“Wish we could nail it, but we can’t.”
— Exelon CEO John Rowe on future nuclear regulations
Some on the left have complained that the right frequently blames Obama for a bad economy, because his administration creates a great deal of regulatory uncertainty for businesses. They claim these charges are based on little but anecdotal evidence, and challenge conservatives to find any historical and/or empirical data to support the contention that regulatory uncertainty can harm businesses.
It so happens that there are five clear examples of how regulatory uncertainty can make it difficult for businesses to plan future operations, and thereby impose barriers to economic activity. Not surprisingly, four of these examples occurred under the Obama administration.
The Production Tax Credit and the Wind Industry
The first example of how regulatory uncertainty directly impacts businesses is how the uncertainty surrounding the protection tax credit (PTC) wrought havoc on the growth of the American wind industry.
According to the American Wind Energy Association (AWEA), the PTC:
“[P]rovides an income tax credit of 2.2 cents per kilowatt-hour for the production of electricity from utility-scale turbines. This incentive was created under the Energy Policy Act of 1992. The PTC applies for the first 10 years of electricity production. It is set to expire on December 31, 2012.”
As the chart above shows, the PTC expired three separate times in 1999, 2001, and 2003. Each time, wind capacity additions (i.e., the installation of new wind turbines), declined in the following year in 2000, 2002, and 2004. Because businesses had no clarity from the government on a PTC extension during these periods, many of them simply stopped building turbines.
The Patient Protection and Affordable Care Act and Private Sector Job Growth
A second example of how regulatory uncertainty is a barrier to economic growth comes from the blog, Tarheel Red. It appears that the passage of the mammoth Patient Protection and Affordable Care Act (PPACA) of 2010 is highly correlated with the rate of change of private sector job growth. Prior to President Obama’s signing of “Obamacare” on March 30, 2010, the addition of new monthly private sector jobs was growing at an average rate of ~70,000 jobs per month. After the Bill passed, this rate declined by over 90% to ~6,000 jobs per month.
The rate of change of private sector job growth declined immediately after Obamacare became law, because it created enough uncertainty for businesses that they decreased their hiring rate.
It makes a good deal of intuitive sense. If you are running a business, and do not have good visibility on how much a future employee will cost with the new healthcare provisions, you will be more likely to delay hiring. You will wait to hire, because you do not have full visibility on what the program will actually cost your business for each employee you add.
Business Expansions into Right to Work States
The Obama Administration is even challenging the right of businesses to build manufacturing plants in any of the 50 states. Last March, the National Labor Relations Board (NLRB) filed a complaint against Boeing for its decision to set up a non-unionized production line in South Carolina. The complaint alleges that Boeing is locating a second production line in that state to retaliate against striking union workers in Washington State.
Since 1989, there have been four strikes at Boeing’s Washington facility. The last strike lasted eight weeks and cost the firm $2 billion.
In 2009, Boeing invested $1 billion in a new factory in South Carolina, a right-to-work state, and hired 1,000 local workers. Had Boeing then laid off 1,000 workers in Washington State, the NLRB might have had a case.
However, Boeing actually increased its Washington workforce by 2,000.
This lawsuit is unprecedented, and could affect every manufacturing business in the United States that is considering building a plant in a right-to-work state. While the government conducts its union-backed witch hunt against Boeing, most manufacturing businesses will likely wait on the sidelines before building new production facilities in right to work states. The net result is less overall economic activity, solely because of the regulatory uncertainty this lawsuit creates.
Uncertainty Regarding Increased Nuclear Regulatory Costs
In the wake of the Japanese earthquake, tsunami, and subsequent nuclear meltdown, the NRC is heavily scrutinizing American nuclear power plants, and is expected to come up with new rules that will likely significantly increase the cost to maintain a nuclear reactor over the next 3 to 5 years. Nuclear executives have no idea what these costs will be, nor will they know for at least another six months. Because of rising regulatory costs, some nuclear executives doubt the U.S. nuclear industry will be able to expand in the near-term. Exelon CEO, John Rowe, suggested there is “little opening for new nuclear plants in the near future,” based on simple economics, not safety concerns.
Regulatory Uncertainty in Offshore Drilling
Obama Administration policy and regulatory uncertainty are also having a negative impact on U.S. offshore oil production. When President Obama first took office in January 2009, there were 66 offshore oil and gas rigs operating off the coast of the United States. In June 2011, there were only 34.
According to the Fitch Rating Agency, regulatory “uncertainty and the limited issuance of drilling permits in the [Gulf of Mexico] are expected to result in upstream spending being diverted to other markets during 2011.” While President Obama has ended the drilling moratorium, the administration has issued only a limited number of drilling permits. Additionally, a clear understanding as to what liabilities companies drilling in the Gulf of Mexico will be responsible for in future accidents, is negatively impacting oil production. The U.S. Energy Administration has estimated that this decline in activity will result in a 13% decline in U.S. offshore oil production in 2011.
The bottom line is that regulatory uncertainty hurts businesses, and the Obama Administration has generated a fair amount of regulatory uncertainty.