1 in increased revenues (i.e. taxes). Ultimately, though, the Republicans may have fumbled at the goal line. The Tea Party caucus held out against ANY tax increase, Grover Norquist raised hell, and the deal fell through. Obama at that point learned he couldn't get a deal even by giving away the Democratic party's farm.

With nothing to lose, Obama has gone on the attack, emboldened with a strategy that just may extend his presidency despite conditions which predict he should lose handily (slow growth, high unemployment). The Republicans have their hands tied in allegiance to Norquist's no-tax pledge, and Obama has seized an opening by publicly framing the argument as rich versus poor. The current activity in Congress serves to illustrate: Several extensions are being taken up by Congress before the holiday recess. One involves extending the payroll tax holiday, another involves extending unemployment insurance. Allowing the payroll tax holiday to expire would primarily hit the middle class hardest, and those needing the unemployment insurance extension are, at the moment, closer to poor. Neither party can afford to be seen as neglecting the middle class or the poor, so there is broad support for both policies (though the support from republicans is grudging). The difference comes from how to pay for it. Obama has proposed a millionaire surtax to offset the costs, while Republicans look to cut government programs and freeze federal wages to finance the extension.

Rather than abandon the wealthy, Republicans hope instead to ride the wave of dissent against big government, as expressed by the Tea Party movement in 2010, but they may be counting on a wave that has flattened. Polling data consistently shows the public favors hitting up the rich to "pay their fair share". This year's Occupy Wall Street (OWS) movement introduced a discussion about income inequality, and volumes of data-sets have emerged which point out how well the uber-rich have fared recently, especially relative to the rest of us. Though the public didn't love the tactics or the image of the Occupy Wall Street crowd, they were sympathetic to the message, and it appears the President hopes to capitalize on this in the year ahead.

The policy battles set for 2012 will include the looming expiration of the Bush-era tax cuts, whose gains went disproportionately to the rich, and the continuing efforts to close corporate tax loopholes, such as those that allowed GE to pay no income tax despite clearing over $5 billion in U.S. profits. President Obama and the Democrats are seeking to extend the Bush tax cuts for everyone except those making over $250,000, whose taxes would rise from the current 36% rate back up to 39%, where it was during the Clinton years. Republicans will fight against the increase, calling it class warfare against the job creators. This at a time when corporations are experiencing record profits, holding more cash-on-hand than they've ever held before. Many naturally find this an odd homage to trickle-down economics, particularly when there's little evidence that these job creators are doing anything lately to earn that moniker. On the face of it, it seems an argument that Obama and the Democrats can win.