Overregulation, not phantom spending cuts, caused economy to shrink in fourth quarter

The president’s re-election means that executive agencies that had been facing bipartisan criticism for being out of control before the election, such as the Environmental Protection Agency and Department of Labor, now have free rein. Indeed, after the election a torrent of new regulations that had been on hold for more than a year were suddenly released — in President Obama’s December Unified Regulatory Agenda and elsewhere. National Journal reported just after the election that “federal agencies are sitting on a pile of major health, environmental and financial regulations that lobbyists, congressional staffers and former administration officials say are being held back to avoid providing ammunition to Mitt Romney and other Republican critics.”

As my Competitive Enterprise Institute colleague Ryan Young has put it: “Now that this ammunition will no longer have electoral consequences, the EPA can move ahead on delayed rules on everything from greenhouse gas emissions to ozone standards. Rules from the health care bill and the Dodd-Frank financial regulation bill also likely will make themselves known in the weeks to come.”

In addition to the domestic rules, the Basel III international banking accord that was scheduled to go into effect this year threatened to severely constrict banks of all sizes from making loans even to high-quality borrowers. Under the regime, banks would have been forced to hold two to three times as much capital against most mortgages and small-business loans as they have to under current regulations.

If there’s one thing worse for the economy than uncertainty, it’s the certainty that thousands of pages of new regulations will go into effect. The fourth-quarter economic contraction was likely caused by entrepreneurs and investors seeing this future of shackling regulations and pulling back their investments in response.

The good news is that these economic problems can be fixed if the regulatory onslaught is reversed or at least significantly reduced. For instance, the first quarter of 2013 may see stronger growth because Basel III was delayed and revised to allow banks to hold different types of capital. To get the economy growing again, President Obama and Congress should focus on making the “regulatory cliff” smaller.

John Berlau is a senior fellow for finance and access to capital at the Competitive Enterprise Institute. Evan Woodham, a CEI research associate, contributed to this article.