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The Role of Regulation in Small Business

Catherine Rampell and Binyamin Appelbaum, New York Times
Thursday, 10 Nov 2011 | 12:26 PM ET
Government Regulation
CNBC.com
Government Regulation

In Wednesday night’s Republican debateon the economy, Herman Cain suggested that the chief problem holding back companies was regulatory uncertainty. Other candidates, including Gov. Rick Perry of Texas, have made similar claims about regulatory burdens.

But in surveys of small businesses conducted by the National Federation of Independent Business, a plurality of companies consistently say that the “single biggest problem” they face is low sales, not red tape or taxes.

The Labor Department’s data on mass layoffs echo this finding. For the last three quarters, “governmental regulations/intervention” have accounted for less than 1 percent of layoffs.

As for hiring, one reason to believe that a lack of consumer demand, rather than regulations, is discouraging employers is that businesses are not even fully using their existing staff and equipment. If regulatory requirements were so burdensome but the demand was there, companies would most likely step up their use of what they already had on hand.

But the average length of the work week is still shorter than it was before the recession began, and has been basically flat since the start of this year.

Additionally, as pointed out by Janice Eberly, the assistant secretary of the Treasury for economic policy, companies are also letting their industrial resources lie fallow rather than running everything at full capacity. “The share of total potential industrial output in use remains 3 percent below its long-run average,” she writes. “Low capacity utilization is inconsistent with concerns about future regulatory risk, but aligns with weak demand holding back current production.”

Making Bad Loans

Several candidates made the argument at the debate that the government forced mortgage lenders to make bad loans. But in reality, most subprime loans were made by companies that were not subject to any kind of federal regulation.

Furthermore, there was no need to force anyone to make the loans. Financial companies jumped into the market. The major investment banks lined up to purchase subprime lenders, the major retail banks created subprime lending divisions, and a generation of upstart subprime lenders like Ameriquest and Countrywide were briefly celebrated as rising stars of American business.

No executive of a major mortgage company said at the time that the government was forcing them to make subprime loans. They said they did it because they thought they would make money. And even now, after the crash of the housing market, with all the temptation to point fingers, it is awfully hard to find a mortgage executive who echoes the argument of the Republican candidates.

Studies of the financial crisis do assign a significant measure of responsibility to the government, but mostly for its failure to regulate these lenders.

Fannie Mae and Freddie Mac, the government-backed mortgage finance companies, did provide financing for large numbers of subprime loans, mostly by purchasing mortgage securities for their investment portfolios. But the historical record shows that they came late to the party, diving into subprime lending because private companies were stealing their business and profits. As such, most experts have concluded that they helped to expand the bubble, but they did not create it.

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