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Deregulation: Why Looser Rules Could Mean a Stronger Economy

By Michael Gayed, Editor, The Lead-Lag Report

As debates over the path of economic growth intensify, one policy lever could emerge over the next several months: deregulation.

While the market usually likes to focus on growth, taxes, inflation, interest rates, and the Fed, the idea of loosening the regulatory restrictions around which businesses operate could be just as influential, if not more so, in shaping the direction of the economy.

And President Donald Trump has signaled that there could be a renewed push for deregulation over his second term.

Given his promise to ignite the U.S. economic growth engine, now is a good time to revisit what deregulation actually means, how it can impact growth, and what it might signal for investors going forward…

What Is Deregulation?

Deregulation refers to the process of reducing or eliminating government regulations and compliance burdens for businesses.

The goal is to loosen restrictions, ease business conditions, and free up capital that could be used instead to grow and expand the business. Reducing or eliminating those rules that impose high costs could improve cash flow and improve balance sheet health. When that happens, businesses often become more profitable and investors benefit.

In economic terms, regulations are often seen as friction. They require businesses to spend time and capital on activities that don’t directly drive revenue.

In 2025, it’s estimated that companies could spend more than $2 trillion maintaining compliance to current regulations. Some manufacturing companies are expected to spend $50,000 per employee annually on this effort. Deregulation could mitigate a lot of this cost and free up resources, reduce costs, and enable companies to operate more efficiently.

Of course, not every regulation is necessarily bad, but the accumulation of regulatory rules and the cost of abiding by them can make U.S. companies less competitive on the world stage.

But considering the current administration’s emphasis on reshaping the global trade market and positioning the United States as an economic powerhouse, it becomes clear how deregulation fits into that goal.

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A Look Back at Trump’s First Term

During Trump’s first term, deregulation was a clear priority. Some of his executive orders established new requirements to justify existing regulations and some were even repealed altogether.

His deregulatory targets were broad-based and covered a number of industries:

• In the energy sector, Trump loosened both EPA oversight and the approval processes for new pipelines and drilling.
• Trump made changes to the Dodd-Frank Act that would adjust the thresholds for bank stress testing and change oversight of regional banks.
• On the labor front, he relaxed rules governing independent contractor classifications.
• Trump targeted the healthcare sector by attempting to accelerate the process for new drug approvals and improve access to telehealth.
• The nuclear industry, which is usually polarizing in the eyes of the public, may find an easier time developing and initiating new facilities to grow its place in the energy sector.

Trump maintained a very pro-business stance as part of his election campaign and his term in office. These moves were intended to reduce overhead costs, but more importantly create more capital investment and allow businesses better opportunities to grow.

In general, the markets mostly reacted favorably to these changes and it was one of catalysts that helped spur a rally in the S&P 500 once Trump entered office.

In his second term, there’s little reason to believe that his positions have changed as he’s said that deregulation will be a focus again. He’s been a fierce opponent of green energy efforts, so it’s likely that the energy sector and the fossil fuel industry could be beneficiaries. Regulations on financial institutions could also be eased in an effort to increase M&A activity and improve lending.

The Economic Case for Deregulation

Let’s take a look at a few consistent themes for how deregulatory efforts could benefit specific industries and sectors:

• Increased Productivity: Companies should be able to spend less time and money on compliance. This would allow them to focus more on growth and research & development and can improve worker efficiency.
• Small Businesses Benefit: Smaller companies tend to spend a proportionately larger amount of time and money on compliance. Given that a lot of core job creation comes from this area of the economy, this could boost the labor market and level the playing field.
• Approval Processes Speed Up: Faster permitting in the energy sector and faster approvals in the healthcare pipeline could boost production and accelerate time-to-market for products.

Not all areas of the economy will benefit equally. In some cases, they’ll be slow to take effect, but deregulation can over time serve as a steady tailwind for companies and their growth trajectories.

What This Means for Investors

From an investing perspective, deregulation tends to create opportunities for businesses, particularly those in industries that are capital-intensive or traditionally beset by regulations.

The energy, financial, and healthcare sectors could be heavily targeted by deregulation, but most areas of the manufacturing space are likely to see some benefits. Areas, including energy infrastructure, regional banks, and biotech may get a tailwind, while small-caps, which often have less financial flexibility than their large-cap counterparts, could outperform.

It’s wise to look at deregulation as a longer-term, yet flexible, theme.

The outlook for the regulatory environment is very politically-driven and could change on a dime based on whoever is occupying the White House. With Trump in the very early stages of his second term, deregulation should be in focus for the foreseeable future and potentially even longer depending on who occupies the White House next.

Final Thoughts

Trump’s tax cut bill has generated a lot of attention, but in a lot of cases for the wrong reasons.

It may ultimately help stimulate economic growth, but it likely also comes at the cost of larger budgetary deficits and a growing national debt.

Deregulation could accomplish some of those same goals, but without the visible price tags. If the Trump tariffs remain grounded by the courts, it’s reasonable to think that he may turn to deregulation as the next step in revving up the U.S. economic growth engine.

Regards,

Michael Gayed

Editor, The Lead-Lag Report