Hit & Run

An Op/Ed That Made Me Cheer! And You Will Too!

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The Washington Post hit something of an op/ed trifecta this morning. Reason TV editor in chief Nick Gillespie just blogged Charles Krauthammer's "Don't Touch My Junk!" op/ed, but the one that got me cheering over breakfast was "Strangling innovation with redtape" by confessed Democrat and software entrepreneur Morris Panner. He points out that regulations and legislation emanating from Washington, and of which the Obama administration and the Democratic Congress are so proud, are stifling the true engine of economic growth, technological innovation. Some insights from Panner:

As the fall campaigns wore on, I had found myself listening closely to the Tea Party, nursing the hope that its message would push both major parties to change the way they do business.

To understand my motivation, pick up the November issue of Washingtonian magazine. The annual Salary Survey notes on Page 81 that top trade association leaders (industry lobbyists) make multimillion-dollar salaries to "keep tabs on what the federal government was doing or might do."

These outsize earnings are symptomatic of a disease that is slowly killing the American economy. We are creating so much regulation - over tax policy, health care, financial activity - that smart people have figured out that they can get rich faster and more easily by manipulating rules on behalf of existing corporations than by creating net new activity and wealth. Gamesmanship pays better than entrepreneurship.

As Reason has been pointing out incessantly, the jobs "created or saved" by the stimulus are basically government jobs or jobs in the ever metastasizing rent-seeking sector. Rent-seeking "occurs when an individual, organization or firm seeks to earn income by capturing economic rent through manipulation or exploitation of the economic or political environment, rather than by earning profits through economic transactions and the production of added wealth." This describes most of the activities that occur inside the capital beltway today. Panner continues:

Given the difficulty of starting a company from scratch, and how economic activity is generated today, you can start to see why, if you were a rational market actor, you would be trying to get a piece of the government action.

The combined expenditures of federal, state and local government are rapidly taking over our economy. At the beginning of President Obama's term, government spending made up 35 percent of gross domestic product. Now, it is up to almost 45 percent, which puts us seventh among advanced economies.

And the Obama administration's new regulatory initiatives make this considerably worse in subtle ways.

The two largest pieces of legislation enacted in the past two years - health care and financial reform - are very vague. Take the new Consumer Financial Protection Bureau. It has a broad mandate to protect us from financial abuse, but when it comes to the actual implementation, the Brookings Institution wrote that unelected regulators will decide "almost everything" about how the organization works.

This is highly dangerous to innovation, which depends on clear and transparent rules. The more complexity, the more incumbents are favored. They have the capital to participate in complicated regulatory proceedings. They can hire high-priced lobbyists to present facts in a light most favorable to them. The more incumbents are favored, the harder it is for new companies to gain traction.

For a preview of what a complex regulatory process looks like, consider our tax system. The World Bank ranks the United States 62nd in the world in terms of how easy it is to pay taxes - and with a 16,000-page tax code, this is no surprise. In 2009 and 2010, Capital Tax Partners, a leading lobbyist representing Goldman Sachs, Apple and others, earned about $20 million in fees, according to the Center for Responsive Politics.

Panner then forcefully advocates a campaign for transparency in legislation, regulation, and the tax code. Hopeless dreaming? Maybe not. President Ronald Reagan oversaw the adoption of the Tax Reform Act of 1986 which dramatically simplified a similarly luxuriant internal revenue code. Was it just coincidence that the Long Boom began about that time?  A good place to start might be Rep. Paul Ryan's (R-Wisc.) Roadmap for America's Future.

Panner's whole op/ed is well worth pondering.

Trifecta? Well, the subject of my next blogpost will be Congressman Sherwood Boehlert's climate change op/ed.