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On the Economy

Deregulation will not create jobs

Republicans' jobs proposals rely heavily on deregulation, but a lenient tax code is largely to blame for our economic woes

By Jared BernsteinGuest blogger / September 6, 2011

Republican 2012 presidential hopeful and former Utah Gov. Jon Huntsman, center facing, talks with local residents at a breakfast at American Legion Post 3 in Nashua, N.H.Republican jobs programs like Huntsman's rely heavily on deregulation, which the author argues would be ineffective.

Cheryl Senter/AP/File

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Though it tops recent lists of Republicans’ jobs proposals, I find it very hard to take seriously the idea that deregulation would move the jobs needle at all. Here’s why.

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To put it economic terms, the dereg crowd vastly overestimates both the magnitude of regulations and the elasticity to which that magnitude is applied.

To estimate a jobs impact of a policy change, you need to know the magnitude of the change (X) and an “elasticity” (e) to map that change onto job gains or losses. If research shows that a 1% tax on soda (that’s X) will reduce soda consumption by 0.5% (that’s e) then it’s fair to guess that a 10% tax will reduce soda sales by 5%.

The R’s making this argument in the regulatory context exaggerate both X and e.

Re X, the first problem, as meticulously described in this analysis of EPA anti-pollution regs by the nonpartisan Congressional Research Service, is that the costs typically assumed by industry lobbyists are a lot higher than what actually comes out of the policy process.

The WaPo, in an excellent editorial today on these points, summarizes the CRS findings:

“Fears of disruption to the power sector are overblown, the CRS said: Newer coal power plants already have pollution controls, and many older ones are set to shut down anyway, in part because burning cleaner natural gas is now so cheap. Meanwhile, studies that many critics continue to rely on in their forecasts of expensive regulatory disaster assume stringent provisions that the Obama administration never proposed.”

Second, and this creates an upward bias to both X and e, you can’t only count the costs of regulations, you have to consider the benefits as well. Again, from the WaPo editorial:

“Reasonable people can disagree on how much economic cost is worth bearing for how much environmental benefit. But the Republican critique seems to deny that such a trade-off even exists.”

Suppose an allegedly “job-killing” regulation led to the improvement in public health, thus decreasing health costs or lost work days. To ignore these factors is to inflate both X and e.

Third, I know of no good, clean estimates of e. Perhaps this has to do with the difficulty measuring X, the true cost of such regs, as the CRS document elaborates. The phase in and implementation of these regs is much harder to measure than a tax change or minimum wage increase, where you have a better chance of cleaner analysis. But whatever the reason, the job-killing claims are largely, if not wholly, speculation.

This also squares with recent history and what employers themselves tell us (re that link, these McClatchy folks consistently do great work getting at the facts behind misleading political arguments). The regulatory regime simply hasn’t changed much over the years, and much of what they do complain about has been around forever. I’ve heard lots of complaints over the years about safety regs, worker comp claims, anti-discrimination cases, and I know for a fact, putting aside any value judgments about their importance, that these regs absorb employers’ time and money.

But there’s nothing new here. In fact, these R’s clamor for deregulation (and tax cuts) in good times and bad, which should also make you suspicious–they’re just appending the word “jobs” to their permanent agenda.* What’s new–although it’s gettin’ pretty old–is that demand crashed in the Great Recession and without customers, there’s no incentive to hire.

If anything, the regulatory regime was more business friendly in the Bush versus the Clinton years, but employment grew about four times as fast in the Clinton years on an annualized basis.

And what’s most incredible about this Republican talking point is that it’s precisely lax regulation, specifically in mortgage underwriting and financial markets, that got us into this jobless mess in the first place.

At the end of the day, this is really just a case of the folks who drove us into the ditch clamoring to get the keys back.

*Another WaPo article today points out the following (my bold):

Rep. Cynthia Lummis (R-Wyo.) had previously failed to win passage of a bill to help the soda-ash mining industry in her state. This year, she introduced the same idea with a new name: “Soda Ash Royalty Extension, Job Creation, and Export Enhancement Act of 2011.”

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