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Is Regulation Really What's Wrong with America?

Wealth Daily's Weekend Edition

Written by Briton Ryle
Posted January 21, 2012

Publisher's Note: As associate publisher and research assistant for The Wealth Advisory, Briton Ryle is the newest member of the Angel investment research team.

I thought his insight on what's really ailing the U.S. economy worthy of sharing in our Weekend Edition.

Have a great weekend,
Brian Hicks


Is Regulation Really What's Wrong with America?
By: Briton Ryle

How's the U.S. economy doing?

Ask a Harvard Business School grad that question, and you might get a pretty depressing answer.

A recent survey that polled 10,000 Harvard Business School alumni started with the question, "What ails the U.S. economy?"

And the answers were not at all good... 71% of the respondents say the ability for America to compete will decline over the next three years; 66% said we are falling behind emerging economies.

Why?

Well, according to the survey, it's pretty much everything: The tax code, political system, K-12 education, macroeconomic policies, legal framework, regulations, infrastructure, and workforce skills were all named as reasons for the decline in U.S. competitiveness.

The authors of the study explained: “For the first time in decades, the business environment in the United States is in danger of falling behind the rest of the world... With this, pressures on jobs, wages and living standards will only grow."

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This may not be news to you.

After all, there's been plenty of press howling about how regulations are killing business. Bankers complain about the Volcker Rule and how it's hurting the banking business. But then, that was the idea, wasn't it?

Don’t forget, as Americans, we're realizing that all was not well on Wall Street at the end of 2007. Morgan Stanley (NYSE: MS) had $1.05 trillion in assets that were backed by just $30 billion of equity. That's completely insane.

So, after the financial crisis exposed our nation's bankers as a bunch of gambling lunatics, it seemed appropriate that they should be reeled in by increased regulation.

And we're seeing the results — in both bank earnings and their compensation structure.

Goldman Sachs' (NYSE: GS) earnings were down 67% in 2011. In 2011, Goldman set aside $12.22 billion to pay compensation and benefits for its 33,300 employees. That comes out to around $367,000 per person. Not bad, right?

Well in 2006, the firm paid out $16.46 billion in compensation and benefits — or roughly $621,000 per employee.

(Personally, I think a few high-profile prosecutions may have been more effective in dealing with the banks than adding regulations, but I could be wrong.)

So, are American banks less competitive? Maybe.

But not against European banks, at least...

Where is the U.S. Energy Policy?

Then there's the rejection of the Keystone Pipeline that was to bring more Canadian tar sands oil to America.

It's being used as Exhibit A for how our government is anti-growth and anti-job.

But the state of Nebraska didn't want the pipeline to run near the Ogallala Aquifer. And even though Transcanada (NYSE: TRP) agreed to reroute the pipeline, the fast-tracked application was still rejected.

Now Bloomberg reports Transcanada may be ready to propose a pipeline from the Bakken oil shale formation to Texas. In my opinion, that would be much better than the pipeline from Canada...

For one, Bakken oil is light sweet crude, as opposed to the carbon-intensive sour oil that comes from Alberta. And two, even though the Bakken formation extends into Canada, the U.S. side is more developed. A new pipeline could encourage more production and more jobs (even though the Bakken area already has an effective unemployment rate of zero.)

Still, I expect some version of the Keystone Pipeline project will eventually be passed.

But the debate over Keystone XL isn't really about jobs or oil.

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It's really just another example of our broken political system, akin to the brinkmanship that nearly pushed us to default, rather than an indictment of the president (and trust me, I'm no fan of this administration's policies).

There have been plenty of accusations that carbon emission caps are job-killers. But the fact is these EPA regulations are encouraging utilities to switch to natural gas-fired electricity plants. General Electric (NYSE: GE) has been a big beneficiary as a major supplier of natural gas turbines.

We have to ask why natural gas prices are zeroing in on record lows.

In Japan, natural gas sells for around $15 mmBtu. In the United States, we have more natural gas than anywhere else in the world, and it sells for $2.50 mmBtu because we don't have enough demand.

Is this because of regulation — or a lack of incentives to boost the use of natural gas?

America's Shrinking Profit Margin

We can't ignore the fact that America's heyday was a direct result of cheap energy inputs to manufacturing. Cheap energy made for strong profit margins that could be transferred to workers via relatively high wages.

Globalization and expensive energy have changed that formula.

And clearly, the financial alchemy that created and popped the housing bubble and artificially ramped GDP and employment was no substitute for real growth. It was a wealth effect on steroids. And we know the use of steroids has a debilitating effect.

From this perspective, the drop in U.S. competitiveness is not a result of regulation. It's structural — and inevitable, as energy costs rise and global wages compete with each other.

The Bureau of Labor Statistics keeps track of why workers are fired. In 2010, 0.3% of the people who lost their jobs in layoffs were let go because of “government regulations/intervention”; 25% were laid off because of a drop in business demand.

That's the issue we're dealing with: lack of demand due to high unemployment and lost household wealth from the housing crash.

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We Have to Have SOMEONE to Blame

The authors of the Harvard survey conclude “it would be wrong to place either the U.S. competitiveness problem or its solution at the feet of the government” — but rather at business.

“Part of the business agenda for U.S. competitiveness,” they write, “is to stop taking actions that benefit one’s own firm but, collectively, weaken America’s business environment.”

So Harvard Business School's own professors — who are not just academics, but corporate vets as well — are pointing the finger at their own students, past and present.

How interesting, they have seen the enemy and it is us. Or them.

As for me, I am absolutely bullish on American business and our ability to innovate and overcome.

Corporate America has already shown it can adjust to weak demand and a totally incompetent government.

Profits on the S&P 500 will hit a record this year. And that's in spite of the current business and economic climate, not because of it.

America is home to Apple (Nasdaq: AAPL) and Coca-Cola (NYSE: KO), Microsoft (Nasdaq: MSFT) and Intel (Nasdaq: INTC), Ford (NYSE: F) and Wal-Mart (NYSE: WMT).

There are only a handful of international brands that can compare to these names. And I don't expect that to change anytime soon.

In fact, I expect Uncle Sam to emerge from the current crisis of confidence leaner and meaner than we have ever been before.

Consider the current environment a window of opportunity for you to invest in the resurgence of America while stock valuations are relatively low.

More ideas for investing and profiting in America's "ailing" economy below.

Until next time,

Briton Ryle
Analyst, Wealth Daily

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