As JPM writes in its intraday update, the "Trump/Ryan enthusiasm is starting to quietly fade as investors appreciate the enormous logistical and mathematical hurdles associated w/realization of their agenda. The nature of the Trump White House is such that investors should get used to avalanches of headlines, tweets, etc. on a daily basis but very little of this stream of consciousness barrage is likely to be incremental – platitudinous promises about slashing taxes “massively” or cutting regulations “by 75% or more” are increasingly being ignored as markets wait for specifics on the “Big 3” (tax reform, deregulation, and infrastructure spending). Tax reform continues to account for the bulk of the Trump/Ryan enthusiasm but enormous uncertainty exists around this issue (timing, revenue offsets, forced vs. optional repatriation, 35% vs. 20 or 15% when the average cash/effective rate is already ~23-25%, etc.)."

Yet while investors are becoming somewhat disenchanted with the tax reform and infrastructure spending aspects of the Trump agenda, little has so far been said about the deregulation aspect of Trump's proposals, and it is here that another potential source of upside, especially to small US businesses - the primary source of job creation - resides.

As JPM's Michael Cembalest reminds us in his latest note "The Rules of the Game: on regulation and deregulation", the updated WhiteHouse.gov website states the following: “the President has proposed a moratorium on new federal regulations and is ordering the heads of federal agencies and departments to identify job-killing regulations that should be repealed.”

According to Cemablest, this initiative would be welcomed by small businesses which have expressed rising concerns about regulation since 2009. Similarly, in a 2014 survey by the National Association of Manufacturers, 88% of respondents felt that regulations were affecting their business, by far the #1 concern in the survey. Why might this be the case? While most administrations add to new regulations, the regulatory pace of the last 8 years substantially exceeds its two predecessors.

Cemablest further notes that while it is hard to measure the cost of regulations, in part due to their magnitude and complexity, some agencies try: according to the US Office of Management and Budget, the cost of new regulations passed since 1980 are around $250 billion per year. Other estimates are substantially higher: the latest review from the Competitive Enterprise Institute (the most detailed report I have seen on the subject) cites annual regulatory compliance and economic impact costs of $1.8 trillion, which is roughly equal to all personal and corporate income tax collections.

One direct implication from these soaring compliance costs and the heightened pace of government regulation, is that the US has become, in relative terms, a harder place to start a new business., which may also explain why the bulkof , if not all, job additions under Obama was in minimum-wage, part-time and other low-paid service jobs, leading to a record number of multiple jobholders in recent months.



The next chart shows World Bank data on starting a business that compares the US to the world, and to countries in the OECD. As another indicator of the complexity that US businesses face, consider the inexorable rise in the length of US tax regulations, and in the number of pages in the Code of Federal Regulations (second chart). The US Office of Management and Budget estimated that it took 9.8 billion man-hours for businesses to complete Federally required paperwork in 2015, up from 7.4 billion man-hours in the year 2000.

Making matter worse, according to the JPM strategist, regulatory expansion is augmented by the fact that it is driven by agencies that do not answer to voters. There are roughly 25-30 rules issued by agencies for every law passed by Congress (“regulation without representation”). Related compliance costs from rules and regulations fall disproportionately on smaller and medium sized firms, which account for 50% of total employment.

It brings to mind the 1992 article written by George McGovern, one of the most progressive politicians of the 20th century, on his experience owning a small business after leaving the Senate and dealing with regulation: “A Politician’s Dream is a Businessman’s Nightmare”. You would think that there would be a substantial amount of effort by government agencies to try and understand the costs and benefits of regulation, given its impact on the economy, which as the chart bottom right shows that while regulatory costs amount to $20,000 for all US firms on average, they crush small business by about $30,000 per worker, making new business creation, and employee retention, virtually impossible.