Economics, Pethokoukis

Here’s how crony capitalism and regulation kill US economic growth

Mercatus

Mercatus

What timing. I just wrote a blog post on how crony capitalism is hurting American business dynamism. In particular, regulation makes it harder for new firms to enter a market and gives an edge to large incumbent firms who can lobby for favorable new rules. And as I write, ” … fewer startups means fewer disruptive new competitors to force big business to innovate or die.”

Then I see this Mercatus Center study from Antony Davies:

A new metric provided by RegData counts the number of “binding words”—“shall,” “must,” “may not,” “prohibited,” and “required” —that appear in the Code of Federal Regulations , and cross-references those word counts with the industries to which they apply.

A comparison of the RegData data to production-efficiency measures provided shows that industries that are subject to less regulation have significantly higher production-efficiency measures than do industries that are subject to more regulation.

Over the period 1997 through 2010, the least regulated industries expe rienced 63 percent growth in output per person, 64 percent growth in output per hour, and a 4 percent decline in unit labor costs. Over the same period, the most regulated industries experienced 33 percent growth in output per person, 34 per cent growth in output per hour, and a 20 percent increase in unit labor costs.

The anti-growth formula: More regulation = less competitive intensity = less innovation and productivity.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

8 thoughts on “Here’s how crony capitalism and regulation kill US economic growth

    • The only major financial deregulation I recall was Gramm-Leach-Bliley, which had absolutely nothing to do with the subsequent housing crash and financial crisis. On the contrary, the diversified institutions that GLBA made possible (BofA, JPM, Wells) absorbed the failing monoline institutions (Bear Stearns, Countrywide, WaMu, IndyMac, Merrill Lynch) at the government’s request and helped stabilize the financial system.

      • Libertarians RIGHT NOW support HR 1105 which would deregulate financial institutions regarding transparency to potential investors about fees.. (94% Republicans voted against it in the last vote, http://www.newrepublic.com/article/117735/private-equity-fraud-how-firms-are-ripping-their-investors)

        And there was the damaging CFMA of 2000 which took regulation of OTC derivatives away from the CFTC, over the valid objection of Brooksley Born. Turns out she was right. This was because conservatives assured us (e.g. Alan Greenspan) that Wall Street could ‘self regulate’ through ‘professional markets’.

        You’re invoking locking the barn door after the horses have escaped.

  1. Huh? The Mercatus study ranks trucking and airlines as heavily regulated but are they? Both were among the first industries to be deregulated in the 1980s — freed to set their own tariffs/fares. Trucking deregulation lies at the heart of the Wal-Mart economy. Harnessing computers and satellite communication, retailers and suppliers turned trucks into rolling extensions of its distribution centers.
    Now the conduct of these businesses is in fact heavily regulated, but for mostly valid public safety reasons. I for one am happy that onboard transponders make it less likely that the trucker in the next lane is starting on meth-fueled Day Three.
    Which brings us to a double huh? Airlines and trucking fared poorer in the recession than less regulated industrles? Well, duh. Suddenly poorer by trillions, consumers weren’t buying or traveling.
    There is a case to be made against dumb regulations.
    The Mercatus study is not it.

    • +1

      The chart is also terrible, it only shows what they purport in a few years with uncorrelated meanderings in both directions in others.

  2. I hate excessive (software) patents, but I like the environment clean and protected from companies protected behind an LLC or bankruptcy who wont be held accountable for the clean-up and leave it to tax payers –I’m all for LLCs and bankruptcy though.

    The point is, the general statements of “less regulation is good” perpetuates the wrong ideals and the wrong type of rhetoric. You really should know better.

  3. The most regulated, subsidized, molly-coddled, enfeebled US industry is agriculture—but the Mercatus dudes did not include agriculture in their study.

    It is often said that US agriculture leads the world….

    I probably would concur with the thrust of the Mercatus study, but it seems yet another “study” in which the authors want to confirm their biases.

    Most academics write the conclusion first, then dodge up the data somehow….

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