President Trump views regulatory red tape wrapped around corporate America much as landowners in the southern U.S. view kudzu — as a creeping menace with an outlandish growth rate and a tendency to suffocate what it covers.
The remedies are also similar: Cut them away faster than they can grow back.
“For many decades, an ever-growing maze of regulations, rules, restrictions has cost our country trillions and trillions of dollars, millions of jobs, countless American factories, and devastated many industries,” Trump said in a December speech recounting his progress.
That trend changed, he said, with an order he issued shortly after his inauguration a year ago that for every new federal regulation imposed, two old ones must be eliminated.
“As a result,” the president said, “the never-ending growth of red tape in America has come to a sudden, screeching, and beautiful halt.”
While corporate America speaks more cautiously, it's nonetheless elated with the billions of dollars in savings the rule changes have generated, and Congress' slashing of the top corporate tax rate to 21 percent from 35 percent in December further roused companies' animal spirits.
"You'll see over time — not tomorrow morning and not instantaneously, but over time — them getting more and more aggressive," said Bank of America CEO Brian Moynihan. "The atmosphere for business has been strengthened."
Deregulation gave cable-provider Comcast the confidence to commit at least $50 billion toward growth, CEO Brian Roberts says, and in December, for the first time in six years, American executives didn't list regulatory expenses as their top cost concern on the Business Roundtable's quarterly economic survey.
That kind of optimism "rests on the pro-growth economic agenda of policymakers," said JPMorgan CEO Jamie Dimon, who chairs the lobbying organization.
In the past year, heads of federal agencies taking their cue from Trump have dropped planned lawsuits by the Consumer Financial Protection Bureau, slowed implementation of a Labor Department rule requiring financial advisers to make investment recommendations that are in a client’s best interest rather than merely suitable, and axed a requirement that Internet service providers avoid basing rates on types of content, users, or websites.
Altogether, the administration has canceled or delayed more than 1,500 regulatory actions planned under former President Barack Obama. About $570 million a year in costs, which comes out to $8.1 billion over a lifetime, has been eliminated as a result, the White House says.
Perhaps even more beneficial, however, is the administration’s well-publicized view of Washington overreach, said Neil Bradley, chief policy officer for the U.S. Chamber of Commerce.
“The most significant thing that has happened in the regulatory space is the deregulatory tone and expectations created by the White House for all the agencies of the government,” Bradley told the Washington Examiner.
With measures such as the 2-for-1 order and mandating a cost-benefit analysis for new rules, Trump and his appointees “really built the expectation that the attitude of this administration wasn’t going to be to find new ways to regulate and then slightly dampen the cost, but instead to relook at regulation in a whole new light of ‘How do we reduce the overall regulatory burden?’” he said.
That has given corporate confidence across the country a shot in the arm, he said, and executives have fewer reservations about investing in new factories and products.
“The CEOs, the folks who are doing medium-range and long-term planning at companies, are looking at the overall regulatory environment,” Bradley said. “Even if they’re not impacted by one of the big regulations that’s in the news every day, they’re looking at an environment where the regulatory threats and overhang have basically disappeared.”
Cheers for Quarles
Industries have, for the most part, welcomed the officials whom Trump has chosen to oversee regulation. One is Randy Quarles, the Federal Reserve’s first vice chairman for banking supervision. A Yale-educated attorney who served in the Treasury Department in both Bush administrations, he was widely viewed as friendlier to banks than was Daniel Tarullo, who handled similar duties without the title.
A January speech, in which Quarles was open to adjusting requirements for capital reserves that enable banks to withstand losses in times of economic stress, affirmed that opinion. He said he counted 24 standards used to measure banks’ loss-absorbing capability.
“While I do not know precisely the socially optimal number of loss-absorbency requirements for large banking firms, I am reasonably certain that 24 is too many,” he told the American Bar Association’s banking law committee at its annual meeting on Jan. 19.
“Let me be clear,” he added, “that while I am advocating a simplification of large bank loss-absorbency requirements, I am not advocating an enervation of the regulatory capital regime applicable to large banking firms.”
Some level of regulation of the largest firms has bipartisan support after the collapse of the housing bubble in the mid-2000s led to the September 2008 failure of Lehman Brothers, which was then the fourth-largest U.S. investment bank, and plunged global credit markets into a deep freeze.
Companies from Citigroup to Bank of America and the insurer, American International Group, were given billions in bailouts to keep their doors open as the government raced to shore up the economy.
Taxpayers, who lost jobs and homes as unemployment spiked, were outraged. But they also chafed under the slow growth afterward that critics blamed partly on excessive regulation of lenders.
Among the ways the Fed’s Quarles would correct that is by offering lenders more insight into annual stress tests, enabling them to gauge better how much of the capital they can lend while still raising dividends and buying back shares.
“The changing of the guard across financial regulatory bodies,” including Quarles’ appointment, “has been a gradual but decidedly pro-banking process,” said Bradley Ball, strategist at Swiss bank UBS. “The regulatory pendulum had swung too far to the negative under the prior administration, and President Trump’s personnel changes are working every day to reverse that trend.”
The president’s efforts have brightened the mood in U.S. markets, where major indexes have surged. The S&P 500, a broad measure of the biggest American companies, has climbed 26 percent since Trump’s inauguration while the Dow Jones Industrial Average, a narrower measure of blue-chip stocks, has climbed 34 percent to top a record 26,000.
The head of Trump’s Office of Information and Regulatory Affairs, Neomi Rao, is well aware that critics often characterize the changes that produced such gains as a corporate giveaway at the expense of individuals. She disagrees.
“I want to be quite clear that we are not dismantling important health and safety regulations,” Rao said at the Brookings Institution on Jan. 26.
Necessary rules, however, are inevitably accompanied by extraneous regulations that harm consumers by curbing competition, stifling innovation, and raising “the costs of ordinary goods and services,” Rao said.
“What we’re really focusing on,” she added, “is lifting regulatory requirements that are no longer working for the American people.”
Risk of class-action suits
While Democratic members of Congress and consumer advocates debate that assessment, few would dispute the breadth of Trump’s changes in the space of only a year.
Some of the best known, involving topics with names redolent of politico-industrial jargon, have become practically household terms: Net neutrality. Clean power. Mandatory arbitration.
The arbitration rule, proposed by the Consumer Financial Protection Bureau under former director Richard Cordray, an Obama appointee, sounds arcane. But it involves a finance-industry practice with at least passing familiarity to anyone with a credit card: A clause written into contracts of all types that keeps individual borrowers from suing lenders in court.
Instead, they accept an agreement, often without reading it, that requires them to settle any claims through private mediation with a hearing officer, typically paid for by the company.
While finance executives and lobbyists say this allows rapid, lower-cost resolution of complaints without the sort of delays that are common in courts, critics say it deprives consumers of the leverage they would have if a class-action suit had not been pre-emptively ruled out and instead remained an option.
Congress nixed the rule in September using its review powers. But the decision was so close in the Senate after Democrats highlighted a fake-accounts scandal at Wells Fargo and a massive hack of consumer credit-scoring firm Equifax that Vice President Mike Pence had to cast a tie-breaking vote.
Executives from both companies faced thorny questions about using arbitration during Senate Banking Committee hearings around the same time.
Despite pressure, Wells Fargo CEO Tim Sloan refused to change the policy, even amid criticism that his bank had attempted to apply the requirement to customers for whom unauthorized accounts were opened by bank employees.
The bogus accounts, more than 3 million of them, were created over at least five years until a probe by the CFPB and California regulators led to a public settlement in late 2016.
The bank then conceded that it had fired an average of 1,000 employees a year for the practice. The accounts were created largely by entry-level workers paid as little as $12 an hour and pressured to sell as many as eight different products to each customer household or risk losing their jobs.
“Forced arbitration clauses always give the advantage to the employer, to the bank,” Sen. Sherrod Brown, an Ohio Democrat, told Sloan during the 2017 hearing. “Why should we believe you’re committed to changing your bank’s practices and being fair to customers when you continue to use that behind-closed-doors arbitration system?”
Because, Sloan says, the San Francisco-based lender now prioritizes resolving customer complaints to such a degree that he would consider it a failure to invoke the arbitration policy.
Regardless, Republicans on the committee argued, private arbitration needs to remain an option, partly because of its cost-efficiency.
“I don’t think we should be forcing consumers to fund the lawsuits of class-action lawyers,” said Sen. Tom Cotton, R-Ark., voicing a sentiment that ultimately won the day in the full Senate’s vote.
Fixing the fiduciary rule
For financial advisers risking heightened liability under the Department of Labor’s so-called fiduciary rule, the victory was less clear-cut.
In June, Labor Secretary Alex Acosta agreed to widen the applicability of a 1974 retirement law that obliges financial advisers for retirement accounts to make financial recommendations in their clients' best interests.
Many people had said the rule should be delayed, and the president had expressed concern when ordering a review in February that the requirement might restrict workers’ access to advice they needed to build sufficient savings for homes, college, and retirement.
Acosta eventually said he would enforce the provision as well as requirements that providers charge only reasonable rates and avoid misleading statements.
Other provisions, which would require financial institutions to sign an enforceable contract with individual retirement account-holders and bar the use of incentive plans or quotas that might encourage advisers to make self-serving recommendations, won’t be enforced until at least July 2019.
“A lot of the criticism of Obama administration rules was that they would ultimately restrict credit in ways that would be damaging to the most marginal borrowers,” said Phil Wallach, who developed a deregulation tracker for the Brookings Institution before moving to the R Street Institute.
“A lot of that has been targeted, I think sincerely, with the hope that getting rid of those rules” would benefit struggling borrowers who need credit, he told the Washington Examiner.
Clean Power Plan
Trump described similar motives for his push to eliminate the Clean Power Plan, designed by his predecessor to reduce carbon-dioxide emissions from electrical power plants. Trump worried, he said, that the requirements would push up power bills while hurting coal miners.
The Obama initiative had targeted a 32-percent reduction in greenhouse gas emissions over a 25-year period by encouraging power suppliers to shift from coal to natural gas, nuclear, or clean-energy systems.
The Supreme Court blocked the plan in 2016, however, and Trump's Environmental Protection Agency Administrator Scott Pruitt is now working to repeal it while seeking input on a replacement.
“If you think about the Clean Power Plan being enacted and the cliff that we faced as an industry for 2020, 2022, I think that’s probably gone away now,” Arch Coal CEO John Eaves told investors on an earnings call the month after Trump’s inauguration.
Repealing the plan won’t resolve all of the coal industry’s challenges, particularly the competitive threat from cheaper natural gas available through hydraulic fracturing of large shale deposits.
Prices for coal from the Powder River Basin, the largest coal-producing region in the U.S., have tumbled about 17 percent to $12.35 a ton in the past decade.
Production of 38.7 million tons through Jan. 20 of this year, meanwhile, is down 11 percent from the same period in 2017, according to federal statistics.
“We’re never going to see, probably, the coal consumption we saw six years or eight years ago” of 1.1 billion tons, Eaves conceded in early 2017. “But I think it’s 750 million tons, plus or minus, going forward and pretty stable.”
Additionally, “a lot of communities that were economically dependent on coal in one way or another feel grateful that they’re getting at least a little bit of relief and some attention from the White House,” said Wallach, the former Brookings fellow.
“They felt that they were already down, and the last administration was sort of kicking them,” he added.
'Killing the golden goose'
The industry’s renewed optimism, and that of others, under Trump is apparent not only in the stock markets but in a variety of economic indicators.
Unemployment has dropped to 4.1 percent, the lowest since Bill Clinton was president, and economic growth topped 3 percent for two straight quarters before waning.
“You remember how bad we were doing when I first took over,” Trump reminded his audience in December. “We must liberate our economy from years of federal overreach and intrusion.”
One of the most significant Obama-era policies that Trump has eliminated, say observers, is net neutrality, which governed how Internet service providers set rates and regulated the web as a public utility.
His Federal Communications Commission chair, Ajit Pai, cast the deciding vote in a 3-2 decision in December that returned the Internet to what he called “tried-and-true light touch regulation.”
Excessive oversight, the chairman said, had reduced investment in high-speed networks by billions of dollars. That's a first in the cyber age, outside of recession.
“Online traffic is exploding, and we consume exponentially more data over time,” Pai said. “With new activities like high-volume bitcoin mining that we can’t yet fully grasp, we are imposing ever more demands on the network.
“That means our networks themselves will need to scale, too,” he continued. “But they don’t have to. If our rules deter the massive infrastructure investment that we need, eventually, we’ll pay the price.”
If the decision was a positive for broadband providers, it was far less welcome at companies from Apple to Netflix and Amazon, all of which have invested in video-streaming services and would find profit crimped if the rates for gaining access to their content suddenly surged.
Netflix, the producer of hits such as “Stranger Things” and “The Crown,” responded by joining the Internet Association lobbying group to fight the decision.
"A strong Internet should have enforceable net neutrality rules," the Los Gatos, Calif.-based company said in its fourth-quarter earnings report.
The U.S. Chamber’s Bradley doesn’t disagree with that. What his organization objected to, he said, was the Obama administration’s maladroit approach to achieving it.
“We shouldn’t be in a situation where we have to regulate the entire Internet like a 1930s phone company in order to have those rules of the road,” Bradley said.
Following the FCC’s decision, he added, Congress should find a way to achieve net neutrality “without killing the golden goose.”
Finishing the job
Regardless of whether lawmakers can agree on that, there’s no shortage of other government mandates that corporate America would like to eliminate or ease in the meantime.
Some, such as Obamacare and pieces of the Dodd-Frank law, which attempted to set up safeguards that would prevent a repetition of the 2008 financial crisis, require legislation to alter.
With Republicans’ slim majority in the Senate, winning the 60 votes necessary to stop a Democratic filibuster is a challenge at best. But Sen. Ted Cruz, R-Texas, says there are ways around that.
He proposes using budget reconciliation bills, which require only a bare majority, to address both.
“The biggest unfinished task is Obamacare: We need to finish the job,” he told the Washington Examiner in an editorial board interview last month. “We got very close the last time.”
Dodd-Frank, he continued, “puts enormous regulatory costs on the economy,” which have been particularly debilitating to regional and small banks.
Passage of a bipartisan compromise reached in the Senate Banking Committee, chaired by Idaho Republican Mike Crapo, could help further efforts by the Fed’s Quarles to address that.
It would increase the size at which lenders are subjected to heightened regulatory oversight to $250 billion in assets from the current $50 billion.
Banks with less than $10 billion in assets would be exempted from the Volcker Rule’s prohibition of trading on their own accounts, and the Federal Reserve would keep its authority to apply stricter rules to companies with $100 billion to $250 billion of assets.
While that wouldn’t benefit the nation’s largest banks, such as Morgan Stanley, CEO James Gorman is optimistic that the government will ultimately loosen, at least a little, some of the capital requirements imposed and tightened in the past decade.
“It’s too early to predict the magnitude of any changes, but we expect some relief,” he told investors in January.