Appeared in the May 10, 2018, print edition.

The asset base of the world’s financial institutions crumbled in the fall of 2008 as mortgage-backed securities collapsed and credit markets froze. The Federal Reserve responded by buying government bonds, pumping liquidity into the financial markets, and expanding bank reserves.

The Fed also did something that was not so widely noticed: It started to pay interest on excess reserves, effectively paying banks not to lend. That allowed the Fed to expand bank reserves and inject liquidity into the financial system without significantly expanding the money supply.

Did America actually experience 3% real growth to start with? Yes. In the postwar era, the U.S. averaged 3.4% annual growth from 1948 through 2008. We averaged 3% growth for half of the George W. Bush presidency (2003-06). From 2009-12, the Obama administration, the Congressional Budget Office and the Federal Reserve all thought they saw 3% growth just around the corner. If the possibility of 3% growth is gone forever, it hasn’t been gone very long.

America enjoyed 3% growth for so long it’s practically become our national birthright. Census data show that real economic growth averaged 3.7% from 1890-1948. British economist Angus Maddison estimates that the U.S. averaged 4.2% real growth from 1820-89. Based on all available data, America has enjoyed an average real growth rate of more than 3% since the founding of the nation, despite the Civil War, two world wars, the Great Depression and at least 32 recessions and financial panics. If 3% growth has now slipped from our grasp, we certainly had it for a long time before we lost it.

While Obama apologists like to claim that labor-productivity and labor-supply factors preclude 3% growth, most of the growth constraints we face today are directly attributable to Mr. Obama’s policies. The Bureau of Labor Statistics reports that labor-productivity growth since 2010 has plummeted to less than one-quarter of the average for the previous 20, 30 or 40 years. Productivity fell during the current recovery, not during the recession. With high marginal tax rates, especially on investment income, new investment during the Obama era managed only to offset depreciation, so the value of the capital stock per worker, the engine of the American colossus, stopped expanding and contributed nothing to growth.

A tidal wave of new rules and regulations across health care, financial services, energy and manufacturing forced companies to spend billions on new capital and labor that served government and not consumers. Banks hired compliance officers rather than loan officers. Energy companies spent billions on environmental compliance costs, and none of it produced energy more cheaply or abundantly. Health-insurance premiums skyrocketed but with no additional benefit to the vast majority of covered workers.

In a world of higher costs, productivity plummeted. Productivity measures the production of things the market values that flow from the employment of labor and capital. Try listing the Obama-era regulatory requirements that generated the employment of labor and capital in ways that actually produced something you buy.

By waiving work requirements for welfare, lowering food-stamp eligibility requirements and easing standards for disability payments, Mr. Obama’s policies disincentivized work. Disability rolls have expanded 18.6% during the current recovery, compared with a 16% decline during the Reagan recovery. The CBO estimates ObamaCare alone will reduce work hours by 2% and eliminate 2.5 million jobs by 2024. At the current 1% growth in the civilian population above the age of 16, a mere reversion to the pre-Obama labor-force participation rates would supply more than enough workers to generate a 3% growth rate.

Even baby-boomer retirement is driven in part by public policy. When Social Security paid its first check in 1940 average life expectancy was 64 years and benefits started at 65. Today early retirement is available at 62. Life expectancy is now projected to be 79 years. People are healthier, morbidity rates have fallen dramatically, and the retirement age can and should be raised.

Bad policies—not bad luck or a loss of God’s favor—have driven down labor productivity and the labor supply. We can change those policies. If reversing Mr. Obama’s policies simply eliminated half the gap between the projected 1.8% growth rate and the average growth rates during the Reagan and Clinton recoveries, it would deliver 3% real growth generating nearly $3.5 trillion in new federal revenues over the next 10 years. That’s not as much as the $4.3 trillion in revenues lost by Mr. Obama’s slow growth, but it’s more than Mr. Trump promises to bring back by reversing his predecessor’s policies.

America without 3% growth is not America. Since 1960, the American economy has experienced 30 years with growth of 3% or more. Seventy-nine percent of all jobs created since 1960 were created during those years. The poverty rate fell by 72% and real median household income rose by $20,519. In the 26 years when the economy had less than 3% growth, just 21% of all post-1960 jobs were created, the poverty rate rose by 37% and household income fell by $12,004. With 3% growth, the American dream is achievable and virtually anybody willing to work hard can live it. Let 3% growth die and a lot of what we love most about our country will die with it.

Mr. Gramm, a former chairman of the Senate Banking Committee, is a visiting scholar at the American Enterprise Institute. Mr. Solon is a partner of US Policy Metrics.

The Obama debt surge was largely hidden by ultralow interest rates and the Fed’s purchases of government securities. So massive were the Fed purchases of Treasury debt and mortgage-backed securities that the central bank effectively funded 55% of the Treasury debt issued during Mr. Obama’s presidency, as compared with less than 10% of the debt issued during World War II. Although the publicly held national debt doubled as a share of gross domestic product, the cost of servicing it dropped to 1.3% of GDP in 2016 from 1.7% in 2008.

During the Obama recovery, private investment averaged only 88% of the postwar norm, and housing starts remained at recessionary levels. Both would surge if a robust economic recovery were to ignite now, intensifying competition for credit. Real interest rates would begin to rise as they did in other postwar recoveries.

The effect on federal borrowing would be staggering. If interest costs simply returned to their postwar norms, debt-servicing costs would rise by $4.4 trillion over the next decade. If those costs were simply borrowed, it would increase debt-servicing costs by another $1.3 trillion. By 2027, federal interest costs as a share of GDP would more than triple to 4.9%, exceeding $1.4 trillion annually—roughly equal to that year’s projected Medicare spending.

During previous postwar recoveries, annual gross private domestic investment averaged 17.5% of GDP, and yearly Treasury borrowing went up on average by only 1.6% of GDP. But now if interest rates returned to their historic norms, debt-servicing costs in the fifth year of a recovery would cause Treasury borrowing to spiral to 6.6% of GDP. In other words, federal borrowing would represent more than four times the competition for available credit than it did in previous postwar recoveries.

In addition to these headwinds, a full-blown recovery and a return of normal interest rates would force the Fed to sell assets, increasing further the competition for available credit. Recall that the Fed’s bloated balance sheet is the mirror image of bank reserves, which have swollen as a result of the central bank’s various monetary easing programs. The Fed’s purchases of $3.4 trillion in Treasury bonds and mortgage-backed securities have pushed up bank reserves to $13.07 for every dollar they are required to hold. These massive excess reserves have not expanded bank lending or the money supply because the Fed now pays interest on them—sterilizing excess reserves by in essence converting them into interest-bearing Fed securities.

Once a powerful recovery is under way, demand for loans will rise, increasing interest rates and giving banks an incentive to expand lending. To stop the money supply from exploding, the Fed will have to reduce its balance sheet to soak up the excess liquidity in the banking system. Whether the Fed sells securities, lets the securities it holds mature, pays higher interest rates on excess reserves to stop banks from lending, or borrows against the value of its balance sheet, it will end up competing directly with the private sector for credit.

Even if the Fed had five years to unwind excess reserves, it would still have to dump $590 billion of Treasury bonds and mortgage-backed securities into the markets each year. The combined effect of these asset sales and new Treasury borrowing would generate a massive headwind for the recovery, driving up interest rates faster and higher than has been the postwar norm.

In the six decades before 2007, the Treasury borrowed on average an extra 1.6% of GDP a year. The Fed offset part of that by buying some 0.3% worth of federal debt a year, reducing net new public demand for credit to 1.3% of GDP. But by the fifth year of a full-blown recovery with normal interest rates, the Treasury would have to borrow some 6.6% of GDP. At the same time the Fed would shift from being a buyer to a seller of financial assets, absorbing another 2.6% of GDP of available credit. That totals 9.2% of GDP in new borrowing, seven times the postwar average. This would crowd out private investment at a level never before remotely approached in a postwar-era recovery.

Igniting and sustaining a strong recovery will require not only overcoming the post-Obama stagnation but also overpowering these extraordinary headwinds. As long as the economy has little pulse, the fever of rising interest rates will not be felt. But in a full-blown recovery the extraordinary nature of the challenge will become all too clear.

President Trump’s tax-cut proposal is a medicine that should be taken at full strength to trigger strong, sustained private investment. The lifting of regulatory burdens—including the repeal of Dodd-Frank—should be pursued relentlessly through executive action, agency rule-making and legislation. Spending limits and entitlement reforms will be critical to sustaining the recovery once it has begun. With Medicaid metastasizing and Medicare and Social Security veering toward insolvency in the next two decades, comprehensive entitlement reform cannot be delayed.

Failing to ignite a strong recovery in the private sector, or to reduce dramatically the growth of government during the ensuing recovery, will risk making the current Washington-induced stagnation a permanent part of American life.

Mr. Gramm, a former chairman of the Senate Banking Committee, is a visiting scholar at the American Enterprise Institute. Mr. Saving is a professor of economics and the director of the Private Enterprise Research Center at Texas A&M University. Michael Solon contributed to this article.

Appeared in the May. 18, 2017, print edition.

Aug. 3, 2016 

Donald Trump has been criticized by Democrats and Republicans alike for saying that “the American dream is dead.” But instead of slaying the messenger, critics on both sides of the aisle should be examining why so many Americans agree with Mr. Trump and why the Obama “recovery” has been so painful for so many.

When President Obama took office during the 2007-09 recession no president was ever better positioned to lead a strong recovery. With an impressive electoral mandate, Mr. Obama enjoyed a filibuster-proof Senate supermajority, a 79-vote House majority and a nation ready for change. History too seemed to smile on Mr. Obama’s endeavor. The recession ended just six months into his first term and, with the sole exception of the Great Depression, every severe recession since 1870—when reliable annual data were first collected—had been followed by a vigorous recovery.

In his capacity to implement his program, Mr. Obama stood as a colossus with the fates on his side, the vast power of government at his disposal and no one—not Congress, the Supreme Court or the Federal Reserve—willing or able to deny his will. No resources were spared. The Obama $836 billion stimulus exceeded all previous U.S. economic stimulus programs combined. The Treasury borrowed over $1 trillion a year for four years in a row, according to Office of Management and Budget data. The Federal Reserve injected $3 trillion of new reserves into the banking system, generating record-low interest rates.

With infrastructure spending so popular and government coffers so empty, the appeal of subverting private wealth to serve government objectives has become even more attractive. The latest scheme to do so is the European Union’s attempt to “incentivize” more insurance investment in public infrastructure as part of its “Solvency II” regulatory regime. In January the EU lowered capital standards for infrastructure investments by as much as 40% but cited no major errors in the old risk model or any new empirical evidence to justify the change. Instead, the EU repeatedly emphasized its need for “€2 trillion in [infrastructure] investment” by 2020.

The U.S. seems set to follow Europe’s lead. The Treasury Department’s new Federal Insurance Office released a report last year encouraging “state insurance regulators to assess the current [risk-based capital] approach and explore appropriate ways to increase incentives for infrastructure investments by insurers.”

Haven’t we seen this movie before? Didn’t lowering capital standards in the mortgage industry have a bad ending? Remember the subprime-mortgage meltdown and the 2007-08 financial crisis?

The most infamous modern effort to make private wealth serve government goals began on Sept. 12, 1992, when candidate Bill Clinton called for private pension funds to “invest” in government priorities, such as affordable housing and infrastructure. As President Clinton’s point man on harnessing private wealth for public use, then-Labor Secretary Robert Reich drooled over the sheer size of private-pension wealth. “In all, America’s pension funds hold assets that total $4.6 trillion,” he said in 1994 congressional testimony. “If $4.6 trillion worth of one-dollar bills were laid end-to-end, they would stretch a distance equal to 907 round-trip journeys from Washington, D.C., to the moon.”

In a 1994 letter to this newspaper, Mr. Reich promised “competitive, risk-adjusted rates of return” for pensions “plus ancillary benefits, such as affordable housing, infrastructure improvements and jobs.” Yet even the unions, the Clinton administration’s most reliable allies, flatly rejected sacrificing their life savings for government goals.

Despite losing the battle to raid pensions to fund affordable housing, the Clinton administration won the war by using Housing and Urban Development quotas and the little-known Community Reinvestment Act (CRA) to force Fannie Mae and Freddie Mac and banks to serve government goals. HUD housing quotas ultimately required that 55% of all loans purchased by Fannie and Freddie had to be subprime-type loans. President Clinton’s financial regulators used the CRA to force banks to make subprime loans.

As former Federal Reserve Chairman Alan Greenspan said in 2008 congressional testimony, the “early stages of the subprime market . . . essentially emerged out of the CRA.” By the time the crisis broke, federal regulators had used the CRA and HUD quotas to destroy mortgage-credit standards and fill the financial system with 31 million subprime-type mortgages. No less than 76% of those mortgages were issued, held or guaranteed by the federal government.

The EU and the U.S. seem determined to repeat this sad history, only this time lowering capital standards and providing “incentives” for insurers to invest in roads, railways, airports and bridges. If U.S. insurers push back, it isn’t hard to imagine a future Treasury secretary questioning their “economic patriotism” and pressuring them to fund infrastructure. Thanks to the 2010 Dodd-Frank financial law, the Treasury Department already claims power over 30% of the insurance industry. This authority will expand as the Treasury and Federal Reserve work with international regulators to impose the G-7 Financial Stability Board’s international capital standards on U.S. insurers.

Those who question the threat faced by insurance policyholders need only remember that imposing Community Reinvestment Act on the insurance and securities industries was the greatest unfulfilled demand by Democrats in the debate on the 1999 Gramm-Leach-Bliley Act. Had they succeeded, the misery caused by the subprime crisis would have been even deeper and more widespread.

The European Commission’s impressment of the insurance industry to fund infrastructure sounds like predatory behavior. Last year the commission said that “if insurers were to increase their investment in infrastructure to even 0.5% of total assets, which seems achievable, this would mean an extra €20 billion of [infrastructure] investment.” The commission speaks as if it had found a pirate’s treasure map, and piracy seems what they have in mind.

Wealth cannot serve two masters. Individuals buy insurance to promote the well-being of their families. Pressuring or “incentivizing” insurance companies to do anything other than to protect policyholders steals wealth from its rightful owners. Now regulators want to gamble the insurance policy you purchased to protect your loved ones on the profitability of projects like the California High-Speed Rail Authority. We already know how this story ends.

Mr. Gramm, a former chairman of the Senate Banking Committee, is a visiting scholar at the American Enterprise Institute.

Appeared in the October 3, 2016, print edition.

By PHIL GRAMM And THOMAS R. SAVING

Oct. 14, 2015 6:27 p.m. ET

The Federal Reserve enjoys extraordinary independence from the elected branches of government, based on the well-founded fear that politicians cannot be trusted with the power to print money and manipulate interest rates. While the Fed should be independent in setting monetary policy, its ever expanding regulatory powers, which have the force of law, entail a level of discretion that requires democratic accountability enforced by bipartisan oversight and transparency.

Because the U.S. was on the gold standard when the Federal Reserve was established in 1913, the Fed had limited control of the aggregate money supply. It acquired control with the effective demise of the gold standard in 1933. Recognizing the political implications of the central bank’s new power, Congress removed the secretary of the Treasury and the Comptroller of the Currency from the Federal Reserve Board in 1935.

During World War II, the Fed agreed to buy government debt to maintain a ceiling of 0.375% for Treasury bills and 2.5% for Treasury bonds. The inflation following the war—and the effort of the Truman administration to force the Fed to buy the bonds it issued to fund the Korean War—brought to a head the conflict between preserving stable prices and the Fed’s function as an agent of the Treasury. An agreement among Congress, the Treasury and the Fed produced the Accord of 1951, freeing the Fed from the necessity of supporting the market for federal debt.

The massive quantitative easing during the current recovery has led the Fed to purchase debt on a scale that far exceeds anything that occurred before the 1951 Accord. The Fed bought less than 12% of the $1.9 trillion World War II debt as measured in 2009 dollars. Since the fall of 2009, when the recovery began, the Fed has purchased $1.7 trillion of Treasurys and $1 trillion of mortgage-backed securities, directly and indirectly funding more than 55% of federal debt issued during the recovery.

Debate continues to rage over what benefits have accrued to the economy from the Fed’s near-zero interest-rate policy. But there is no debating the fact that Fed policy has made it possible for the federal debt held by the public to double, while the cost to the Treasury of servicing that debt has actually fallen—lowering the federal deficit by some half a trillion dollars a year.

No matter how pure the Fed board’s motives may have been, the fact remains that today every member of the Board of Governors is anObama appointee. This has occurred because—while the Federal Reserve Act provides terms of 14 years—the average tenure of members appointed in the past two decades has fallen to less than five years. As long as board members choose to serve short terms, there will always be a real question about how independent and nonpartisan the board is.

The independence of the Board of Governors could be strengthened by mandating that no more than four of the seven members can be from any one political party. The central bank’s independence could be further enhanced by increasing the number of the Fed’s regional bank presidents serving in rotation on the Fed’s monetary policy-setting body, the 12-member Open Market Committee, from four to seven.

The U.S. has long recognized that the accountability of federal regulatory agencies is best enforced by bipartisanship, transparency and oversight. The 1887 Interstate Commerce Commission had a five-member bipartisan board with no more than three members from the same party; and the agency was funded by annual congressional appropriations. Bipartisan boards funded by congressional appropriations have been the norm from the Federal Trade Commission in 1914, the International Trade Commission in 1916 and the Securities and Exchange Commission in 1934, down to the Commodity Futures Trading Commission in 1975 and the Federal Energy Regulatory Commission in 1977.

The Fed’s regulatory powers have grown since the 1930s, and thanks to the 2010 Dodd-Frank financial reform, the Fed is now the country’s most powerful regulatory agency. The central bank has hundreds of regulators embedded in the front offices and board rooms of the nation’s major financial institutions. It dictates business practices, imposes regulations—some written by foreign regulators—and exercises broad and unaccountable discretionary powers that could determine the success or failure of virtually any financial institution in America.

The Fed’s independence in conducting monetary policy should be strengthened, recognizing the dramatic change in the tenures of board members, but a bipartisan board is indispensable for the nation’s most powerful regulator. The Fed’s regulatory and supervisory activities should be subject to the transparency and public comment provisions of the Administrative Procedure Act and the same constraints that hold other regulatory agencies accountable. All Fed regulatory activities should be subject to rigorous cost-benefit analysis and the Congressional Review Act, which enables Congress to disapprove agency rules that would have a major impact on the economy.

The Fed’s lack of accountability as the nation’s dominant regulator is at odds with our commitment to the rule of law and the principle of checks and balances, and is a growing threat to our economic freedom.

Mr. Gramm, a former chairman of the Senate Banking Committee, is a visiting scholar at the American Enterprise Institute. Mr. Saving is an economics professor and the director of the Private Enterprise Research Center at Texas A&M University.

How did Barack Obama join Franklin Roosevelt and Ronald Reagan to become one of the three most transformative presidents in the past century? He was greatly aided by the financial crisis that erupted during the 2008 campaign. This gave the new president a mandate and a large Democratic congressional majority that fully embraced his progressive agenda.

Having learned from previous progressive failures, President Obama embarked on a strategy of minimizing controversial details that could doom his legislative efforts. But no factor was more decisive than his unshakable determination not to let Congress, the courts, the Constitution or a failed presidency—as America has traditionally defined it—stand in his way.

Americans have always found progressivism appealing in the abstract, but they have revolted when they saw the details. President Clinton’s very progressive agenda—to nationalize health care and use private pensions to promote social goals—was hardly controversial during the 1992 election. But once the debate turned to the details, Americans quickly understood that his health-care plan would take away their freedom. Even Mr. Clinton’s most reliable allies, the labor unions, rebelled when they understood that under his pension plan their pensions would serve “social goals” instead of maximizing their retirement benefits.

In its major legislative successes, the Obama administration routinely proposed not program details but simply the structure that would be used to determine program details in the future. Unlike the Clinton administration’s ill-fated HillaryCare, which contained a detailed plan to control costs through Regional Healthcare Purchasing Cooperatives and strictly enforced penalties, ObamaCare established an independent payment advisory board to deal with rising costs. The 2009 stimulus package was unencumbered by a projects list like the one provided by the Clinton administration, which doomed the 1993 Clinton stimulus with ice-skating warming huts in Connecticut and alpine slides in Puerto Rico.

The Obama stimulus offered “transparency” in reporting on the projects funded but only after the money had been spent. Similarly the 2010 Dodd-Frank financial law defined almost nothing, including the basis for designating “systemically important financial institutions” that would be subject to onerous regulation, what bank “stress tests” tested, what an acceptable “living will” for a financial institution looked like or what the “Volcker rule” required.

In addition to a filibuster-proof majority in the Senate, Mr. Obama benefited from unprecedented Democratic support in Congress. Congressional Quarterly reported that “Obama’s 98.7% Senate success score in 2009 was the highest ever,” surpassing LBJ’s 93%, Clinton’s 85% and Reagan’s 88%. Reagan’s budget, tax cuts, Social Security reform and tax reform programs all had significant bipartisan input and garnered the strong Democratic support they needed to become law. But ObamaCare had no bipartisan input and did not receive a single Republican vote in Congress. The Obama stimulus package received no Republican votes in the House and only three Republican votes in the Senate. Dodd-Frank received three Republican votes in the House and three in the Senate.

Voters used the first off-year election of the Obama presidency to express the same disapproval that they had expressed in the Clinton presidency. Democrats lost 54 House and eight Senate seats in 1994, and 63 House and six Senate seats in 2010.

Mr. Clinton reacted to the congressional defeat by “triangulating” to ultimately support a bipartisan budget and tax compromise that fostered broad-based prosperity and earned for him the distinction of being one of the most successful modern presidents. Mr. Obama never wavered. When the recovery continued to disappoint for six long years he never changed course. Mr. Clinton sacrificed his political agenda for the good of the country. Mr. Obama sacrificed the good of the country for his political agenda.

The Obama transformation was achieved by laws granting unparalleled discretionary power to the executive branch—but where the law gave no discretion Mr. Obama refused to abide by the law. Whether the law mandated action, such as income verification for ObamaCare, or inaction, such as immigration reform without congressional support, Mr. Obama willfully overrode the law. Stretching executive powers beyond their historic limits, he claimed the Federal Communications Commission had authority over the Internet and exerted Environmental Protection Agency control over power plants to reduce carbon emissions.

When Obama empowered himself to declare Congress in “recess” to make illegal appointments that the courts later ruled unconstitutional, he was undeterred. In an action that Lyndon Johnson or Richard Nixonwould have never undertaken, Mr. Obama pushed Senate Democratic Leader Harry Reid to “nuke” the rights of minority Senators to filibuster judicial nominees and executive appointments by changing the long-standing 60-vote supermajority needed for cloture to a simple majority.

American democracy has historically relied on three basic constraints: a shared commitment to the primacy of the constitutional process over any political agenda, the general necessity to achieve bipartisan support to make significant policy changes, and the natural desire of leaders to be popular by delivering peace and prosperity. Mr. Obama has transformed America by refusing to accept these constraints. The lock-step support of the Democrats’ supermajority in the 111th Congress freed him from having to compromise as other presidents, including Reagan and Mr. Clinton, have had to do.

While the Obama program has transformed America, no one is singing “Happy Days Are Here Again” or claiming it’s “morning in America.” Despite a doubling of the national debt and the most massive monetary expansion since the Civil War, America’s powerhouse economy has withered along with the rule of law.

The means by which Mr. Obama wrought his transformation imperil its ability to stand the test of time. All of his executive orders can be overturned by a new president. ObamaCare and Dodd-Frank can be largely circumvented using exactly the same discretionary powers Mr. Obama used to implement them in the first place. Republicans, who never supported his program, are now united in their commitment to repeal it.

Most important, the American people, who came to embrace the Roosevelt and Reagan transformations, have yet to buy into the Obama transformation. For all of these reasons it appears that the Obama legacy rests on a foundation of sand.

Mr. Gramm, a former Republican senator from Texas and chairman of the Senate Banking Committee, is a visiting scholar at the American Enterprise Institute.

According to the Federal Deposit Insurance Corp., 1,341 commercial banks have disappeared since 2010. Remarkably, only two new banks have been chartered. By comparison, in the quarter century before the financial crisis, roughly 2,500 new banks were chartered. Even during the Great Depression of the 1930s, an average of 19 new banks a year were chartered.

A Mercatus Center survey found that while community banks have hired 50% more compliance officers to deal with Dodd-Frank, overall industry employment has increased only 5% and remains below precrisis levels. Industrial, consumer and mortgage finance continue to flee the banking system, as the American Bankers Association reported this week that the law’s regulatory burden has led almost half of banks to reduce offerings of financial products and services.

New financial-services technology, such as online and mobile payment systems, has continued to blossom, but almost exclusively outside the banking system. The massive resources of, and talent in, banks have been sidetracked, rather than being employed to make loans and boost the economy.

Worst of all, Dodd-Frank has empowered regulators to set rules on their own, rather than implement requirements set by Congress. This has undermined a vital condition necessary to put money and America back to work—legal and regulatory certainty.

It is true that a certain amount of regulatory flexibility is necessary in many laws. But in the Securities Exchange Act of 1934, and most subsequent banking law before Dodd-Frank, the powers Congress granted to regulators were fairly limited and generally implemented by bipartisan commissions.

Major decisions were debated and voted on in the clear light of day. Precedents and formal rules were knowable by the regulated. And regulators generally had to be responsive to Congress, which controlled agency appropriations. These checks and balances, while imperfect, did promote general consistency and predictability in federal regulatory policy.

This process has been undermined. For example, Dodd-Frank’s Consumer Financial Protection Bureau is not run by a bipartisan commission. And the CFPB’s funding is automatic, virtually eliminating any real ability for elected officials to check its policies. Consistency and predictability are being replaced by uncertainty and fear.

Over the years the Federal Trade Commission and the courts defined what constituted “unfair and deceptive” financial practices. Dodd-Frank added the word “abusive” without defining it. The result: The CFPB can now ban services and products offered by financial institutions even though they are not unfair or deceptive by long-standing precedent.

Regulators in the Dodd-Frank era impose restrictions on financial institutions never contemplated by Congress, and they push international regulations on insurance companies and money-market funds that Congress never authorized. The law’s Financial Stability Oversight Council meets in private and is made up exclusively of the sitting president’s appointed allies. Dodd-Frank does not say what makes a financial institution systemically important and thus subject to stringent regulation. The council does. Banks so designated have regulators embedded in their executive offices to monitor and advise, eerily reminiscent of the old political officers who were placed in every Soviet factory and military unit.

Dodd-Frank’s Volcker rule prohibits proprietary trading by banks. And yet, despite years of delay and hundreds of pages of new rules, no one knows what the rule requires—not even Paul Volcker.

Then there is the “living will,” a plan that banks deemed to be systemically important must submit to the Fed and the FDIC on how they would be liquidated if they fail. The Fed and the FDIC have almost total discretion in deciding whether the plan is acceptable and therefore whether to institute a variety of penalties, including the divestiture of assets.

Large banking firms must undergo stress tests to see if they could survive market turmoil. But what does the stress test test? No one knows. The Fed’s vice chairman,Stanley Fischer, said in a speech last month that giving banks a clear road map for compliance might make it “easier to game the test.” Compliance is indeed easier when you know what the law requires, but isn’t that the whole point of the rule of law?

To limit abuse by the rulers, ancient Rome wrote down the law and permitted citizens to read it. Under Dodd-Frank, regulatory authority is now so broad and so vague that this practice is no longer followed in America. The rules are now whatever regulators say they are.

Most criticism of Dodd-Frank focuses on its massive regulatory burden, but its most costly and dangerous effects are the uncertainty and arbitrary power it has created by the destruction of the rule of law. This shackles economic growth but more important, it imperils our freedom.

Mr. Gramm is a former chairman of the Senate Banking Committee and a visiting scholar at the American Enterprise Institute.