“We’re going to be doing a big number on Dodd-Frank.” So President Trump proclaimed days after his inauguration, when signing an executive order requiring federal agencies to identify two regulations they plan to cut whenever requesting a new one.
That Trump chose Dodd-Frank – the sweeping regulatory reforms of Wall Street that President Obama signed into law in response to the financial crisis – isn’t a surprise. Bankers have complained loudly about the reforms, and the new president is channeling those complaints.
Trump’s virulent opposition to regulation extends well beyond Dodd-Frank. He is coming down especially hard on environmental regulation, and is now working to dismantle Obama’s Clean Power Plan initiative. This effort to address global climate change would shut down heavily polluting coal-fired power plants and stop construction of new plants, while replacing them with wind and solar farms.
The repeal of Obamacare would reduce regulations on small businesses and stakeholders in the health-care industry. Owners of businesses that grew to 50 or more workers particularly disdained the mandate that they help their employees get health insurance.
The Trump administration is taking aim at regulations on the energy industry, quickly approving the controversial Keystone XL pipeline project that Obama had stopped. And Obama’s effort to expand eligibility for overtime pay to more workers was immediately kiboshed by Trump.
I can go on, but you get the picture: Trump has a very different perspective on regulation than did Obama.
Businesses couldn’t be happier. Small-business optimism as measured by a survey conducted by the National Federation of Independent Business, a trade group, has soared since the election. The percentage of respondents saying government regulation is their biggest problem has plunged.
Stock investors also are pleased. The run-up in stock prices since the election is due in no small part to investor expectations that large companies will be unshackled from government oversight. Stocks of big financial institutions are up the most, given Trump’s dim view of Dodd-Frank, as are the stocks of energy companies.
Investors also like Trump’s ostensible position on mergers and acquisitions. Unlike the Obama Justice Department, which looked at large company mergers with a jaundiced eye thinking that such combinations would lead to too much market power, the Trump Justice Department likely won’t have those concerns. Stock prices of telecommunication companies, where some of the biggest deals are pending, have jumped post-election.
However, what may be good for individual businesses, or even the stock market, doesn’t necessarily translate into what is good for the broader economy. Indeed, it's difficult to connect the dots between regulation and economic growth and jobs. If Obama’s regulatory policies were such a serious impediment to growth, then how is it that the U.S. economy performed better than almost every other developed economy during his presidency?
It seems self-evident that regulation can become overdone and stifle economic growth. But it is equally as evident that there can be too little regulation. The financial crisis was partly the result of a failure to adequately regulate parts of the financial system. Moreover, at the extreme, too little regulation can result in corruption, undeniably a corrosive on growth in other parts of the world.
There is no compelling evidence that the current regulatory environment is affecting the U.S. economy one way or another.
Having said that, there is a sensible argument that massive regulatory changes to large parts of the economy, such as Dodd-Frank and Obamacare, could slow growth while everyone adjusts to the changes. Banks were required to raise a lot more capital – the financial cushion banks need to absorb losses on their lending – to comply with Dodd-Frank. That isn’t necessarily a bad thing, as the odds of a major bank failure are now pretty low, but as the banks were raising more capital they were lending more cautiously. Small businesses, in particular, had a tough time getting loans.
That's no longer the case. The banks have raised the capital they need, and they are lending again with gusto. Bank loans to businesses are expanding at a robust double-digit pace. The adjustment to Dodd-Frank is complete, and with the banking system on such a solid financial foundation, prospects for economic growth are actually better.
CEOs tell me they can adjust to almost any set of regulations, as long as the rules are clearly defined and they don’t change. If President Trump actually does “do a number on Dodd-Frank,” banks will be forced to make another round of big changes, adding to their costs and harming growth until they can figure it out.
To be sure, there is a balance between appropriate regulation and over-regulation. There is also nary a regulation that does not deserve a good hard look and perhaps an adjustment or two. But it is folly to believe that we can deregulate our way to a stronger economy and more jobs.Mark Zandi is chief economist at Moody's Analytics.Help@economy.com