Trump's Deregulation Efforts Are Driving Market Dynamism
U.S. stock markets began rising almost immediately after Donald Trump was elected, and have now produced more record highs than at any time in the last 20 years. What accounts for this phenomenal growth? Many economists will attribute the markets’ enthusiasm to the possibility of tax reform that President Trump promised during the campaign. But business-friendly tax reform is at this point only a future possibility; reductions in regulation are happening now — and that’s the key to understanding the market’s dynamism.
This may seem counterintuitive to those who have been following the Trump administration’s regulatory reforms. Aside from a few executive orders and two Treasury reports about financial regulation, nothing much has happened. Moreover, it is becoming clear that reform of the Dodd-Frank Act — which made headway in the House with the adoption of Jeb Hensarling’s Financial Choice Act — is going nowhere in the Senate as long as the filibuster rule remains in effect.
But the problem of excessive regulation was so severe, and has been such an impediment to economic growth, that the mere slowing of new regulations can stimulate substantial new business confidence, investment, and hiring. And a slowing has occurred since Donald Trump took office.
During the Obama administration, the number of new regulations averaged more than 3,000 per year. Many of them — net neutrality rule from the FCC, the fiduciary rule from the Labor Department, Operation Choke Point led by the Justice Department, and the mortgage rule issued by the Consumer Financial Protection Bureau — reshaped (or threatened to reshape) whole industries. Many other rules from overzealous bank examiners reduced the formation of new small banks to almost zero. These rules also raised the compliance costs of existing banks to such an extent that there were little funds left for lending to the small firms and startups that are the source of most economic growth and new employment in the United States.
All this becomes clear if we look at the Obama administration as a whole. During the eight Obama years, economic growth was slightly less than 2 percent — far below any recovery in the last 60 years.
During this period there were only four policies that were significant enough to affect economic growth: the Economic Recovery Act, which spent over $800 billion on “shovel ready” projects; the Affordable Care Act, which poured more money into the economy through health-care subsidies; and the Fed’s Quantitative Easing (QE) program, which succeeded in keeping interest rates at historic lows.
If Keynesian deficit spending actually did what its supporters claim, all of these policies should have stimulated substantial economic growth. It didn’t happen. A major reason for this was the Dodd-Frank Act — the fourth significant Obama policy — which was by far the most restrictive regulatory law since the New Deal. This law alone authorized almost 400 new regulations, many of which still had not been issued when the Obama administration ended.
Dodd-Frank was based on the false premise that the financial crisis was caused by insufficient or lax regulation of the financial industry. As I showed in my book, Hidden In Plain Sight, the financial crisis was actually caused by the government’s housing policies, which — because they were ignored as a factor in the crisis — continue to this day.
Along comes the Trump administration. In every agency where Trump has nominated the senior policy official, the need for new regulation — and the value of old ones — is being questioned. Both Treasury reports emphasized deregulating the economy through administrative action, which is clearly the most likely route to needed reform.
The business community is recognizing that they can plan for growth without new regulations adding to their costs. That’s why the markets are exuberant. Tax reform, as important as it is, will only be icing on the cake.
Peter J. Wallison is the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute. He is writing a book on the growth of the administrative state.