The quantity, cost and allocation of capital makes a huge difference both in the job market and business startups, as well as improving the level of success that existing businesses can achieve. Improving market access to capital is necessary to having a vibrant, healthy and growing economy. Since the downturn of the last recession, however, this has been a problem with access to capital, particularly for small businesses. There are many potential areas where improving public policies and lessening regulations can improve small business access to capital and create economic efficiency and growth. Here are some examples of how regulations are effecting the U.S. economy:
- Dodd-Frank’s financial regulations are estimated to cost $36 billion and add 73 million hours of paperwork. These costs equate to $310 per household. While this has occurred, consumer credit has fallen by nearly 15%. Correcting these regulations can help.
- Another opportunity for improvement is that regulators should relieve the lending cap on credit union loans to businesses. That cap directly limits loaning to small businesses.
- In addition, some employers have been delinquent in pension deposits that they were obliged to make. The S&P 500 companies operate pension funds that are $375 billion underfunded. State and Local government pension funds show unfunded liabilities of over $5 trillion. This constitutes a looming pension debacle, but an opportunity for improvement.
- Government-operated National Flood Insurance Program (NFIP) works as an impediment against private flood insurance competition. The program, now around $25 billion in the red, tends to subsidize higher income consumers at the cost of lower income consumers. Moreover, the government program lacks fiscal restraint by subsidizing the rebuilding of structures in areas that are prone to repetitive storm damage, instead of encouraging mitigation. The private sector is willing to provide flood insurance and more able to match premiums to risk, but regulations are hampering this market entry.
- Property insurance price controls and regulatory cross-subsidies have adverse effects that reduce capital needed to assure that consumers get claims paid. In Florida, for example, subsidies benefit multi-home owners who may live in Canada or Monaco, at the expense of Floridians. These subsidies represent welfare for the rich. In North Carolina, good drivers pay a surcharge in order to keep premiums lower for drivers deemed to be too “risky.” These are a few examples where sensible policy solutions are needed.
Future work on the Lost EconomyTM will investigate workable policy solutions in financial service markets.