From the very start of his presidency, Donald Trump has made it a high priority to reduce the level of federal regulation. And in 2017, the stock market has boomed. Many business leaders believe that this is hardly a coincidence, and that Trump’s deregulatory efforts have fueled the boom. Are they right?
Probably not — but it’s complicated.
There are lots of estimates of the costs of federal regulations, and they’re mostly rubbish — interest-group fare. The least unreliable figures come from the annual reports of the Office of Management and Budget. Under both Republican and Democratic administrations, the reports are produced by civil servants; they’re not political documents. (I was head of the Office of Information and Regulatory Affairs from 2009 to 2012, and political interference with the numbers in those reports was taboo.)
The largest and most surprising lesson is that from 1981 through 2016, the annual costs of federal regulations have not greatly varied across administrations.
In years with unusually low regulatory burdens, the costs have been under $4 billion (1986, 2002, 2006 and 2013 were such years; 2014 was on the cusp). In years with unusually high burdens, the costs have been in excess of $10 billion, but almost always under $15 billion (those years include 1988, 1992, 2000, 2007, 2008 and 2012).
Under both Republican and Democrats, annual regulatory costs have usually been in the vicinity of $5 billion to $7 billion. Importantly, the annual benefits of regulations (including lives saved and illnesses averted, as well as purely economic savings) have almost always dwarfed the annual costs. And contrary to a widespread belief, regulatory costs were pretty comparable under President George W. Bush and President Barack Obama.
Costs in the billions are nothing to sneeze at, and the Trump administration should be applauded for trying to cut them. But it’s doubtful that amounts at this level have a big impact on the stock market. For comparison, President Trump requested a budget of $98.7 billion for the Department of Transportation, and in 2016, General Motors’ revenue was more than $160 billion.
To be sure, the OMB’s estimates are incomplete. For example, the independent regulatory agencies (such as the Federal Communications Commission, the Federal Reserve Board and the Federal Trade Commission) often fail to quantify the costs of their regulations. Those costs might be high, but they are not included. And if we think that government’s own estimates tend to be self-serving, then the actual numbers might be a lot larger.
Even so, consider some other data that undermines the proposition that regulatory activity reduces stock prices: Over a period of many decades, the stock market has done a lot better under Democratic presidents. We don’t know why that’s so, but it would be tough to defend the proposition that Democratic presidents have imposed systematically lower regulatory burdens.
Under President Barack Obama, the stock market did spectacularly well. In terms of the market’s overall performance, Obama ranks among the very few most successful presidents in American history. On his watch, annualized returns were well above the very high ones enjoyed under Harry Truman, Dwight Eisenhower, Ronald Reagan and Franklin Delano Roosevelt.
Put to one side the question how much credit Obama deserves for those high returns. While he did engage in significant regulatory cost-cutting in important domains, he was not exactly the Great Deregulator — which further weakens the idea that stock market performance is much affected by whether a president does or does not favor regulatory steps to protect (say) health, safety and the environment.
Which brings us to Trump, who is trying both to slow the flow of new regulations and to reduce existing regulatory burdens. Under an important executive order issued in January, the net cost of regulation for 2017 is not allowed to exceed zero. True, we will see new regulatory burdens, but they will almost certainly be very low by historical standards, and they will be accompanied by cost-cutting measures that will prevent an increase in overall costs.
Repealing existing regulations is proving a lot tougher. Unless Congress does the job, the executive branch has to use cumbersome procedures, which usually take a year or more. While the Trump administration has succeeded in eliminating dozens of existing regulations, it’s hard to argue that this is the reason for the stock market boom. After all, the Office of information and Regulatory Affairs approved more than 600 regulations in 2016 alone.
Elimination of regulatory burdens is often a great idea, and it can help a lot of people. But, again, the hard evidence provides little support for the proposition that it’s a big help for stock prices. Nonetheless, I suspect that the hard evidence is missing something.
John Maynard Keynes, sometimes described as an early behavioral economist, drew attention to the role of “animal spirits,” contending that “economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average business man.” In his view, “a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations.”
It’s reasonable to speculate that in 2017, White House skepticism about national regulation has contributed to a highly congenial economic atmosphere — and to an increase in spontaneous optimism. That’s hardly the principal driver of the stock market boom; it’s probably not even a major contributor. But it certainly hasn’t hurt.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.