Why does the market just keep going up?
The indexes are once again at fresh new all time highs. Since the election, the S&P 500 is up 19% and the Dow Jones and NASDAQ are up more. Second quarter GDP grew at 3.1%, the highest in a long time, and most expect the fourth quarter to be even stronger.
A main reason is confidence. Business and consumer confidence numbers are higher than they’ve been in over a decade. There is a rising level of faith in the longer term trajectory of the economy and the market under a business friendly administration.
After the last eight years there is a lot of low hanging fruit. Proposed fiscal stimulus like tax reform and tax cuts can propel economic growth to a new level, and passage in some form is regarded as likely. It also helps that the global economy is the strongest it’s been since 2010.
But there’s something else. A very positive economic force that gets scant attention is powering the economy higher. It’s called deregulation.
President Trump has vowed to “cut all regulation by 75%”. So far, he is following through. The Administration is on pace to cut regulations more than any other Administration in history by far. Regulations are being slashed in energy, healthcare, manufacturing and other sectors. It looks like it might actually make good on that 75% cut, or close to it.
In order to realize the benefit of deregulation it’s worth examining the massive extent of the economic burden caused by excess regulation.
Last year, Congress passed 214 new laws. Those laws came with 3,853 new rules. And that was just one year. This has been going on for decades. There is no system for discarding old regulations and new ones just get piled on top. Decades of rules build up like plaque that hampers the healthy function of the economy.
How bad is it? A publication called the Code of Federal Regulations lists all the Federal regulations currently in force. The publication is 175,000 pages long. If the pages were laid out end-to-end, it would stretch for 25 miles. It is estimated that the regulatory state cost the economy $2 trillion every year. That comes out to $15,000 per US household every year.
If the annual cost of federal regulation to the US economy were the GDP of a nation state, it would be the seventh largest economy in the world. A recent study at George Mason University states that if the regulatory burden had remained unchanged from 1980 to 2012 the US economy would be 25% larger, an additional $4 trillion per year in GDP.
Clearly, there is a lot gain by scaling back the regulatory beast. Most business owners will tell you that regulation is the biggest problem, even more than taxes. And the beautiful thing is that most regulations can be trimmed under the radar without passing legislation.
Right now, deregulation is the most powerful tangible force driving this economy. And it just continue to a driving force in the years to come.
Tom Hutchinson is a Wall Street veteran with extensive investing and finance experience.
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