According to a paper released by think tank American Action Forum (AAF) last week, the Dodd-Frank regulation could reduce US economic output by nearly a trillion dollars over the next decade.
In the paper, President of AAF Douglas Holtz-Eakin highlights how the general perception of this regulation has been negative. He explores how banking sectors see the act as a burden and believe that complying with this act has harmed lending, investment and growth. No evidence has been provided for this belief and the AAF paper attempts to estimate the growth impact of the Dodd-Frank Act.
Holtz-Eakin estimates that the Dodd-Frank Act will make a significant impact on economic growth and compliance costs will reduce this growth by $895 billion, or $3,346 per working person between 2016 and 2025.
“Collecting results, the impact on economic growth is a decline in the per capital growth rate of 0.059 percentage points annually. The lower rate of economic growth translates into a total loss of $895 billion in GDP or $3,346 for every member of the working age (16 and older) population over those 10 years,” Holtz-Eakin says.
Although these numbers have been calculated with precision, Holtz-Eakin emphasised that “everyone should take this all with a grain of salt.”
Since release, the paper has received some negative attention. A liberal advocacy group, Americans for Financial Reform posted its own response to Holtz-Eakin’s paper on its website, which listed many flaws in the AAF predictions alongside the benefits of financial regulation.
“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. Extensive economic research shows that the benefits of greater financial sector stability alone will exceed the costs claimed by the AAF,” the group argued.
Americans for Financial Reform also say that the AAF study was based on the assumption that higher compliance costs lead to reduced lending. “Some of those costs will be absorbed by lower compensation for executives or other cost-cutting measures. The study also assumes the costs of implementing the new rules will extend for at least the next decade, when in fact some of those costs will only last a few years,” the Wall Street Journal reported.
The 2010 Dodd-Frank Act was put in place to reform the financial services industry in the US in the wake of the 2008 financial crisis. The aims of this legislation were to protect consumers from abusive banking practices, encourage confidence in larger institutions and improve transparency in the financial system.
Holtz-Eakin says that the act “created new agencies and bureaus, changed capital requirements, revamped securitisation rules, changed the oversight of derivatives, imposed the Volcker Rule, and had provisions for corporate governance.”
Better Markets, the Washington advocacy group have produced their own study on regulation and financial crisis costs and their prediction is a growth reduction of $12.8 trillion. CEO Dennis Kelleher says that investing in regulation cannot entirely prevent financial crises from happening. “Focusing on claimed costs of regulation to prevent another financial crash ignores the massive and very expensive costs of such crashes. The country cannot afford not to fully regulate finance and prevent future financial crashes,” Kelleher said according to the WSJ.
The Wall Street Journal also report that some believe that the Dodd-Frank Act has made the financial system safer and has protected the US against another crisis. At a conference last week hosted by the think tank Institute for New Economic Thinking, United States Senator for Massachusetts Elizabeth Warren remarked that financial regulations are necessary. “Rules are not the enemy of the markets. Rules are a necessary ingredient for healthy markets,” Warren said.
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