Regulatory Uncertainty Isn't Causing High Unemployment

From the Treasury Department:

If regulation was a significant drag on business today, we would expect to see profits constrained after recent regulatory reforms were passed into law.  However, corporate profits as a share of gross domestic income have about recovered their pre-recession peak, and earnings per share in industries most affected by recent regulatory changes, such as energy and health care, have among the highest earnings per share of those in the S&P 500.  This growth is inconsistent with a corporate sector held back by regulation. 
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If regulatory uncertainty was the primary problem facing businesses, firms would prefer to use their existing capacity and current workers as much as possible, while avoiding building additional capacity until they are more certain about the contours of future regulation. 

Specifically, if demand was strong but businesses were concerned about future regulations, they would increase the hours of the workers they already employ rather than hiring additional workers.  We have seen no evidence of this in the data: the average work week for private employees has been roughly flat for the past year.  Similarly, if demand were strong, firms could easily expand using existing capacity without taking on the cost and risk of added capacity.  However, the share of total potential industrial output in use remains 3 percent below its long-run average.  Low capacity utilization is inconsistent with concerns about future regulatory risk, but aligns with weak demand holding back current production.

At the same time, business investment has led economic growth over the last few years.  Since the end of the first quarter of 2009, real investment in equipment and software has grown by 26 percent – about five times as fast as the economy as a whole.  However, businesses would not increase investment if they thought that future regulation posed a threat to their ability to operate profitably

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• In the September survey of small business owners by the National Federation of Independent Businesses, more than twice as many respondents cited poor sales (29.6 percent) as their largest problem than cite regulation (13.9 percent).
• In an August survey of economists by the National Association for Business Economics, 80 percent of respondents described the current regulatory environment as “good” for American businesses and the overall economy.
• As noted above, in a recent Wall Street Journal survey of economists, 65 percent of respondents concluded that a lack demand, not government policy, was the main impediment to increased hiring.
• According to data from the Bureau of Labor Statistics, less than three-tenths of 1 percent of mass lay-offs in the second quarter of this year were due to government regulations or intervention.