Economics, Regulation

Thanks to Regulatory Burdens, We’ve Got a Jobless and Creditless Recovery

There’s little disagreement that the U.S. labor market is struggling to create jobs in what is probably the worst “jobless recovery” in history. From the peak of 115.6 million private-sector jobs in January 2008, private-sector employment today is slightly below 109 million, or about 6.7 million fewer jobs than when the recession started. At the current rate of private job creation over the last year, about 141,000 jobs per month, it will still take roughly four more years just to replace the current 6.7 million job deficit. When you also consider the addition of millions of new entrants every year into the labor market, it will likely be even longer before the U.S. labor market ever approaches anything close to full employment again.

Where there is some disagreement is about what is causing this protracted jobless recovery. AEI fellow Peter Wallison offered one explanation for the sluggish job creation this week in The Atlantic: substantial regulatory uncertainty. Faced with the complexities and uncertainties of pending major health care (Obamacare) and financial (Dodd-Frank) reforms, firms are simply reluctant to hire new workers.

Another regulatory burden that might further explain the anemic job creation is offered this week by e21 in a commentary titled “Why Aren’t Banks Lending?: Credit Growth & Regulatory Micromanagement.” The article outlines what might be called a “creditless recovery,” where the amount of credit being created in the U.S. economy is not sufficient to support robust economic growth and healthy job creation.

The chart above illustrates graphically the current “creditless recovery” by displaying the quarterly ratio of total credit market borrowing to GDP back to 1952. Despite some improvements over the last year, the amount of credit available in the U.S. economy in relation to the size of the economy (GDP) remains at a critically low level, less than half of the historical average. The flow of credit is often described as the “lifeblood of the economy” (even by President Obama), and without that critical ingredient, it’s no wonder that economic and job growth are so anemic.

What explains the “creditless recovery”?

According to the e21 analysis, the credit sclerosis is being caused by a new era of “regulatory overreach” where the “judgment of bankers is being supplanted by the judgment of regulators.” In this oppressive regulatory environment, many lenders have been refusing to make many high-quality loans to creditworthy customers that would normally pass even the most conservative underwriting standards. While a certain amount of conservatism in bank lending is certainly warranted following the financial crisis, it appears that the recent “regulatory micromanagement” has unnecessarily stifled credit creation, and in the process stifled economic and job growth.

To jumpstart job creation, Wallison recommends repealing Obamacare and Dodd-Frank. We might also consider reducing the regulatory overreach and micromanagement in the banking industry that is contributing to both a “jobless and creditless recovery.”

4 thoughts on “Thanks to Regulatory Burdens, We’ve Got a Jobless and Creditless Recovery

  1. WC: you do understand that he’s talking about the private economy? He’s talking about mom & pop trying to get a loan to open a dry-cleaning store, or any of thousands of other small business opportunities that need extra cash to get started or to expand. There’s only two ways of getting that extra cash, and only one that doesn’t involve giving up a share of profits – credit. Dodd-Frank has clamped down on credit. Not surprisingly, nobody is creating any jobs. If you don’t see the relationship, stay under your rock and don’t bother us. (Obamacare is the “1″ in this 1-2 whammy, Dodd-Franks is only #2. A real piece of #2.)

    The hyperregulatory ObamaState has created so much uncertainty that, even though companies are making money, they’re not expanding and they’re not hiring because they can’t accurately estimate how much it will cost to employ anybody under Obamacare, how much taxes will be after next year, how much energy will cost after Obama shuts down the coal industry and extends his permitorium on oil drilling. Combine Obamacare, Dodd-Frank, hyperactive anti-business agencies like the NLRB and EPA and you’ve got an economy about to double dip. The normal “business cycle” has been suffocated by regulations so badly that even time won’t restore prosperity, because time won’t make all those regulations go away.

    Of course, WC, if you’re talking about the gov’t borrowing money, you have a good point.

  2. A very similar assessment was made last week by John Taylor, a professor of economics at Stanford and senior fellow at the Hoover Institution, in a WSJ article titled “The End of the Growth Consensus.” He notes how the non-interventionist economic policies of the 1980′s led to much more robust growth after the 1981-82 recession than we are seeing today. As he says, “Attention was paid to the principles of economic and political liberty: limited government, incentives, private markets, and a predictable rule of law. Monetary policy focused on price stability. Tax reform led to lower marginal tax rates. Regulatory reform encouraged competition and innovation. Welfare reform devolved decisions to the states. And with strong economic growth and spending restraint, the federal budget moved into balance.”

    He goes on to note how the swing back to strong government interventionist policies starting in the late 1990′s resulted in an epidemic of unintended consequences—a financial crisis, a great recession, ballooning debt and today’s nonexistent recovery.

    You can view the full article here:

  3. I will reserve judgment on the ObamaCare Arguement. However, (as a consultant to a major financial center bank (to bug to fail) I do not think the Dood Frank is the problem (It is focused on Consumers not Businesses).

    Nor do I think that Dood-Frank is the ansewer. I believe the reimposition of Glass Stegal and a return to state regulation of banks is perhaps a start.

    I welcome all thought on these starter comments.

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