Economics Update (January-March 1997)

Regulatory Reform Could Boost Growth

I s the U.S. economy growing at the optimal rate? According to Earnest W. Deavenport Jr., Chairman and Chief Executive Officer of Eastman Chemical Company, "the slow growth, low inflation economy that we've grown accustomed to over the past five years isn't necessarily the right thing for America. . . . not in a world that is free for the first time in nearly half a century from the twin specters of communism and nuclear war . . . . "

Earnest Deavenport
Earnest Deavenport, chairman and CEO of Eastman Chemical Co.
Deavenport, speaking recently to the Board of Directors of the Atlanta Fed and local business and community leaders, said that the global economic environment could foster robust growth. He pointed out that inflation is largely in retreat worldwide and that three-fourths of the globe's population is concentrated in emerging nations just beginning to enjoy the benefits of capitalism. Furthermore, Deavenport noted, the world looks to the U.S. for economic leadership—to act as an "engine of growth and innovation."

"Our economy is capable of doing much more. Annual growth of at least 5 percent without igniting inflation is possible if we give the economy room to grow," he asserted.

"What can we do to get our economy moving?" Deavenport asked. Product liability laws, taxes, trade barriers, and antiquated government regulations are four problem areas that, in his opinion, "depress productive capacity and potential while artificially inflating interest rates."

Legal costs, some the result of frivolous litigation, push the cost of business ever higher, Deavenport pointed out. Quoting figures from the National Association of Manufacturers, he said that U.S. companies spend $55 billion annually in outside legal costs—more than any other nation in the world.

"We can get rid of a lot of headaches—economic and otherwise—by reforming our. . . product liability laws," Deavenport proposed. "Today's all-encompassing liability laws hold not only the manufacturer responsible, but all of the suppliers as well."

Deavenport also cited the need for tax reform. "Fundamental tax reform should reduce special provisions and move toward a simplified rate structure. It should favor savings and investment in capital and technology rather than penalizing those who save and those who invest for the future."

He observed that "even though tax rates were cut dramatically in the '80s, income tax revenues increased by $200 billion a year." The current deficit, Deavenport asserts, was created by unbridled government spending, not by lower taxes.

"The reality," he submits, "is that every time the tax burden has been reduced on the American people, not only has America prospered, but government revenues have gone up."

Expansion of international trade and exports would also fuel U.S. economic growth, Deavenport said, explaining that "a trade surplus generates additional income, capital investment, increased economies of scale, and higher productivity in key manufacturing sectors."

He cites the chemical industry as one example. "When it comes to balance of trade, the chemical industry is the nation's leader—outpacing aerospace, agriculture and electronics," Deavenport states. "In 1995, chemical industry exports totaled nearly $61 billion—a trade surplus of $20 billion," he said.

"For every dollar increase in exports, GDP eventually rises by two dollars. We should be working to expand trade and exports by opening markets abroad, reducing export controls, and delinking trade and social issues," he proposed.

The current structure of environmental regulations also constrains growth, according to Deavenport. "We can help our own economic cause by taking a hard look at our nation's regulatory structure and rules," he contended.

Deavenport believes that many regulations could be updated, while others could be eliminated altogether. Ideally, he would like to see regulations that are

  • flexible enough to give business more discretion in the way it meets regulatory targets;
  • rational enough to reflect the possibilities that today's technology offers; and
  • sensible enough to be based on sound, risk-based economic analysis, rather than headline-driven hysteria.
He said that "regulations should change people's incentives so that they voluntarily modify their behavior, not the other way around."

While changes in these areas could enhance economic growth, Deavenport contended that people's perceptions about growth must change first. "We need to take a risk on growth," he stated.

Risk does not include giving up low rates of inflation for growth, however. When asked how much inflation he would trade for growth, Deavenport replied "None. Inflation is an insidious killer. But you don't have to have inflation to get faster growth."

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