Douglas Holtz-Eakin, President of the American Action Forum, has
released a “short paper” that looks at the growth impacts of the banking
sector’s response to the various new regulatory requirements imposed by the
Dodd-Frank Act and the burden of compliance costs. Among the requirements
mentioned by Holtz-Eakin were enhanced capital requirements, revamped
securitization rules, changed oversight of derivatives, and imposition of the
Volcker Rule, that required 398 separate rulemakings.
Subject to large uncertainties. Using a modified version of a
standard model of economic growth—the Solow model—Holtz-Eakin determined that the growth consequences would result in
$895 billion in reduced Gross Domestic Product or $3,346 per working-age person
over the next 10 years. He cautioned that the computation “is subject to large
uncertainties, but the order of magnitude is instructive.”
The framework used by Holtz-Eakin focused on the links between
saving and investment in the economy as a whole. To “flesh out” the growth
implications of the increased Dodd-Frank burdens, he used data from the Bureau
of Economic Analysis to develop estimates of the share of capital in national
income; the gross national saving rate; and the ratio of output to capital.
Tiered risk regulatory structure. Responding to Holtz-Eakin’s
analysis, William Moore, the Executive Director of the Regional Bank Coalition,
stated, “This study confirms what regional banks already
know from experience: there are real, significant costs to the American economy
as a result of Dodd-Frank.” He added, “This study demonstrates that if Congress
would implement a more appropriately tiered to risk regulatory structure,
regional banks would be able to do more of what we do best: invest in local
communities to help grow good jobs with good wages.”
Following the release of the analysis, a number of advocacy groups
and commentators sought to disprove Holtz-Eakin’s figures and methodology.
Multiple, significant flaws. The advocacy group Americans for
Financial Reform stated that the study had multiple, significant flaws. AFR believed that the AAF study both exaggerates the
growth costs of regulation and fails to include benefits from regulation that
would substantially exceed even these exaggerated costs.
The first major flaw identified by AFR is the failure to
incorporate any of the benefits of improved financial sector regulation.
Extensive economic research shows that the benefits of greater financial sector
stability alone will exceed the costs claimed by the AAF. If Dodd-Frank cuts
the annual probability of a financial crisis in half, it will create $2.9
trillion in economic benefits over the next decade. This figure alone is more
than triple the costs claimed in the AAF study, and does not even count the
substantial benefits that will accrue from improvements in consumer protection
and economic fairness.
Secondly, AFR believes that the AAF study exaggerates the growth
impacts of regulation in several ways. The study assumes that all regulatory
costs will be subtracted from capital investment, even though some regulatory
costs themselves involve capital investment and some compliance costs will be
funded by spending reductions (e.g. cuts in top executive compensation) at
financial institutions. The study also appears to assume that temporary
transitional regulatory costs extend permanently, according to AFR. Finally,
the study assumes that increases in bank capital (higher equity vs. debt in
bank funding) are identical to a tax on investment, which is highly questionable.
Terrible priority. In a posting, Mike Konczal, a fellow with the
Roosevelt Institute, called Holtz-Eakin’s paper “a bad analysis, immediately
violating the first thing you learn in corporate finance: capital structure
doesn’t dictate funding costs.”
Konczal took exception to Holtz-Eakin’s focus on higher capital requirements
functions as a tax. He noted that equating higher capital requirements to a tax
is “a terrible move with serious consequences, and if they are going to do it,
they need to do better than this.”
Scare tactic. Finally, David Dayen, of the The Fiscal Times, wrote
that the figure of $985 billion “is not that big.” He noted, “Using a 10-year
period magnifies the raw dollar amount. U.S. annual GDP in 2014 was $17.4
trillion. An $895 billion cost over 10 years amounts to 0.059 percentage points
annually, per the AAF numbers,” and added, “Dodd-Frank costs 0.059 percentage
points a year” doesn’t look good in a headline. Dayen also noted that the $3,346
cost to every working-age American “sounds huge until you realize that this is
over a 10-year period, and the actual number is less than a dollar a day.”
