In the late ’70s as a “baby banker” at Continental Bank in Chicago, I did a stint as a credit analyst in the international lending department evaluating “country risk.” We analyzed each country to determine whether or not they had secure property rights, a stable rule of law, fair taxation, a reasonable regulatory regime, freedom from corruption and cronyism, openness to free trade, a stable currency and a sustainable level of government spending. All of these nurture voluntary exchange and free enterprise system that promotes economic growth which, in turn, make countries better credit risks.
Back then, I took it for granted that the U.S. was the gold standard for economic freedom. That is no longer the case. According to the Heritage Foundation Index of Economic Freedom:
- The US now ranks 12th in overall economic freedom behind countries like Chile and Estonia;
- The US Federal Government debt now is over 100% of the GDP – and 5-6 times that amount if you include off balance sheet liabilities; and
- The US ranks 40th in trade, investment and financial freedom.
U.S. productivity growth has slowed to a crawl.
The annual rate of new business creation in the U.S. is about 28% lower today than it was in the 1980s (according to an analysis of the US Census Bureau’s Business Dynamics Statistics annual data series).
One reason for the drop in productivity is the increase of government regulations. Many regulations are designed to protect existing business at the expense of newer, more efficient producers (i.e., startups and emerging growth companies). Big companies can afford to comply with lots of regulations, small ones can’t. Big businesses can lobby to get rules written in their favor, small businesses can’t; they usually don’t even know the rules are being written.
In the era of “You didn’t build that”, punitive regulations are being ushered in as part of today’s hostile rhetorical climate that demonizes business. Look no further than “Obamacare” which has punished small business, choked new business creation and seriously chilled economic dynamism. And in reaction to the asset bubble collapse of 2008, we’ve passed laws like Dodd-Frank that aim to castigate our banks and capital markets that provide the oxygen (i.e., money and finance) to facilitate business growth.
According to the FDIC, the number of federal banks nationwide shrank to below 7,000 (from a peak of more than 18,000) for the first time since federal regulators began keeping track in 1934. The decline in bank numbers has come almost entirely in the form of exits by banks with less than $100 million in assets. Why care?
Community banks represent the vast majority of U.S. banks and are critical to the economy because they are more likely to make small-business loans. They hold 46% of loans to farms and small businesses vs. only 14% of total banking industry assets. For rural communities, small banks are often the only lender, since the big banks are closing branches. And small business loans have declined about 10% between 2010 and 2012.
The number of new banks formed since 2008? One. New bank applications? One. In American Samoa.
A big reason for the decline in the number of banks:
- Regulatory compliance costs are increasing. For example, the small United Southern Bank in Kentucky is about the same size as it was in 2009 but added 15 back-office employees just to ensure compliance with new federal regulations;
- The Federal Reserve Board is manipulating the money supply to keep interest rates near zero, which helps the big banks but crushes small bank interest rate margins.
- It will take over 24 million man-hours per year to comply with the rules imposed by Dodd-Frank. It only took 20 million man-hours to build the Panama Canal.
And, look at what’s happened to our capital markets. For decades, U.S. stock exchanges were seen by companies around the world as the most prestigious location to list shares. But the number of public listings in the U.S. peaked at 8,884 companies in 1997. It’s now down to roughly 5,000. The dot-com bubble and the Great Recession wiped out many publicly-traded companies, but also regulations such as the Sarbanes-Oxley Act, Section 404, Reg FD, etc. have had a chilling effect on companies wishing to go public in the United States. Public company regulatory costs are estimated at $2.5 million annually for an emerging growth company after it goes public and can consume most of its profits.
At the same time, emerging markets such as China have lured more companies to their exchanges. Between 2000 and 2012, the U.S. averaged just 177 listings annually while the number of listings on exchanges in China nearly tripled to more than 4,000.
Why does this matter?
Emerging public growth companies create the most jobs. Big companies don’t create jobs. The typical acquisition strategy for most large tech companies is to buy the technology and fire the people.
So what do we need to do to restart our entrepreneurial engines and again foster free and voluntary exchange? We need to address three political and policy issues that stand in the way:
- The first is the cost of good intentions. We’ve passed thousands of laws and regulations – many well meaning – that have slowed the pace of innovation and economic growth to a crawl.
- The second is that we have 19th-century regulations and government crippling 21st-century innovation; and
- Third, we have an ideological and secular war being waged over economic growth. We want it. The Left doesn’t.
Democrats are obsessed with income inequality. They believe it’s a winning issue. We have reached a point when the desire for robust economic growth has become controversial and politically contentious. Social justice (“income inequality”) and environmentalism (“sustainable growth”) are vying with economic growth for political traction.
If we can’t agree on the ends for policy, we’re certainly not going to agree on means.
Also, liberal ideologues want control and are leery of unleashing the private sector and wealthy individuals to invest, innovate, and create jobs. While such policies have a history of working, the cost – yielding power over the economy – is too high for them.
Don’t look to Congress for ideas. Most members just don’t get it. In the first place, they’re mostly lawyers or professional politicians. Entrepreneurs look forward; lawyers are trained to look backward. In the second place, they’re legislators, they want to pass laws. We do not need new laws. We need to eliminate many existing laws that are antiquated and needlessly meddle in our daily lives. And finally, they want to get re-elected . . . which means promising more good stuff from the government.
How do we win the battle of opinion to roll this back? Let’s start by seizing the moral high ground. We are a country where historically, voluntary exchange between free people, and not government coercion, has been a guiding principle.
Get people asking the questions: who are these people who are passing these laws and writing these regulations? What makes them qualified to tell us how to run our lives and our professions?
If we frame policy issues through the prism of voluntary exchange and with the goal of fostering entrepreneurship–and I believe that most Americans will agree with us–we can energize America to rediscover her entrepreneurial roots.