Is Financial Regulation Killing or Creating Jobs?

This is a hard question to answer, and how you do depends on your view of what caused the crisis

600 dodd-frank signing Leader Nancy Pelosi flickr.jpg

These days, one of Republicans' chief rallying cries is to do away with excessive regulation. They say that it destroys jobs and creates uncertainty, which prevents additional hiring. Their logic makes sense: additional regulation imposes a cost, and as rules evolve firms might not be able to plan for growth. But regulation also creates jobs: the government must hire new regulators, and firms must hire more compliance staff. So on balance, will last summer's giant financial regulation bill be a net job killer or creator?

Job Killer

Over the past week, there both viewpoints have been argued. Let's start with the negative side. Tuesday's Wall Street Journal editorial laments:

What is the cost of overregulation? Bank of America appears to have provided part of the answer by announcing yesterday that the nation's largest bank will cut 30,000 jobs between now and 2014. CEO Brian Moynihan said the bank's plan is to slash $5 billion in annual expenses from its consumer businesses.

Mr. Moynihan didn't say this, but we will: These layoffs are part of the bill for the last two years of Washington's financial rule-writing. After loose monetary policy had combined with insane housing policy to create a financial crisis, the Democrats who ran Washington in 2009 and 2010 enacted myriad new rules that had nothing to do with easy money or housing.

In fact, Bank of America is merely the latest and most significant of the firms on Wall Street having announced layoffs since the summer began. While financial regulation isn't likely the only explanation for the need to reduce labor costs, it is almost certainly one of the motivations.

Job Creator

But maybe we shouldn't fret: regulation can also increase employment. Someone has to figure out, implement, and carry out all of those new rules. Ben Protess reports for DealBook on how the bill will be a boon for derivatives lawyers:

With President Obama's $447 billion job bill facing an uncertain future, could Dodd-Frank be the next best thing? After all, the nation's biggest banks and financial firms are hiring a steady stream of lawyers, compliance experts and technology gurus to gear up for the new regulatory regime. As The New York Times reported on Friday, some are calling the growth industry "Dodd-Frank Inc."

"This is the full employment act for derivatives lawyers," said Richard McVey, chief executive of MarketAxess, a derivatives trading platform well-positioned to capitalize on Dodd-Frank.

The article's sources go on to say that the new rules "will foster a landslide of hiring in the financial sector."

Marian Wang at ProPublica agrees and cites another way jobs will be created:

But separate from the jobs created to actually handle new regulation, others have pointed out that regulations can have a long-term, positive effect on overall economic growth by preventing the types of crises that put an industry on life-support.

Last year, two studies by central bankers and regulators found that the short-term impacts of stricter capital requirements were "significantly smaller" than the estimates published by banking groups, the Times reported. Rather, the studies said that stricter regulation would lead to more long-term growth by preventing future crises.

So Which Is It?

Let's start with the fact that we've got more regulators, compliance officers, and lawyers needed. Is this a net benefit to the economy? Absolutely not: these workers make doing business more expensive. Regulation imposes this additional cost on firms, and ultimately the U.S. economy. So there's little reason to celebrate these additional jobs: they're actually cutting the nation's growth, not expanding it. Firms must now spend more money to produce the same amount of output.

But what about Wang's argument? These regulators may produce something new: better financial stability. If the cost of complying with the new regulation is less than the cost of the financial crisis that would have occurred without the new regulation, then the rules will actually enhance economic growth, and ultimately, net hiring.

The question, then, is whether or not the regulation imposes a net cost or provides a net benefit to the U.S. economy. Unfortunately, we can't know for sure. If the regulation was less than or equal to the optimum amount needed to enhance financial stability, then the economy will be better off. If the regulation goes too far, then the economy will be worse off.

How you view this question probably depends on where you stand on your view of what caused the financial crisis. If you believe that it was caused by poor government housing policies, then you likely believe that the regulation will harm the U.S. and kill jobs. So don't expect many Republicans to be impressed by these regulation-creates-jobs arguments. Only those who believe that the crisis occurred because regulation was too lax and Wall Street needed to be reigned in will believe that the rules will promote growth.

Image Credit: Leader Nancy Pelosi/flickr

Presented by

Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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