Regulation Buildup and Economic Preformance

The American Enterprise Institute (AEI) has an interesting blog post written by economist Mark J. Perry and policy analyst Thomas Hemphill. They analyze the important, but often ignored, impact regulatory buildup has had on economic growth over the past few years. As they noted, “the U.S. economy grew at an annual rate of only 0.5% during the first quarter of 2016…  economic growth has averaged only 1.4% annually over the last seven years.” This is far below the 3% historical average–a benchmark Obama has not hit (he is the first president to do so. Even FDR hit 3% economic growth during the depression).

So, how big of an impact have regulations had? Perry and Hemphill write:

In a 22-industry study released in April by the Mercatus Center at George Mason University, a group of researchers found that federal regulations created an economic drag on the U.S. economy amounting to an average annual reduction in GDP growth of 0.8%. … What would have happened if federal regulations had been “frozen” at the levels that prevailed in 1980?…

The Mercatus research team calculated that the 0.8% annual drag on real GDP growth since 1980 due to the cumulative effects of regulation can be extrapolated into a 25% reduction in the size of the U.S. economy in 2012, or an economy that was $4 trillion smaller (nearly $13,000 per American) than it would have been in the absence of regulatory growth.

An economy smaller by $4 trillion, or $13,000 per family, due to increasing regulatory burdens since 1980 is a staggeringly high number. Mercatus has an older study, published in 2013, that calculates how much regulatory burdens have cost the U.S. economy since 1949.

In 2011, nominal GDP was $15.1 trillion.  Had regulation remained at its 1949 level, current GDP would have been about $53.9 trillion, an increase of $38.8 trillion.  With about 140 million households and 300 million people, an annual loss of $38.8 trillion converts to about $277,100 per household and $129,300 per person.

I can only dream of a world where every household was $277,000 wealthier than it is today and government smaller–and it looks like it could have been possible had regulatory burdens not exploded since the end of WWII.

Now, some of the regulations since 1949 (and 1980, for that matter) had to have been good. I am also not an anarcho-capitalist: I agree that some regulations are needed. But these studies demonstrate the trade-offs we have with regulation. Regulations may (though usually not) provide consumer protections and stability, but they come at a high economic cost. At what  point do the costs outweigh the benefits? My answer is “almost always”; generally speaking, the costs of any new regulation outweigh the benefits. Even if you disagree with that conclusion, these studies should be eye opening.

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