The New Regulatory Regime

I have been encouraging my students to listen to Marketplace®, the syndicated audio journal produced on the USC campus. One of the more illuminating series airing on Marketplace® is a set of five shorts titled “The Price of Profits,” which, this last Friday, aired a segment titled “Shareholder Values versus Jobs.”

The segment focuses on the changing shape of employment in Nashville, poster child of the new economy. Like many southern states, over the past thirty years Tennessee has enacted a steady stream of laws that aims at attracting capital. Capital is felt to be attractive because where capital goes, it stands to reason, jobs and revenues follow. Except that often the costs to municipalities, counties, and states for attracting capital include tax incentives (even offering handsome capital incentives) and weakening or eliminating labor standards; all of which serve to eliminate or reverse the benefits felt to arise from attracting capital in the first place.

Which raises the interesting question: who actually supports these efforts?

No mystery here. Capital is attracted to places where it is felt to perform most efficiently for shareholders. Municipalities, counties, and states that eliminate industrial standards and taxes make these places attractive to the owners of capital.

My students will recognize that this pattern of deregulation has been recognized and understood for well over a century. My students read WS Jevons, C Menger, and A Marshall, all late nineteenth century economists who recognized and understood this pattern. Chiefly, however, its principle interpreter has been JM Keynes, who, following A Marshall, noted that, wherever investment decisions led investors to adopt policies leading to declining wages and declining consumer demand, there markets suffered irreparable harm in the short-run from sagging demand and, in the long run, from additional costs arising whenever businesses face additional factor costs.

One common response to these additional costs is to further exacerbate the problem by shifting the regulatory burden off the shoulders of investors onto the shoulders of working families. The idea, of course, is that, if we eliminate the drawbacks to investment and economic expansion, investors will plow their capital back into job creation, which, in turn, helps reignite demand. The problem is that these regulatory changes favoring capital teach precisely the opposite lesson. They teach, in effect, that investors can enjoy handsome returns — better returns, in fact — maintaining the liquidity of their assets (not fixing them to factors of production) than plowing them into factories and jobs. In other words, the very regulations themselves (which, in effect, eliminate constraints on private capital) remove the incentives to investment in jobs and factories.

Curiously, this predictable response to the new economy is also playing out in Europe. Wherever capital can find favorable conditions — i.e., deregulated labor and capital markets — it will migrate, creating precisely the credit crunch we see in the struggling economies of the EU. Where the regulatory structure remains strong, by contrast — e.g., in Germany, France, etc. — there, capital markets remain strong and consumer demand is strong. So, for example, in a manner similar to the US, where owners of capital prefer to live, dine, and raise their families in NYC, San Francisco, Chicago, and Minneapolis — places with stronger regulations on labor and higher corporate taxes — areas of attractive rent-seeking opportunities (e.g., Greece) suffer.

A common market, where a shared set of regulations place the same constraints on capital throughout the market, leads to greater consumer demand and economic growth.

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