In the wake of the recent elections, there is one thing both parties still agree on: Middle-income families are being squeezed and voters are angry. But why? And what should be done about it?
Our politicians have placed any number of barriers in the way of prosperity, and one of the most costly has been the Dodd-Frank financial reforms (DF). Congress passed this 2,300-page law in 2010. It has since spawned a massive new regulatory environment with an impact reaching far beyond the nation’s $1.1 trillion financial services industry.
The Government Accountability Office provided an original estimate of DF’s direct cost: $2.9 billion over the first five years. If that is accurate, it means the law will cost the taxpayers roughly $0.6 billion annually, or $5 for each private-sector worker.
The direct cost to taxpayers is only the beginning. Historical estimates show private-sector costs to comply with government regulations tend to be 36 times the direct cost to government. If DF is typical, the annual cost of compliance will be more like $22 billion, or $188 for each private-sector worker.
Unfortunately, there are numerous indications the DF regulations are far from typical. Since the passage of DF, various banks from the smallest to the largest have announced layoffs amounting to roughly 10 percent of their employees. In many cases, the layoff announcements came while banks also announced they were aggressively hiring workers to comply with new regulations. If the 10 percent figure is characteristic of the entire financial industry, it means DF has a compliance cost of close to $120 billion annually, or just over $1,000 for each private-sector worker.
As burdensome as that estimate sounds, it too likely understates DF’s compliance costs. The financial industry is unique in directly impacting every other part of the economy. Thus regulations affecting finance have a disproportionately greater impact than other regulations.
It’s more appropriate to compare compliance costs of DF with those associated with previous financial reform legislation. Sarbanes-Oxley (SOX), the predecessor to DF, created 16 new regulations. Various surveys showed the cost of complying with those regulations from 2004 to 2007 averaged roughly $9 billion a year. In a recent analysis, the Davis Polk law firm identified 398 explicit new regulations created by DF, making it at least 25 times more extensive and complex than SOX.
If the costs of complying with SOX are the more reasonable gauge for those associated with DF, it could easily cost 25 times more than its predecessor, or $225 billion a year. This amounts to almost $2,000 for each private-sector worker.
In addition to the size and complexity of DF, the legislation has taken on a life of its own. By last year, the original 2,300 pages of the law had spawned 14,000 additional pages of regulations. And regulators have gotten around to implementing only 39 percent of those regulations. This is a law that keeps taking more and more out of the economy.
DF seriously undermines people’s living standards. Whenever laws take resources away from the production of goods and services people want and allocate those resources for the paperwork government demands, living standards decline. This is particularly true for low- and middle-income families, whose incomes tend to be disproportionately affected by such actions.
When fully implemented, DF is likely to reduce the goods and services available to a typical U.S. worker by anywhere from $1,000 to $2,000 a year. Repealing this horrendous piece of legislation is one way to restore the gains in living standards that were once a hallmark of the U.S. economy.