Debt is a dangerous financial tool for private firms and for city, state, provincial, and federal governments. “Debt Crisis Shakes Chinese Town, Pointing to Wider Problems,” (New York Times, April 25, 2017) reports:

… Local companies had agreed to guarantee hundreds of millions of dollars of one another’s loans. When some of those loans went bad, the impact rippled across the city.

Zouping’s plight offers a sobering example of the problems that could lurk within China’s vast and murky debt load. A nearly decade-long Chinese lending spree drove growth but burdened the economy with one of the world’s heaviest debt loads, equal to $21,600 worth of bank loans, bonds and other obligations for every man, woman and child in the country. Debt in China has expanded twice as fast as the overall economy since 2008.

Debt problems are also significant

The China Debt Crisis Is Still Ripening,” (Wall Street Journal, May 2, 2017) looking at China’s shadow debt market:

Already, a big rebound in “shadow finance,” primarily bank-mediated company-to-company loans, is papering over the cracks in China, blunting the impact of the tighter corporate bond market. While corporate bond debt outstanding fell by 58 billion yuan ($8.4 billion) in the first quarter of 2017, shadow finance ballooned by more than 2 trillion yuan, nearly twice as much as in the fourth quarter of 2016.

As the US/China topic debate season draws to a close, it looks like the long predicted collapse of the Chinese economy won’t happen in May or June. The key question is how much Chinese government banks loaning to state-owned enterprises, combined with casino like shadow lending has distorted the still-expanding Chinese economy.

Traders Are Worried About China Local Government Debt Again,” (Bloomberg, April 6, 2017) looks also at expanding local government debt:

This new-found anxiety is a blow to a market that had started to recover in 2016 from the liability web that entangled local governments and their financing vehicles after 2008. Despite not seeing any defaults, LGFV bonds became the poster children for China’s ballooning debt problem. For many investors, the debt is symbolic of the country’s excesses in the wake of the global financial crisis, when municipalities — barred from issuing bonds on their own — used the vehicles as a way of meeting funding shortfalls.

All developed countries have mixed economies, partly market-based with private property, and partly government owned, managed, and regulated. The economic mixture varies from country to country, and often within countries. (In India the province of Kerala has long been run by communists, while Gujarat, for example, has pro-market policies.)

In China, XinhauNet reports: “SOEs have potential in mass entrepreneurship, innovation: premier” (April 28, 2017):

China’s centrally-administered state-owned enterprises (SOEs) have a promising future in boosting mass entrepreneurship and innovation, Premier Li Keqiang has said.

Premier Li said he believes centrally-administered SOEs have more potential and opportunity in implementing mass entrepreneurship and innovation as they are rich in technology, talent, capital and resources.

Government owned and managed enterprises have a mixed record across the world, with a great many expensive failures. Next door to China is South Korean, fifty years ago an impoverished country recovering from war and partition, and suffering from misguided economic policies.

In “How to Go From the Third World to the First,” (Wall Street Journal, April 27, 2017), John Tamny reports:

In the years immediately after the war, South Korea’s disastrous economic policies produced alarming inflation and food shortages.

Economic advisors from the U.S. made things worse with poor economic advice. An economics professor from Dartmouth described his early work advising the South Korean government on collecting taxes. Theater owners were fudging attendance figures to reduce tax payments. So U.S. advisors recommended the government set taxes on the number of seats in each theater rather than claimed number of moviegoers. Before long tax revenues from theaters again fell, and South Koreans were sitting on the floor to watch movies.

The John Tamny review of The New Koreans  reference early misadventures with state owned enterprises:

Mr. Breen also suggests that the South’s growth began with dictator Park Chung-hee’s “guided capitalism” in the 1960s, but, as he later acknowledges, the companies supported by Park “almost all failed.”

Still, advocated of government “guidance” and direction of economic development see success story in Japan, Taiwan, Singapore, and South Korea, all of which had heavy government involvement in their early stages of economic development. Market advocates argue most of these interventions were and are misguided, diverting resources and subsidizing failures, and slowing authentic economic development.

With mixed economies like South Korea and China (as well as Japan, Taiwan and Singapore), successes and failures can be credited and blamed on either private enterprise or government’s guiding hand, often depending upon the preferences and preconceptions of researchers. The South Korean government aided major family-owned corporations (called chaebols). The Foreign Policy article, “Success Story in South Korea” was published in 1969.

Screen Shot 2017-05-03 at 8.33.52 AMNicholas Lardy’s Markets Over Mao: The Rise of Private Business in China  (Columbia University Press, 2014) argues in a 2014 Wall Street Journal interview that State Owned Enterprises (SOEs) praised by China Premier Li Keqiang in the article above, are problems more than solutions:

[WSJ]You argue that China’s state-owned enterprises don’t have the power that their opponents say they do. What’s your proof?

[Lardy] SOEs appear to be a relatively small portion of the Chinese economy. They account for between one-third and one-quarter of GDP. But in manufacturing, SOEs only account for 20% of output. In some parts of the Chinese economy, the private sector has largely displaced state companies.

[WSJ] You also say the notion that China flourishes because of “state capitalism” is outmoded. Why?

[Lardy] State capitalism means a high degree of state ownership of production, a great deal of control over investment, a great deal of control of the banking sector and a very substantial use of industrial policy. I don’t think the term ‘state capitalism’ fits China very well because its industrial policy has been an almost complete failure.

The return on assets of state firms is plummeting. It was around 3.7% in 2013, which is less than half the cost of capital

Debt Crisis Shakes Chinese Town, Pointing to Wider Problems,” (New York Times, April 25, 2017) suggest that continued government bank financing of favored state enterprises resulted in private enterprises resorting to complex and risky cross-company debt:

One of the paradoxes of China’s debt troubles is that the country is awash in debt, yet publicly listed or privately held companies can find it hard to borrow. The state-controlled banking system lends mainly to state-owned enterprises, which can seem like a good credit risk because they have implicit government guarantees.

In response, private companies often band together, guaranteeing one another’s borrowings, to give bank credit officers more confidence that loans will be repaid. The downside is that if one company runs into trouble, it can drag down the other companies that guaranteed its debts. Those other companies, in turn, can set off their own credit guarantees from yet more companies with no direct connection to the first one.

Across China, local government fund local development through debt, and this is a huge potential problem. “China Spawns Debt Market to Ease Burden on Local Governments,” (Bloomberg Markets, January 17, 2017) reporting:

China’s economic slowdown is hampering municipalities’ ability to support the 5.6 trillion yuan ($818 billion) of outstanding onshore notes sold by local government financing vehicles, which ballooned after the financial crisis when they used them to meet funding shortfalls. The notes offer an improvement over LGFV bonds because of cash-flow visibility, analysts said.

The vast overinvestment in steel and aluminum production as well as shipbuilding and other heavy industrial enterprises across China were built on enthusiastic local government support and debt.

China’s shipbuilders go from boom to rust,” (The Australian, February 10, 2017) reports:

Until last year the Yangzhou Guoyu Shipbuilding Company was a bustling village of 6000 workers striving to fulfil worldwide orders for new ships.

Today, in a scene repeated across China’s industrial heartlands, the yard stands silent but for the howling of stray dogs around its deserted docks. Outside the closed gates is a ghost town of abandoned workers’ dormitories, closed restaurants and crumbling internet cafes.

Much of Yizheng’s 27km stretch along the Yangtze’s northern bank 320km upriver from Shanghai is now a wasteland, where idle cranes loom half-seen through choking grey haze.

Unfinished hulks of ships are left to rust.

China’s central and regional government’s enthusiasm about shipbuilding since 2000, partly as a way to absorb massive new steel production, fueled the current collapse:

Shipbuilding became a symbol of China’s industrial might in the early 2000s, when Beijing vowed to transform its modest shipbuilding sector into the world’s largest producer by 2015 — then did it five years ahead of plan. …

The result is that China’s private sector shipyards have been virtually wiped from the map, while Beijing is keeping only the most viable state-run yards alive with subsidies. …

Chinese shipyards capable of building large ocean-going vessels have roughly halved in number since 2013 to about 70, he said, while hundreds of smaller shipyards have gone bust.

So, against the optimistic claim: “China’s centrally-administered state-owned enterprises (SOEs) have a promising future in boosting mass entrepreneurship and innovation…” is the reality of failed enterprises championed and funded in the past by local and central government bonds and banks.

The steel, aluminum, and ships exported and sold below cost in world markets have likely left a hole vast and deep of unpayable debt across China.

China warns on hidden local government debt risks,” (Financial Times, March 4, 2017) reports:

Local governments’ fiscal woes come as they face the prospect of either continuing to support highly indebted state-owned enterprises, especially in steel and coal, or allowing them to close and taking on the burden of additional pensions, unemployment benefits and unpaid debt.

 

How can the U.S. government deal with security and humanitarian challenges in East African countries? The NSDA’s Public Forum resolution on SpeechandDebate.org:

Public Forum Debate – 2017 Nationals PF Topic Area: Africa
Resolved: In East Africa, the United States federal government should prioritize its counterterrorism efforts over its humanitarian assistance.

The National Interest in “Kenya’s Counterterrorism Approach is Floundering,” (August 4, 2016), reports the U.S. government is spending significant amounts on counterterrorism in East Africa:

Kenya is one of the largest recipients of U.S. security assistance in sub-Saharan Africa. Through both State and Defense Department accounts, the Kenyan government has received over $141 million in security assistance funds since 2010­—an amount that rose to $100 million in 2015 alone. Most of this financing is directed towards counterterrorism support,…

NCPA’s David Grantham, in “The Military, Nation-Building and Counterterrorism in Africa,” (Issue Briefs, National Security, April 18, 2016) is critical of complex and expanding U.S. operations in Africa:

This expensive, Department of State-led program, which is now integrated into the military’s U.S. Africa Command (AFRICOM), boasts lackluster oversight and a penchant for nation-building –‒ using multiple agencies to rebuild a given country’s political, economic and social infrastructure. In fact, its shape and language resembles failed, Cold War anticommunism programs in Latin America that ended up complicating rather than solving American security problems. (Full Issue Brief pdf here.)

This Issue Brief reviews the long history of U.S. government spending in Africa:Screen Shot 2017-05-02 at 5.53.33 PM

Under the Alliance for Progress, the U.S. government provided billions of dollars in economic aid, military equipment and civil assistance over the course of 10 years in the hope the funds would grow democratic institutions and undermine the appeal of communism. …

Despite past failures, prevailing wisdom once again says U.S. national security policies must target the ideology behind the threat in developing nations through taxpayer-funded development and modernization programs.

Interesting Africa Facts lists a lot of countries as East African. Wikipedia, however, lists some different countries: “Tanzania, Kenya, Uganda, Rwanda, Burundi and South Sudan.” South Sudan isn’t on the list from Interesting Africa Facts, nor on the list from Africa Ranking. Africa Ranking lists and gives brief overviews with maps and key facts on the geography and economies of “The 9 East African Countries.”

A connection to the current China policy topic is reported in “China’s Geostrategic Search for Oil,” (pdf) (The Washington Quarterly, Summer 2012, p. 84), with Sudan as a source for 15 percent of China’s oil imports:

Figures for 2010 reveal that 23 percent of China’s offshore equity oil production was in Kazakhstan, 15 percent in both Sudan and Venezuela, 14 percent in Angola, five percent in Syria, …

HuffPost story, “Why China Is So Invested In South Sudan’s Future,” (WorldPost, June 23, 2016) reports:

Nowhere else in Africa do China’s financial, diplomatic and geopolitical interests confront as much risk as they do in South Sudan. Beijing has invested billions of dollars in the country’s oil sector, deployed about 1,000 troops to serve as U.N. peacekeepers and committed considerable diplomatic capital to help resolve the ongoing civil/ethnic war.

Sudan Tribune reports “China controls 75% of oil investment in Sudan: minister,” (August 3, 2016). Note that this article is about China investment in Sudan, which is separate from earlier investment in South Sudan oil fields:

Sudan lost 75% of its oil reserves after the southern part of the country became an independent nation in July 2011, denying the north billions of dollars in revenues. Oil revenue constituted more than half of the Sudan’s revenue and 90% of its exports.

Not all online sources list Sudan and South Sudan as part of East Africa, but this CNBC article: “South Sudan joins East African Community club,” supports South Sudan’s inclusion:

The young, troubled country of South Sudan was admitted to the East African Community (EAC) as its sixth member (the others being Tanzania, Kenya, Uganda, Burundi, and Rwanda).

Being admitted to the regional body means that South Sudan will enjoy all the economic benefits the club currently has to offer (freer movement of labour and capital and, in principle, free trade) and will join the members as they move to increase economic integration (through a monetary union) and eventually establish a single political federation.

South Sudan applied for membership to the EAC as soon as it gained independence in 2011. However, its application was declined because of the country’s institutional weakness.

East African Economic and Rule of Law Issues

This U.S. Chamber of Commerce publication, “Building the Future: A Look at the Economic Potential of East Africa,” survey’s economic expansion in recent years. From beginning of Executive Summary:

East Africa has been the fastest-growing region on the continent over the past decade, but trade between the United States and the region’s main economies remains limited. In 2014, Kenya, Rwanda, Ethiopia, Tanzania, Uganda, and Burundi all had higher growth rates than the United States. Despite this growth, U.S. trade with the region has been marginal and represents only 5% of total East African trade. East Africa’s main trading partners are China, India, and the European Union (EU). 

Regional integration has played a key role in boosting intra-East African trade and increasing the region’s access to global markets. The East African Community (EAC), a regional economic community that was originally founded in 1967 and revived in 2000, is the leading regional organization on the continent. Since 2000, the EAC has gradually reduced tariffs, trade barriers, and bottlenecks in the region, helping members increase their trade performance.

Peruvian economist Hernando de Soto, in a short video “Markets Without Borders,” argues that the legal exclusion of most Africans from formal rule of law institutions restricts their options for engaging in world markets. DeSoto arScreen Shot 2017-05-02 at 3.53.57 PMgues that one-third of the world’s population lacks access to the rule of law, and elites of the world tend not to be bothered by that. The video looks at the informals of Tanzania as well as Peru.

DeSoto argues, at 1:30 (one minute, thirty seconds) into the Markets Without Borders that without access to legal institutions, the poor in Africa and other countries are “left out as orphans” and “will end up bringing civilization down:”

Globalization is a civilisation in the making. Civilization has always been designed by elites. And the tendency of elites has always been to feel that if it just covers themselves and maybe the top ten to twenty percent, it’s alright.

If globalization doesn’t create the space required for those who are excluded to come in. Does not give them the instruments, the tools with which  to prosper, they will be left out as orphans. And these orphans will end up bringing civilization down.

“The President’s Last Trip to Africa: Focus on Promoting Economic Freedom and the Rule of Law,” pdf (Heritage Issue Brief, July 24, 2015). This BBC News story, “How severe is the terror threat in East Africa?” also reports at the time of President Obama’s last trip to Africa”:

Long a territorially focused group with quasi-governmental ambitions to impose Sharia law at home, al-Shabab is now becoming a more mobile, networked regional presence.

This has brought it a number of benefits. Al-Shabab’s growing reach along the African coast is providing valuable new sources of funding and recruits.

This is a logical adaptation: enhanced global counter-terror finance efforts have strangled funding from the Somali diaspora, amongst other international sources.

In terms of recruitment, as foreign fighters have been drawn to Syria, the group has been overshadowed on the global stage.

Yet al-Shabab has stepped up its Swahili-language propaganda – which plays on deep-seated social, economic and political grievances in East African states.

U.S. Attacks Reveal Al-Shabab’s Strength, Not Weakness,” (Foreign Policy, March 9, 2016) reports:

At a time when the United States has grown increasingly alarmed at the spread of Islamic extremism in Africa — from Boko Haram in Nigeria to al Qaeda in the Sahel region to the Islamic State in Libya — the resilience of al-Shabab has highlighted the limits of the Obama administration’s approach to counterterrorism on the continent. American drone strikes, coupled with financial and material assistance to a 22,000-strong African Union peace enforcement mission (AMISOM), have succeeded in driving al-Shabab from most urban areas. But those policies have not prevented the group from continuing to strike civilian, government, and AU targets as it seeks to expel AMISOM and establish an Islamic state in Somalia.

So these reports look at terrorism concerns in East Africa. What about recent humanitarian concerns? “East Africa Summit to Focus on Refugees, Food Concerns,” (Voice of America, March 21, 2017) reports:

Kenya plans to shut the Dadaab refugee camp by the end of May. Dadaab is home to more than 300,000 refugees, most of them Somalis. Tens of thousands have already returned to Somalia.

Humanitarian agencies are currently struggling to save lives in Somalia, where more than 6 million people need assistance because of drought and insurgent attacks. The aid agencies warn if nothing is done, the crisis in Somalia may become worse than the 2011 famine.

The United Nations estimates more than 17 million people need humanitarian assistance in East Africa.

Last May, CNN also reported: “Kenya to close refugee camps, displacing more than 600,000,” (May 6, 2016). East African refugee camps represent and economic burden as well as terrorism and humanitarian challenges:

“Kenya, having taken into consideration its national security interests, has decided that hosting of refugees has come to an end,” Kibicho said, pointing to threats, such as the terror group Al-Shabaab.

Kenya announced the closure of refugee camps last year for the same reasons but backed down in the face of international pressure

At the time, government officials were not clear where they expected the refugees to go, other than somewhere into Somalia and out of Kenya. Kibicho’s statement didn’t address the question of where the refugees would go.

An alternative approach to refugees is found in another East African country, Uganda, as explained in: “Refugee economies – the Ugandan model,” (IREN, June 30, 2014):

Uganda has a relatively liberal policy towards its 387,000 refugees and asylum-seekers, most of whom have fled conflict in the Democratic Republic of Congo (DRC) and South Sudan. Uganda does not have refugee camps as such, but most live in designated refugee settlements where there are allocated plots of land to farm. They can, however, get permission to live outside these settlements if they think they can support themselves, and Kampala in particular has a sizeable refugee population.

Betts told IRIN: “Uganda is a relatively positive case in that it allows the right to work and a significant degree of freedom of movement. That isn’t to say that it’s perfect, but it’s definitely towards the positive end of the spectrum. The reason we chose it is that it shows what’s possible when refugees are given basic economic freedoms.”

Screen Shot 2017-05-02 at 4.43.52 PMThe Uganda model is discussed in this post: “Refugee Economics: Success of Self-Reliance Refugee Policy,” (Economic Thinking, July 21, 2014):

The Oxford study, titled Refugee Economies: Rethinking Popular Assumptions begins:

Recent displacement from Syria, Afghanistan, Iraq, South Sudan, and Somalia has increased the number of refugees in the world to 15.4 million. Significantly, some 10.2 million of these people are in protracted refugee situations. In other words, they have been in limbo for at least 5 years, with an average length of stay in exile of nearly 20 years. Rather than transitioning from emergency relief to long-term reintegration, displaced populations too often get trapped within the system.

Uganda’s “Self-Reliance” policy for refugees offers a promising model for other countries struggling with incoming refugees:

‘Self-reliance’ policy allows refugees freedom of movement, as well as the right to work or run a business. The economic lives of refugees in Uganda, how they interact with the private sector and how they use technology challenged five myths about refugees. 

Here is page with short outline and link to video discussing misunderstandings of Refugee Economics.  The full Refugee Economics study is online here (pdf).

Video from YouTube is here:

 

Foreign Correspondents as They Live and Breathe,” (New York Times, March 30, 2017) reports on the still deadly air pollution in China:

Ian Johnson, a China correspondent, took out his phone to check Air Matters, an app that measures air quality based on the Environmental Protection Agency’s Air Quality Index, which scores the air from 0 to 500. Over 300 and the air is “hazardous.”

The NYT post says Trump Administration actions on coal power CO2 emissions will hurt efforts to reduce pollution worldwide:

shanghaipollution

Shanghai, 3dman_eu, Pixabay

Now efforts to dial back air pollution worldwide are likely to take a hit: On Tuesday, less than a week after rolling back fuel-economy standards for the auto industry, President Trump announced an executive order reversing the rest of the Obama administration’s climate plan. If carried through, the order — which lifts American limits on carbon dioxide emissions from coal-fired power plants, the largest contributor of particulate pollution…

Carbon dioxide and particulates are both released from coal-fired power plants and not from solar, wind, and hydropower. Power plants fired by natural gas power don’t emit particulates and release far less carbon dioxide than burning coal (though studies show some methane is released by leaks in natural gas drilling and transportation).

Technologies that reduce CO2 emissions from burning coal are different and more expensive than technologies that reduce particulate emissions. People are suffering and dying now from particulate emissions from coal in Beijing and around China, but not suffering or dying from CO2 emissions.

Beijing’s deadly air pollution has forced it to close all of its large coal-power plants,” (Quartz, March 22, 2017) notes that Beijing has closed it’s coal power plants, but still imports electricity from nearby provinces that burn huge amounts of coal:

…in 2013 the city’s administration swore to stop using coal in the large power-plants that supply electricity to the capital and its 21 million inhabitants. By 2015, three of its four coal-fired power plants had been shut down and have switched to natural gas. On Saturday (Mar. 18), the Huaneng Beijing Thermal Power Plant, which produced 845 MW of power—more than a tenth of the power created by all power plants near Beijing—was closed down, too. Its transition to burning natural gas will start soon.

But the city’s hunger for power means it’s unlikely to run on coal-free energy any time soon, or that regular blue-skies will become a reality. Beijing still gets a chunk of its power from neighboring provinces such as Hebei and Inner Mongolia, where huge coal-power plants are in operation.

The Quartz article reports that coal is “dirty” power:

Coal is the dirtiest of fossil fuels. Per kilogram, it produces the least amount of energy and the most amount of pollution (as carbon dioxide, particulate matter, nitrogen oxides, and sulfur oxides). And China consumes a lot of it.

But while particulate, nitrogen oxides (NOx) and sulfur oxides (SOx) are pollutants, carbon dioxide (CO2) is not a pollutant. CO2 contributes to global warming. Burning coal and other fossil fuels adds CO2 to the atmosphere, which is now .0004 CO2 (.04 percent):

The Earth’s atmosphere is 78 percent nitrogen, 21 percent oxygen and 1 percent other gases, including about 0.04 percent carbon dioxide.

Screen Shot 2017-04-28 at 9.05.33 PMCarbon dioxide in the atmosphere has risen from .00028 (.028) at the beginning of the industrial revolution due mostly to burning of fossil fuels in developing and developed countries. Particulate pollution from coal burning in China today causes health problems similar to pollution from the “dark satanic mills” during England’s Industrial Revolution, that William Blake wrote of.

Over a century later, pollution from coal was still killing across the United Kingdom. The Great Smog of 1952, also called the Big Smoke killed some 4,000 people, and is discussed in “Everything to Know About the Great Smog of 1952, as Seen on The Crown,” (Time, November 4, 2016)

The Big Smoke developed in London on Dec. 5, 1952, triggered by a period of cold weather collecting airborne pollutants, mainly from the coal fires that were used to heat homes at the time, which formed a thick layer of smog over the city.
According to the United Kingdom’s public weather service, it was so thick you couldn’t see from one side of the street to the other. In one East London area, it was reported to be so thick people could not see their feet.

See also “60 years since the great smog of London – in pictures,” (The Guardian, December 5, 2012).

Connections between the 1952 London to China today, “Research On Chinese Haze Helps Crack Mystery Of London’s Deadly 1952 Fog,” (NPR/the two-way, November 23, 2016):

A team of atmospheric scientists researching pollution in China say they’ve cracked a 60-year-old mystery — with research that explains not only the haze over Beijing, but also the remarkably toxic Great Smog of London from 1952.

By examining conditions in China and experimenting in a lab, the scientists suggest that a combination of weather patterns and chemistry could have caused London’s fog to turn into a haze of concentrated sulfuric acid.

The article describes the research in more detail, and concludes:

“London fog only had to do with coal burning — it is relatively easy to solve the problem,” Zhang says. “In Beijing or any other cities in China, you have coal burning, traffic emissions, agriculture. It’s very complicated … it’s very, very difficult [to solve].”

And earlier post, “For Still-Poor China, Coal Pollution from Home Heating,” focuses on China coal burning for heat, and the heavy pollution consequences. This earlier post highlights a key article: “Beijing’s Plan for Cleaner Heat Leaves Villagers Cold,” (WSJ, Jan. 25, 2017) which reports the continued problem of burning coal for home heating in communities near Beijing.

Chinese government policies that try to reduce CO2 emissions from burning coal rather than reducing particulate emissions, raise electricity costs, which results in more Chinese people burning coal at home instead of drawing electricity from the grid.

Manufacturers associations such as the National Association of Manufacturing (NAM) have been wary or hostile to imports, but recognize that for U.S. firms to succeed in world markets they have to compete successfully with foreign firms.

An alternative to tariff barriers, or subsidies for U.S. manufacturers, is to review and where possible reduce regulatory costs here at home. When debaters (or politicians) call for restricting imports to “bring back American jobs,” negatives can counter that reducing regulations at home would enable U.S. firms to be succeed in more industries at home and overseas.

The costs imposed by excess regulations are a significant burden according to NAM:

Manufacturers are the backbone of our nation’s economy and employ more than 12 million men and women who make things in America. To maintain manufacturing momentum and encourage hiring, the United States needs government policies more attuned to the realities of global competition. Our regulatory system produces unnecessarily costly rules, duplicative mandates, impediments to innovation and barriers to our international competitiveness. Despite many initiatives and efforts to reduce the unnecessary regulatory cost imposed on businesses, the cumulative regulatory burden continues to expand.

The new NAM study (pdf) reviews  financial impacts, which heavily impact smaller firms:

The study also reveals the extent to which manufacturers bear a disproportionate share of the regulatory burden, and that burden is heaviest on small manufacturers because their compliance costs are often not affected by economies of scale. The analysis finds that the average U.S. company pays $9,991 per employee per year to comply with federal regulations. The average manufacturer in the United States pays nearly double that amount—$19,564 per employee per year. Small manufacturers, or those with fewer than 50 employees, incur regulatory costs of $34,671 per employee per year. This is more than three times the cost borne by the average U.S. company

Recent posts for a past policy topic on federal court system reform discuss books and studies on the historical and current debate over liberty of contract. For US/China policy debaters, the key issue is the regulatory burden on U.S. manufacturers which raises costs and reduces manufacturing flexibility. (Especially those regulations that raise costs without protecting consumers, workers, or the environment.)

Should it matter to state and federal judges whether the stated goals of the regulations have some reasonable justification, such as public safety? When Uber drivers contract with Uber and with Uber customers to give people rides, should city or state regulators be able to outlaw or rewrite those contracts? China’s heavy-handed regulation of ride-sharing played a role in Uber giving up and selling its China operations to a competitor. But expensive ongoing battles with state and local regulators in the U.S. also left Uber with less flexibility to absorb losses overseas. “State approves sweeping new regulations for Uber, Lyft but delays rules on leased vehicles,” (Examiner, April 25, 2017) reports:

The California Public Utilities Commission, which regulates what it calls Transportation Network Companies like Uber and Lyft, passed myriad new regulations Thursday, from rules as small as where the pink mustaches on cars should go to as sweeping as stricter vehicle inspections.

A July 14, 2015 re/code headline reads: “Uber Could Have to Pay an Additional $209 Million to Reclassify Its Drivers in California.” That cost to Uber would be passed on to rideshare customers who would pay higher fares, and to drivers who would earn less, plus the the value of Uber the enterprise would be reduced by these new labor regulations. Already Uber is spending millions of dollars to defend its ability to operate as it hires extra lawyers, lobbyists, and public relations consultants.

Uber and Lyft are service companies rather than manufacturers, so don’t face direct competition from Chinese and other overseas manufacturers. Thousands of  U.S. manufacturers though do struggle with regulations as they try to compete with international firms. Higher labor costs are one issue, but U.S. workers are usually much more productive, so their higher wages don’t make U.S. firms less competitive.

Work rules however, can be an issue. U.S. firms have product development cycles that can  require work long hours during crunch times (and less hours before and after). Should employees be allowed “comp time” for long hours, or should state and federal regulations mandate time-and-a-half for extra hours? Are start-up entrepreneurs and enterprises in the U.S. burdened by the same labor regulations designed for large manufacturers?

Regulatory costs to Uber and Uber customers are similar to thousands of other regulations laced across the economy. The estimated total: $2,000,000,000,000 a year! (two trillion dollars), according to studies on regulatory costs.

Liberty of Contract: Rediscovering a Lost Constitutional Right looks at the justice arguments for the court system to defend liberty of contract from special interest legislation. The natural rights claim is that people’s life, liberty, and pursuit of happiness ought not be infringed by government. But thousands of state and federal regulations, the book claims, have little current safety rationale.

In the Competitive Enterprise Institute’s Ten Thousand Commandments 2015An Annual Snapshot of the Federal Regulatory StateClyde Wayne Crews collects the data from regulatory studies and federal publications. From the summary:

The scope of federal government spending, deficits and the national debt is staggering, but so is the impact of federal regulations, which now exceeds half the amount the federal government spends annually. Unfortunately, regulations get too little attention in policy debates because, unlike taxes, they are unbudgeted. They are also difficult to quantify because their effects are often indirect. In Ten Thousand Commandments, Crews compiles available data on regulatory costs and trends. By making the size, extent and cost of Washington’s rules and mandates more comprehensible, Crews underscores the need for more review, transparency and accountability—for both new and existing federal regulations.

The 2016 Ten Thousands Commandments report is here.

This research shouldn’t be seen a “greedy” corporations just trying to evade costly regulations. Public choice economists argue that most regulations are promoted by businesses and industry associations as protection against competition or litigation.  This is known as regulatory capture theory.

Ideally, Congress would escape the embrace of business, labor, environmental, and other interest groups, and reduce or eliminate regulations that raise costs without delivering safety or other benefits.

To some extent judicial restraint arguments encourage the federal court system to defer to Congress as it passes both helpful and harmful legislation. But judicial engagement advocates argue the court should step in to block regulations that interfere with use of private property and otherwise lawful liberty of contracts.

The National Association of Manufacturers also publishes a study of the cost of excess regulations (page has link to full study:

The National Association of Manufacturers (NAM) has issued a report that shows the macroeconomic impact of federal regulations. The study also reveals the extent to which manufacturers bear a disproportionate share of the regulatory burden, and that burden is heaviest on small businesses and manufacturers because their compliance costs are often not affected by economies of scale. 

CEI’s Crews also discusses the cost of regulations in his July 9, 2015 Forbes column, and explains that many businesses promote regulations that help their business or industry:

Alas, the same holds for external pressures. In particular, it is not the case, as OMB has proclaimed, that “businesses generally are not in favor of regulation.”

Free enterprise capitalism is a different political system from a mixed economy where regulatory favors are readily available.

Business not only generally favors regulation, but often sought regulation in the first place (Nobel laureate George Stigler said that in 1971 and explained “regulatory capture” in an article called “The Theory of Economic Regulation.”)

And Crew notes:

Also important: Just as economic regulatory agencies are captured by special interests, much of what is considered social or health/safety or environmental regulation may self-interested rather than public-spirited. Even when regulation “works,” the overall or societal benefits can be outweighed by costs; also the social calculus approach to “net” benefits can ignore wealth transfers, property takings and due process. 

American enterprises that hurt customers, endanger employees, or pollute air and water should face legal challenges and be forced to pay for damages. Regulations that raise costs without protecting consumers, employees, or the environment end up reducing jobs, lowering wages, and raise costs for consumers.

What are the claimed costs of excess regulations? According the CEI’s 2016 10KC report:

The federal regulatory cost reached $1.885 trillion in 2015.

Federal regulation is a hidden tax that amounts to nearly $15,000 per U.S. household each year. …

Many Americans complain about taxes, but regulatory compliance costs exceed the $1.82 trillion that the IRS is expected to collect in both individual and corporate income taxes from 2015. …

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