Regulation(s) and our Economy

The American Enterprise Institute‘s AEIdeas has looked at the economic cost of Federal regulation and growth in regulation; this study and one by The Heritage Foundation make…interesting…reading in conjunction with each other.

Here’s the money headline on the AEI report:

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

And the money graph:

And now some highlights [emphasis in the original]:

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.

They conclude, in the main:

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 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.  One channel through which regulation has reduced output is TFP*.  We find that federal regulation can explain much of the famous and famously puzzling productivity slowdown of the 1970s.



* Total-Factor Productivity (TFP) is a variable which accounts for effects in total output not caused by inputs (inputs here are the classic factors of production: raw materials and labor, for instance).  Technology Growth and Efficiency are regarded as two of the biggest sub-sections of Total Factor Productivity, and now, Federal regulation is shown to be a major sub-section, also.

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