Markets
The Regulatory Burden in the U.S. is a Whopping $4 Trillion
One of the big problem with regulatory policy is that typically new regulations are only added – never subtracted.
A good example of this is the federal tax code, which is now 74,608 pages long.
It’s an astonishing 148x longer than it was under President Franklin Roosevelt’s New Deal:
If all you have is a hammer, everything looks like a nail. Regulators add new regulations to “solve” problems, but there is much less political will to actually go back and sort through any outdated, ineffective, or convoluted regulations of the past.
Over time, this has created a massive regulatory burden that continues to snare the growth potential of many industries. According to one study, the cumulative effect creates a burden with a dollar value greater than the GDP of many of the world’s largest economies.
Regulatory Burden in the U.S. is a Whopping $4 Trillion
The following graphic comes from a recent study by the Mercator Institute and it shows that the U.S. regulatory burden alone is bigger than the economies of Germany, France, Brazil, Russia, or the U.K.
The full study focuses on how regulatory accumulation, or the buildup of regulations over time, changes the approach that businesses have in making decisions and investments that could lead to innovation and technological growth.
These changes affect the economy, and a core finding of the study is that U.S. growth was reduced by an average of 0.8% per year from 1980 to 2012 due to this regulatory accumulation. An exponential effect is created over time as companies are forced to invest fewer dollars into activities like R&D and hiring new staff. Instead, they must divert money and time to areas such as compliance or acquiring licenses.
There are now over one million words denoting “constraints” in the Code of Federal Regulations – and the total size of the code is roughly 180,000 pages according to Mercator’s database.
Markets
How Disinflation Could Affect Company Financing
History signals that after a period of slowing inflation—also known as disinflation—debt and equity issuance expands.
How Disinflation Could Affect Company Financing
The macroeconomic environment is shifting. Since the second half of 2022, the pace of U.S. inflation has been dropping.
We explore how this disinflation may affect company financing in Part 2 of our Understanding Market Trends series from Citizens.
Disinflation vs. Deflation
The last time inflation climbed above 9% and then dropped was in the early 1980’s.
| Time Period | March 1980-July 1983 | June 2022-April 2023* |
|---|---|---|
| Inflation at Start of Cycle | 14.8% | 9.1% |
| Inflation at End of Cycle | 2.5% | 4.9% |
* The June 2022-April 2023 cycle is ongoing. Source: Federal Reserve. Inflation is based on the Consumer Price Index.
A decrease in the rate of inflation is known as disinflation. It differs from deflation, which is a negative inflation rate like the U.S. experienced at the end of the Global Financial Crisis in 2009.
How might slowing inflation affect the amount of debt and equity available to companies?
Looking to History
There are many factors that influence capital markets, such as technological advances, monetary policy, and regulatory changes.
With this caveat in mind, history signals that both debt and equity issuance expand after a period of disinflation.
Equity Issuance
Companies issued low levels of stock during the ‘80s disinflation period, but issuance later rose nearly 300% in 1983.
| Year | Deal Value |
|---|---|
| 1980 | $2.6B |
| 1981 | $5.0B |
| 1982 | $3.6B |
| 1983 | $13.5B |
| 1984 | $2.5B |
| 1985 | $12.0B |
| 1986 | $24.2B |
| 1987 | $24.9B |
| 1988 | $16.9B |
| 1989 | $12.9B |
| 1990 | $13.4B |
| 1991 | $45.2B |
| 1992 | $50.3B |
| 1993 | $95.3B |
| 1994 | $63.7B |
| 1995 | $79.7B |
| 1996 | $108.7B |
| 1997 | $106.5B |
| 1998 | $97.0B |
| 1999 | $142.8B |
| 2000 | $156.5B |
Source: Bloomberg. U.S. public equity issuance dollar volume that includes both initial and follow-on offerings and excludes convertibles.
Issuance grew quickly in the years that followed. Other factors also influenced issuance, such as the macroeconomic expansion, productivity growth, and the dotcom boom of the ‘90s.
Debt Issuance
Similarly, companies issued low debt during the ‘80s disinflation, but levels began to increase substantially in later years.
| Year | Deal Value | Interest Rate |
|---|---|---|
| 1980 | $4.5B | 11.4% |
| 1981 | $6.7B | 13.9% |
| 1982 | $14.5B | 13.0% |
| 1983 | $8.1B | 11.1% |
| 1984 | $25.7B | 12.5% |
| 1985 | $46.4B | 10.6% |
| 1986 | $47.1B | 7.7% |
| 1987 | $26.4B | 8.4% |
| 1988 | $24.7B | 8.9% |
| 1989 | $29.9B | 8.5% |
| 1990 | $40.2B | 8.6% |
| 1991 | $41.6B | 7.9% |
| 1992 | $50.0B | 7.0% |
| 1993 | $487.8B | 5.9% |
| 1994 | $526.4B | 7.1% |
| 1995 | $632.7B | 6.6% |
| 1996 | $906.0B | 6.4% |
| 1997 | $1.3T | 6.4% |
| 1998 | $1.8T | 5.3% |
| 1999 | $1.8T | 5.7% |
| 2000 | $2.8T | 6.0% |
Source: Dealogic, Federal Reserve. Data reflects U.S. debt issuance dollar volume across several deal types including: Asset Backed Securities, U.S. Agency, Non-U.S. Agency, High Yield, Investment Grade, Government Backed, Mortgage Backed, Medium Term Notes, Covered Bonds, Preferreds, and Supranational. Interest Rate is the 10 Year Treasury Yield.
As interest rates dropped and debt capital markets matured, issuing debt became cheaper and corporations seized this opportunity.
It’s worth noting that debt issuance was also impacted by other factors, like the maturity of the high-yield debt market and growth in non-bank lenders such as hedge funds and pension funds.
Then vs. Now
Could the U.S. see levels of capital financing similar to what happened during the ‘80s disinflation? There are many economic differences between then and now.
Consider how various indicators differed 10 months into each disinflationary period.
| January 1981 | April 2023* | |
|---|---|---|
| Inflation Rate Annual | 11.8% | 4.9% |
| Inflation Expectations Next 12 Months | 9.5% | 4.5% |
| Interest Rate 10-Yr Treasury Yield | 12.6% | 3.7% |
| Unemployment Rate Seasonally Adjusted | 7.5% | 3.4% |
| Nominal Wage Growth Annual, Seasonally Adjusted | 9.3% | 5.0% |
| After-Tax Corporate Profits As Share of Gross Value Added | 9.1% | 13.8% |
* Data for inflation expectations and interest rate is as of May 2023, data for corporate profits is as of Q4 1980 and Q1 2023. Inflation is a year-over-year inflation rate based on the Consumer Price Index. Source: Federal Reserve.
The U.S. economy is in a better position when it comes to factors like inflation, unemployment, and corporate profits. On the other hand, fears of an upcoming recession and turmoil in the banking sector have led to volatility.
What to Consider During Disinflation
Amid uncertainty in financial markets, lenders and investors may be more cautious. Companies will need to be strategic about how they approach capital financing.
- High-quality, profitable companies could be well positioned for IPOs as investors are placing more focus on cash flow.
- High-growth companies could face fewer options as lenders become more selective and could consider alternative forms of equity and private debt.
- Companies with lower credit ratings could find debt more expensive as lenders charge higher rates to account for market volatility.
In uncertain times, it’s critical for businesses to work with the right advisor to find—and take advantage of—financing opportunities.
Learn more about working with Citizens.
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