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