“There are persons who constantly clamor.   they complain of oppression, speculation and pernicious influence of wealth.   They cry out loudly against all banks and corporations, and a means by which small capitalists become united in order to produce important and beneficial results.   They carry on mad hostility against all established institutions.   They would choke the fountain of industry and dry all streams.” – Daniel Webster, 1838.  

Sometimes we are amazed at how things change, but then really don’t. Daniel Webster made that speech on the Senate floor more than 175 years ago. It is a speech one could very easily imagine hearing today. There has, and always will be, a struggle between industry and government oversight. The question is not whether we need regulations (we certainly do, especially for environmental and safety standards), but whether we are at a point of over regulation in our country? Is the current level of regulation actually hurting wages and growth in the United States? It is our opinion that one of the key reasons we continue to see sub par growth in our economy and in our level of wages is because of too much regulation. Here is our evidence:

Chart 1 on the right shows the growth in the cumulative number of pages of regulations since 1997. Last year alone, there were over 75,000 pages of new regulations issued by the Federal government. This is more than the total amount of pages of regulations that existed in 1975 when there were 71,224. Since 1999, we have seen exponential growth in regulations. Why? We believe that the market crashes of 2000 and 2008 have caused regulators to feel the need to add more regulations. Note that regulation growth slowed dramatically between 2004 and 2007, a time when GDP growth in the U.S. was hovering above 3% per year. The last time we saw regulations grow rapidly was in the 1930’s. From 1930 to 1933, GDP growth was -8.5%, -6.4%, -12.9% and -1.3% respectively. More regulations intuitively make sense, but they are a disaster for the economy. The economy falters, people suffer, and the government tries to intervene and protect the people while actually hurting them.

We all know that nominal wages in America are not going up. What is more important than growth (or lack thereof) in nominal wages is the fact that “real” wage growth in the U.S. continues to decline. Said another way, wages are decreasing after accounting for inflation. As you can see in Chart 2 below, over the same time period that regulations have been rising, real wage growth has been declining. We can’t say with certainty that there is a direct correlation between the two, but the charts are fairly compelling evidence to us that they are.

Consider what has occurred in our industry. As a registered investment advisor, THOR is regulated by the Securities and Exchange Commission. Since our founding in 1992, we have seen regulations increase after the market corrected in 2000 and again in 2008. Having an attorney on staff – Greg Luke in our case – has become a necessity for compliance reasons. We also have retained a consultant at a cost of over $8,000 annually to assist Greg in complying with the growing number of regulations. Just based on the cost of compliance, it would be difficult to start THOR in today’s over-regulated economy.

Some would say, “that is just THOR’s own individual story and regulations are not impacting the economy as a whole”. Chart 3 on the right shows firm entry and exit rates in the U.S. For the first time in decades, we have more firms exiting our economy than entering. The chart has a similar pattern to real wages in that it is inversely related to the increase in the number of pages of regulation. Based on our own experience at THOR, and the evidence in these three charts, government regulations have become a real drag on our economy.

We would contend that if you truly want to have an impact on the economy and improve the standard of living here in the US, our government should make it easier for individuals to start their own business, not make it more difficult. None of us will see real wages rise if we all work at Walmart, even with Walmart increasing its minimum pay to $9 an hour. Entrepreneurship has almost always been a path to wealth and growth in our country. We believe that regulators, for the most part, create regulations to protect our society;   however, there is a fair amount of evidence showing that this protection is stifling growth in our economy. We believe less regulation is what our economy needs today and in the future.