Carpe Diem

Federal regulations have lowered real GDP growth by 2% per year since 1949 and made America 72% poorer

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In a research paper that appears in the June 2013 issue of The Journal of Economic Growth titled “Federal Regulation and Aggregate Economic Growth,” economists John Dawson (Appalachian State University) and John Seater (North Carolina State University) examine the relationship between the growth in regulations (measured by the pages of federal regulations) since 1949 and economic performance (measured by real GDP growth). As the authors point out in their introduction:

Macroeconomists typically divide government economic activity into four broad classes: spending, taxation, deficits, and monetary policy. There is, however, a fifth class of activity that may well have important effects on economic activity but that nevertheless has received little attention in the macroeconomic literature: regulation. Although microeconomists have analyzed both the causes and effects of regulation for decades, macroeconomists have joined the discussion only much more recently, with a number of empirical studies suggesting that regulation has significant macroeconomic effects.

The authors consider only the number of pages of federal regulations (which increased almost seven-fold from 19,335 pages in 1949 to 134,261 pages by 2005) as their measure of the burden of regulation and explain that:

Inclusion of state regulation would be highly desirable, but data collection is an enormous task, far beyond our resources. The only way to obtain time series data on the volume of state regulation is to go to each state capital and search the state archives for old editions of state codes of regulation. With fifty capitals spanning distances of literally thousands of miles, we had no choice but to omit state regulations from our measure.

But even without considering state-level regulations, the estimated adverse effect of increasing regulation on economic growth since 1949 has been staggering, here’s part of the conclusion:

Regulation’s overall effect on output’s growth rate is negative and substantial.
Federal regulations added over the past fifty years have reduced real output growth by about two percentage points on average [annually] over the period 1949-2005. That reduction in the growth rate has led to an accumulated reduction in GDP of about $38.8 trillion as of the end of 2011. That is, GDP at the end of 2011 would have been $53.9 trillion instead of $15.1 trillion if regulation had remained at its 1949 level (see chart above).

Ronald Bailey provides some excellent commentary on the study in a Reason article titled “Federal Regulations Have Made You 75 Percent Poorer,” where he makes an important calculation of how regulations affect us at the household level:

As a result [of the increase in federal regulations], the average American household receives about $277,000 less annually than it would have gotten in the absence of six decades of accumulated regulations—a median household income of $330,000 instead of the $53,000 we get now.

Finally, I think the burden of federal regulations on economic  performance estimated by the authors might actually under-estimate the total drag on economic growth since they only include the cost of compliance and enforcement after the regulations are in place. The cost of federal regulations measured by the number of pages in the Code of Federal Regulations doesn’t include the burden of wasteful rent-seeking that private firms engage in before the regulations are in place, as they attempt to influence (support, oppose or change) federal regulations when they are first being proposed and considered by Congress or a federal agency. Adding in these costs of rent-seeking, and the costs of state regulations, paints a pretty depressing picture of how much poorer we all are due to the crushing burden of government regulations.

33 thoughts on “Federal regulations have lowered real GDP growth by 2% per year since 1949 and made America 72% poorer

  1. Regulations are adopted without respect to any true cost-benefit analysis. This is something no business would do. Congress — and increasingly Federal agencies — for all practical purposes simply assumes that the costs are negligible. The benefits of cleaner air and water, safer automobiles and planes, “green” projects are presumed to exceed the costs without any real substantiation. More recycling? Can’t possibly be any hidden costs there. Banning electronic devices on airplanes? Besides the lack of proof of any benefit, the costs are ignored because they are largely time value and opportunity costs. If you’re a regulator, my time is assumed to be worth zero. Some states at least require ballot initiatives to disclose the associated costs. At the Federal level you’re not even given that information.

    So what’s 2% per year? It means that 36 years from now living standards will be approximately HALF of what they could have been. Anyone want to consult the public as to which they’d rather have?

    • This is the problem with “conservatives” and “liberals”, they start from the assumption that the economy is the most important thing in our entire society and that if we don’t have constant growth we’re a failure as a society. This is unrealistic and self destructive. a Nation isn’t the product of an economy, the economy is the product of the nation. The nation is a group of people with the same blood, history, culture and language. In order to meet profit quotas and keep the economic growth on track we sacrfice the very fabric our of nations, we import millions of people to keep the economy growing at the expense of our people. compare public debt in countries where there are nationalized central banks with those with privatized central banks.

  2. Interesting. Does any of the literature track the US Technology Transfer and Advancement Act of 1996 which, among other things, was intended to permit industries do develop their own leading practice (standardizing and innovating from the ground up, so to say) before federal agencies roll in on an industry and write the rules from the top down. Anyone?

  3. The authors consider only the number of pages of federal regulations (which increased almost seven-fold from 19,335 pages in 1949 to 134,261 pages by 2005) as their measure of the burden of regulation–Mark Perry.

    This strikes me as a weak methodology.

    I would be glad to decrease federal regulations, and, say, entirely eliminate some agencies, such as Commerce, Labor and the USDA.

    Let the airlines develop safety standards, in compliance with their private-sector insurers, and get the NSA, Homeland Security and everyone else out of the airline business. I suspect we would see zero hijackings, and no federal intrusion.

    But this methodology of counting ages is make-believe. More pages might mean “softer and refined” regulations. Or even regulations fine-tuned to be business-friendly (as one might expect through the long-term lobbying process established after initial regulations are instituted).

    Moreover, some regulations are costly, but have huge positives, such as the banning of lead from paint.

    Eliminating pollution from the environment is costly, but who has the right to pollute the air someone else breathes, or their water or soil?

    In short, this is not a compelling bit of academia. These guys are in the cloistered ivory towers, insulated and devising methodologies with no connection to the real world.

    • Is this “research paper” a parody? The methodology is beyond weak. It measures only the gullibility of those consuming it.

    • “….but have huge positives, such as the banning of lead from paint.”

      You assume that regulation was necessary. When consumers discovered the effects of lead in paint, they would have stopped buying lead paint, producers would not be able to sell lead paint and they would stop producing lead paint. And all without the enormous compliance costs, the threat of government force and the resulting drag. There was no net benefit from those regulations, only a huge deadweight loss.

      Eliminating pollution from the environment is costly, but who has the right to pollute the air someone else breathes, or their water or soil?

      The only thing the actual regulation accomplish, besides increasing costs tremendously, is to stop innovation in anti-pollution technologies. Of course, you would have to actually look into what actually happened as a result of the Clean Air Act, and not engage in the post hoc reasoning that since the air and water are cleaner, the wise regulators have chosen the most efficient from among the option and regulations have produced a result well worth the cost.

      Ironic that someone possessed of such obviously sloppy thinking has so much to say about the methodology in this paper.

      • Methinks: When consumers discovered the effects of lead in paint, they would have stopped buying lead paint, producers would not be able to sell lead paint and they would stop producing lead paint.

        That is incorrect. Many people would have still bought lead paint. Lead paint has certain advantages, and if you aren’t concerned about the next generation, then it’s not a big issue for the individual.

        Methinks: The only thing the actual regulation accomplish, besides increasing costs tremendously, is to stop innovation in anti-pollution technologies. Of course, you would have to actually look into what actually happened as a result of the Clean Air Act, and not engage in the post hoc reasoning that since the air and water are cleaner, the wise regulators have chosen the most efficient from among the option and regulations have produced a result well worth the cost.

        That’s actually a better example as there is no incentive for people to stop polluting. It’s almost always cheaper to pollute and pass the costs to the victims of pollution. It’s virtually impossible to prove individualized harm from pollution, so lawsuits are ineffective in the absence of laws in that regard.

        • really, who is not concerned with the future??? BUT for some uses lead paint may still be a valid option….certainly not in homes or around children….BUT when consumers hear something MIGHT be harmful they run from it, this would have happened with lead paint for sure…with out the gov’t!
          No incentive to not pollute???? Pollution = wasted inputs….always good reasons to reduce waste….Most folks do not want to damage their neighbors or the planet……If the pollution is so low you cannot identify any individual harm then you must not have significant pollution.
          The Improvement trends were all well established before the regulations….the regulations slightly reduced the trend line..(increased pollution) and did nothing that would not have occurred with out them!!!!!

          • Mr. Ferris.

            If there were no airline regulations, airline companies would have a burning desire to crash their airplanes in order to get more business. Proving themselves macho would draw a lot of new customers.

            :-)

    • The word burden must be interpreted carefully. The number of pages is not used to measure the impact of the regulations (burden – a verb) on the economy. The number of pages is used to measure the amount (burden – a noun) of regulation each year.

  4. If Americans knew what they pay for regulations, e.g. through lower wages and higher prices, they wouldn’t buy that much.

    I’m sure, the vast majority of Americans would buy less than half of the $2 trillion a year in federal regulations, along with less state regulations, because of ridiculously expensive opportunity costs.

  5. Sorry, thinking that per capita income could be six times higher just doesn’t seem reasonable. Where did they calculate the benefit of regulations, say the laws against racial discrimination that finally allowed the South to join the modern economic world? Do you really think that people would buy America products if they didn’t meet basic safety standards? Would unregulated construction lead to more wealth or decrepit cities and towns?

      • Notably, while you attacked us personally, you didn’t respond to the points we raised.

        * The extreme conclusion, that GDP would be six times higher.

        * The lack of accounting for positive economic benefits of regulation.

    • Did the government mandate that smartphones have more memory, longer battery life, better screens and more functions?

      Fear alleviation is something govt attempts to monopolize. In its absence, all fears that you share with others (and you are definitely not alone on construction fears) would be met by private organizations with much greater variability, such as insurance companies (“we can’t insure this house you’re thinking of buying since it wasn’t built to minimum code standards”).

  6. I think that that reasonable people can agree that some regulations are good. I am sure that a thinking person can come to the conclusion that there are too many regulations. So, if you go for this logic we are presently somewhere between too little (necessary) and too much (crony regulations and bureaucratic creep).

    I think reasonable people can agree we need to greatly reduce, but not eliminate regulations. Many regulations are put in place by powerful concerns to reduce competition and these need to be identified and eliminated. Others, arguably necessary, deal with man’s destruction of the commons (e.g., clean air/water) and need to be re-evaluated to determine that they are effective, i.e., is the money spent on compliance worth it. The problem is that there are too many folks that vote who will tell you there is no such thing as spending too much to get clean air or to reduce CO2. These people just want to spend other people’s money, not get results.

    I agree that many regulations, for example airlines, can be taken out of the hands of the federal government and given to the industry and industry insurance companies. The results will be a safer airline industry at much less cost. There are likely many regulations in this category.

    The federal government has no business creating regulations dealing with public education. This is a state and local matter. There are many in this category that need to be re-examined and taken out of the hands of the feds.

    • I operate a firm in a highly regulated industry and I can think of maybe 2 regulations that are good. That means that 99.99999% of regulations we’re subject to are just drag or, worse, produce exactly the opposite of what it intends. And the two okay regulations are not even necessary. The market would demand the firms do those things anyway and when politically connected firms violate those two good regs, they don’t get punished anyway. So, violations go unpunished.

      The only good, efficient and just regulator is the market. Regulatory agencies simply institutionalize fraud and inefficiency.

      For these reasons, I an in favour of scrapping all regulation. Even the good ones are unevenly enforced, meaning that large abusers are unpunished. The process is costly and opaque and regulation ends up costing FAR more than any benefit it promises to provide (but never delivers).

      • “The only good, efficient and just regulator is the market. Regulatory agencies simply institutionalize fraud and inefficiency.”

        It’s hard to disagree with this statement working in a heavily regulated field as I do where it is clear that industry has every interest in doing the right thing or die.

        It would be interesting to hear other’s opinions on my comment on some regulations needed to prevent a tragedy of the commons. Can this be done by markets alone?

        • DrZ: It’s hard to disagree with this statement working in a heavily regulated field as I do where it is clear that industry has every interest in doing the right thing or die.

          Like the banking industry.

          “I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.” — Alan Greenspan

          • Using Crony capitalists as an example means you do not understand what is being discussed.

            Unless you are too big to fail (crony capitalists) you must serve the public well, faithfully, honestly, effectively and never stop improving….Greenspan seems to have Obama’s political well being as his top priority and the well being of the nation as a distant second…..
            It is the FED that is in bed with the banks so why pretend they are just like other firms???

          • Richard W Ferris: Using Crony capitalists as an example means you do not understand what is being discussed.

            We’re quite aware of crony capitalism, but the banking system, heavily regulated though it was, was also clearly motivated to make profits in markets. Yet, those who worked in banking put their own perceived personal gains above that of their companies, their customers, and the country as a whole. This is what surprised Greenspan—though it shouldn’t have.

    • Of course regulations are good, but not when done by a monopoly (government). Customer regulations are what drive smartphone makers to improve their products endlessly, no? Govt isn’t mandating larger screens and faster CPUs. Customer regulation is more effective, since it’s ongoing and measurable (they either buy or don’t).

      Since everyone wants clean air and clean water, consumer advocacy groups only need to draw attention to the biggest polluters and blackmail them through boycotts to reduce their pollution. When the cost of boycott exceeds the cost of reducing pollution, problem solved.

      Consider that fully 40% of the economic activity is illegitimate, as in govt costs 40% of GDP, and the redistributed money is diverted towards ways in which it probably wouldn’t direct if the original earners had kept it. Much pollution and waste are caused by the recipients of this. Rich people don’t fill landfills with plastic junk, they buy high quality, durable products.

      • Steve,
        No disagreement here.

        As a mental exercise I have tried to envision where your proposal fails. It is hard to make a case for failure, but there are some areas for which it is hard to come up with concrete alternatives.

        Where consumers do not drive regulations, I suppose that professional guilds would form to do the same, but guilds might be as bad as government regulations. Guilds and I have seen this with unions too, form to exclude players to reduce competition.

        There is no question that governments use regulations to extort funds from big players and the players use government regs to limit competition to maintain their monopoly.

        Independent testing labs could do a lot to ensure safety and do away with many regs. For example, lead testing, electrical equipment, etc. There is no question that an informed consumer is part of the solution. However, who develops the initial regs? I can see a lab taking over the government’s role of enforcement of existing regs, but how would non-governmental regulations be originated? Those of you who are in attack mode, I am not advocating we need government to fill this role, I am asking an honest question because it is not clear to me how this would happen.

        Having dealt with building codes, I find many are in place for reasons of safety, longevity, etc. and some are in place to line the pockets of the governor’s brother-in-law.

        So a question by an example, in a perfect world how could we do away with governments writing and enforcing building codes and still end up with buildings that have a long life span and are safe to inhabit? A quality stamp on a contractor by a non-governmental testing agency is easy, but new problems arise all the time for which codes are written to prevent future problems. Who does that part – the origination of new codes?

        • Ok, as Steve mentioned insurance companies are part of the answer. If a contractor builds my house, he must be insured by the ABC builder’s insurance company.

          Steve also wrote: “Customer regulation is more effective, since it’s ongoing and measurable (they either buy or don’t).”

          Well this works at some level, but there are other levels where customers buy and then are killed by the item they bought.

          Product feature evolution fits the model of buy or not buy, but product safety is something insurance companies would have to back. That is where independent testing labs become involved.

          Ok, I think I see how to fix my problem with enforcement vs. origination of regs, it is handled via insurance cos insisting on safety testing.

  7. I recommend that people *actually read* my regulation article with John Dawson before they decide it is good or bad. It is obvious that some of the commentators have not done that.

    For example, the article discusses the weaknesses of using page counts as a measure of regulation, the fact that benefits not captured in GDP are missing, the lack of any measure of vigor of enforcement, and also other issues that some commentators here assume my coauthor and I ignored in our article. We tried to do a thorough and honest job.

    As for our 2% effect being too big, we included an extensive comparison with other studies of regulation’s economic impact that use different measures of regulation in many countries. Some of the data are firm-level and deal with very specific regulations, some are industry level, and some are economy level (like ours). In all cases, our 2% effect is on the *low side* compared with what other studies have found. So be careful about jumping to the conclusion that our estimated effect is too big.

    Furthermore, suppose that reducing economic growth by 2% really is too big an estimate. Suppose the effect is only half that big. GDP still would be something more than 50% bigger than it is now if regulation had remained at its 1949 level. That’s at least another $25,000 in income per household *every year*. In other words, the effects still are huge. Even if the effect is only a quarter as big as our reported estimate, it is huge.

    Are regulation’s costs larger than its benefits? In our article, my coauthor and I explicitly refrained from offering a conclusion on that question precisely because we do not have measures of the non-production benefits. However, it is clear that the benefits have to be very large for the existing level of regulation to be a net social benefit. My own guess is that the costs exceed the benefits. That does not mean that all regulation should be scrapped, only that the amount should be cut back.

    • John Seater: My own guess is that the costs exceed the benefits. That does not mean that all regulation should be scrapped, only that the amount should be cut back.

      As you say, without an estimate of economic benefit, you’re just guessing. Even then, if you could reasonable estimate that half of all regulations are counterproductive, that doesn’t necessarily mean we know which half. It’s like bureaucratic waste. Sure there’s waste, but identifying the specific places to cut is often intractable.

      • It’s not necessarily intractable, but it requires more data than my coauthor and I had available. Federal regulations are divided into “titles,” roughly capturing regulations related to a particular kind of activity or area of concern, such as labor or environment. There are 50 titles, and we had only a little more than 50 observations. We ran regressions using all the titles as explanatory variables, but with so few time series observations, we were left with too few degrees of freedom to pinpoint which titles were having the biggest effects or even which were statistically significant.

        The studies that use other kinds of data are helpful here. They look at regulations affecting only employment or starting a business or some other narrow economic activity. I don’t remember the specific results in general, but regs on business start-up and employment do seem to have very big effects. The econometric results also agree with some very specific predictions of how different kinds of regs should affect economic growth, so there is some reason to think that the results are not statistical artifacts of some sort. Those studies suggest that we can indeed discover which regulations have net social benefits and which do not.

        I hope that my article stimulates further research to pinpoint the main sources of the negative effects so that those can be changed as necessary. I have no doubt that with more data we can do just that.

        Finally, as I made as clear as possible, I was indeed only guessing about the net benefits of regulation, but if our results on the magnitude of the net social loss are at all close to the truth, then it is extremely unlikely that the unmeasured benefits of regulation exceed the meassure costs net of the measured benefits. That suggests to me that it is very worthwhile for other researchers to refine our results and pinpoint the main sources of the costs. From my experience with the existing literature, my own guess (another guess on my part) is that the main problems are going to turn out to be in labor market and environmental regulations.

  8. It is no doubt that increased federal regulations put greater reins on the freedom required for economic growth of businesses and hence the nation as a whole. Job creation is hampered, companies aren’t allowed to flourish fully due to increased restraints on expansion, and a lot of time is wasted. It is surprising to note that the rise in the number of federal regulations in the US since 1949 has led to a fall in GDP at the rate of 2% every year which is huge. If the scenario is so bleak, why is US still considered a superpower in the world? Are economic crises and other national-level setbacks taken into account while determining the fall in GDP? Why only blame the rise in federal regulations?

  9. It is no doubt that increased federal regulations put greater reins on the freedom required for economic growth of businesses and hence the nation as a whole. Job creation is hampered, companies aren’t allowed to flourish fully due to increased restraints on expansion, and a lot of time is wasted. It is surprising to note that the rise in the number of federal regulations in the US since 1949 has led to a fall in GDP at the rate of 2% every year which is huge. If the scenario is so bleak, why is US still considered a superpower in the world? Are economic crises and other national-level setbacks taken into account while determining the fall in GDP? Why only blame the rise in federal regulations?

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