Investment, employment trends belie claims that regulation and ‘too much government’ impede recovery

The claim that an excess of regulatory activity is stifling the economy and jobs growth continues to ignore the roots of the economy’s problems (the collapse of the housing and financial sectors) and the reality of current economic trends. We will save discussion of the causes of the downturn for a different day, except for noting the irony that regulatory opponents are fighting implementation of the stronger financial rules that could help prevent future collapses. Instead, we will update key information from a previous EPI analysis of whether business decisions, specifically investments, are consistent with the excessive regulation story. The earlier report documented that “what employers are doing  in terms of hiring and investment” was inconsistent with business claims that regulatory uncertainty under the Obama administration was impeding job growth. The new data include four additional quarters of results and also take into account revisions to the earlier data that were made available in late July (the Bureau of Economic Analysis annual benchmarking of the National Income and Product Accounts data leads to some revisions). Altogether, we are now able to compare investment trends during the first 12 quarters (or three years) of this recovery to the first 12 quarters of the three prior recoveries.

Of particular interest is whether businesses are holding back from investing in equipment and software because of fears of new or potential regulations. This investment category leaves out residential investment and investments in business “structures”—because those types of investments are clearly faltering as a result of the bursting of the residential and commercial real estate bubble (and not because of regulatory activity).

As a share of the economy, the data show that equipment and software investment has increased more in this recovery than in the three prior recoveries. Indeed, three years into this recovery the growth of 1.6 percentage points in the share of GDP going to investment in equipment and software is more than twice as large as the growth during the first three years of either the George W. Bush or the Reagan recoveries. That means that this recovery, with the Obama regulatory approach, is far more investment-led than the recoveries under the generally deregulatory Bush and Reagan administrations.

Each business cycle has its unique characteristics, of course, such as the challenge of the high tech bubbles facing the early 2000s recovery; such specifics should be taken into account in a detailed comparison. But this simple comparison shows that the oft-repeated assertion that business investment is being held back by Obama’s policies does not correspond with the basic evidence.

Nonetheless, the political organizations representing business (National Federation of Independent Business, Chamber of Commerce, etc.) keep on complaining about regulations and too much government fundamentally holding the economy back. In fact, the businesses they represent are actually investing more under this president’s policies than in the recoveries of the 1980s, 1990s and early 2000s. It would be good to mind the old adage to pay attention to what people do rather than what they say.

Also of relevance in assessing the role of government on the private sector’s recovery is employment growth. EPI’s Josh Bivens and Heidi Shierholz recently documented that “private sector job growth in the current recovery is close to that of the recovery following the early 1990s recession and is substantially stronger than the recovery following the early 2000s recession.” So, it does not seem that regulatory policy or too much government have held back business hiring decisions either. Bivens and Shierholz also document that it has been the loss of government jobs, primarily at the state and local level, which has sabotaged job growth in this recovery. They estimate that the public-sector employment gap is now about 1.1 million, and in July, public-sector employment continued on its downward path. This decline is in sharp contrast to the recoveries under Presidents Reagan, Clinton, and George W. Bush; government job gains were substantial in every one of those other periods.

In short, while the relatively strong growth in nonresidential investment and private-sector employment is inconsistent with the notion that excessive regulatory activity is what troubles the economy, what also remains true about this recovery is that a reduction in government has had a significant negative influence on job trends. Opponents of a stronger role for government should take heed of these economic realities.