Costly Regulations Hinder US Economic Growth

By , H. Erich Heinemann is chief economist of Ladenburg, Thalmann & Co., investment bankers in New York.

THE American economy is moving steadily into expansion. On Friday, Washington raised its estimate of growth in the first quarter to 2.4 percent from 2 percent. However, there are limits to growth.

Robert Crandall of the Brookings Institution, a think tank in Washington, charges that federal health, safety, and environmental regulation is "absurdly inefficient." He says that "populist groups see environmental policy as a means to rein in untrammeled economic progress."

No one knows the true bill for such regulations, but Dr. Crandall says that "the full cost of environmental policy will soon exceed defense spending" (roughly $290 billion a year at present). The vast bulk of this burden falls on the business sector in the form of "mandated expenditures," a thinly disguised implicit corporate income tax.

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The principal result of this approach was a drop in profitability of United States corporations over the last decade to levels far below the norm of the last half century. The business sector accounts for about two-thirds of total private saving and almost all wealth-producing investment.

The decline in profitability has undercut the incentive for business investment. The substandard level of investment has deprived US workers of the tools they need to maintain their standard of living. It is the root cause of the slow motion in the US economy.

While many factors contributed to the riots in Los Angeles, slow growth - which saddles families at the bottom of the income scale with a disproportionate load - certainly played a critical role. The US is paying a high price for misguided health, safety, and environmental rules. Growth may not be a panacea, but the nation is surely far better with it than without.

Meanwhile, the financial community is having trouble interpreting monthly gyrations in economic data. Wall Street spin doctors never let facts get in the way of a good story.

Practitioners of this arcane craft foment market uncertainty. As moods swing from euphoria to despair, trading opportunities develop, especially in government securities.

Minutes after the Census Bureau said that housing starts fell 17 percent from March to April, one of lower Manhattan's merchants of gloom proclaimed that "the housing recovery is over. The risk of a triple-dip [recession] is rising. We think the Fed will vote to cut the discount rate 50 basis points at Tuesday's [May 19] Federal Open Market Committee meeting. If they don't, they are asleep at the switch."

Of course, the Fed did not cut the discount rate.

So far as housing is concerned, home builders and home buyers got carried away under the combined prod of falling rates and the promise (since reneged) of a $5,000 tax credit for first-time home owners. In effect, participants had to pull back to get supply and demand into balance. Including last month's drop, housing starts have risen at a rate of 30 percent for more than a year.

The story in foreign trade is similar. There was a marked bunching of big ticket exports of capital goods in February (mostly jet aircraft), which made March look weak by comparison. For the first quarter as a whole, real merchandise exports totaled a record $103.6 billion, up 10 percent in the last year.

The US has perennial trade surpluses in nonauto capital goods, services, industrial materials, and food products. These surpluses are almost equal to the persistent deficits in petroleum, automobiles, and consumer goods. Press reports about US foreign trade suppress data about the growing surplus in trade in services, currently about $3.5 billion a month in 1987 dollars.

The overall US payments deficit is less than one-half of one percent of gross domestic product. This deficit is likely to rise moderately this year and next. Imports will rise in line with consumer demand.

Exports should keep climbing, reflecting the marked improvement in the competitive position of US industry. As a result, the deterioration in the trade balance should be modest in relation to earlier business cycle recoveries.

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