“We wanted flying cars, instead we got 140 characters” is the pithy and tweetable way the Founders Fund, a San Francisco-based venture capital firm, asks the question, “What happened to the future?”
How did it get away from us? Maybe we regulated away the sci-fi future that our never-happened tiger years would have brought us. A 2013 study from economists John Dawson of Appalachian State University and John Seater of North Carolina State University, Federal Regulation and Aggregate Economic Growth, estimates that the past 50 years of federal regulations have reduced real GDP by roughly two percentage points a year, or nearly $40 trillion.
Instead of the US economy growing by just over 3% a year since World War Two, it would have grown by over 5% a year. “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,” the authors conclude. (And by the way, the study does not attempt to quantify the costs of the Affordable Care Act or Dodd-Frank financial regulation.)
Imagine a US economy four times as big — four times as wealthy — as the one today. Basically, we would have the US economy of 2080 right now. Instead of regulation to reduce air and water pollution, maybe nanobots would be doing the job for us. And maybe we would have flying cars, such as the one depicted cruising above 2019 Los Angeles in the film Bladerunner (top photo)..
If Dawson and Seater are correct, the cumulative impact of decades of post-New Deal regulation is also why US productivity growth and innovation downshifted in the 1970s, a phenomenon still a topic of much debate among academic economists. Indeed, an important channel for regulation impact is decreased innovation, rather than just compliance costs.
But are these numbers even remotely plausible? Dawson and Seater concede that a) “they are aware of no theory that addresses the effects that regulation has on the macroeconomy” and b) “estimates of the output losses induced by regulation may elicit ‘sticker shock’ on the part of the reader.” (Welcome to the miracle of compounding.)
So the duo are breaking some new ground with their model, and I am eager to hear what other economists say about their findings. But the authors do point to a previous study of differing country growth rates from 1950 through 1998 that argues most of the differences between the high and low growth rates were the result of “barriers to riches” from various forms of regulation. At the very least, this study should remind us that there are costs, perhaps immense ones, as well as benefits to regulation.