The Cato Institute’s Mark Calabria critiques Senator Dodd’s financial services regulation bill, highlighting how the bill misses the mark in terms of preventing future economic crisis (and as has been written elsewhere, by enshrining “too big to fail” and government bailouts, may encourage more irresponsible risk-taking). Calabria also focuses on how the bill will deter job creation. He writes:
Reductions in credit directly result in declines in job creation. We know, for instance, that the two most common sources of funds for starting businesses are home-equity and credit-card debt. The bursting of the housing bubble largely eliminated the first option; now Washington is trying its best to kill the second.
Dodd’s proposed “consumer protections” would reach beyond credit cards and restrict the availability of all forms of credit, while raising costs.
The bill would expand the depth and scope of federal financial regulation, raising both regulatory and litigation costs that are ultimately passed on to the consumer. Dodd gives his proposed bureau almost unlimited authority to decide which products and services it can regulate.
The increased cost of offering products to higher-risk borrowers would likely result in many of those products being eliminated from the marketplace, reducing credit for the very individuals who need it the most.
George Mason University Professor Joshua Wright estimates that the Dodd bill’s credit restrictions would reduce job creation by 4.3 percent – about 60,000 fewer jobs every year.
Sadly, the job destruction doesn’t end there. Former Clinton Treasury official Robert Litan and financial expert John Mauldin warn that Dodd’s new restrictions on “angel investors” would dampen or even shut down that investment market.
An “angel investor” is a wealthy individual or small group that provides start-up capital for business ventures. The Dodd bill would require start-ups to file with the SEC before seeking “angel investments” and delay those investments while the SEC reviews the filing. The added legal and filing fees could raise the cost of starting a business by tens of thousands of dollars. It could also add another half-million jobs to the body count.
Many miss the connection between credit and job creation. In fact, one of the U.S. strengths has been the ability of entrepreneurs to access credit so they can start and expand businesses. That shouldn’t be sacrificed in a rush to punish Wall Street.