Regulation Slows Economic Growth

June 28, 2013

The growth of federal regulations over the past six decades has cut U.S. economic growth by an average of 2 percentage points per year, according to a new study in the Journal of Economic Growth. As a result, 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, says Ronald Bailey, a science correspondent for Reason Magazine.

Economists John Dawson and John Seater constructed an index of federal regulations by tracking the growth in the number of pages in the Code of Federal Regulations since 1949. The number of pages, they note, has increased six-fold from 19,335 in 1949 to 134,261 in 2005.

  • The Bureau of Economic Affairs estimates that real gross domestic product (GDP) in 1947 was $1.8 trillion in 2005 dollars.
  • The real GDP growth rate between 1949 and 2011 averaged 3.2 percent per year. Compounded over the period, that would yield a total real GDP of about $13.3 trillion in 2011; that's the same figure the bureau gives for that year.
  • If regulation had remained fixed at 1949 levels, GDP growth would have averaged 2 percent higher annually, yielding a rate of about 5.2 percent over the period between 1949 and 2011.
  • Compounded, that yields a total GDP in 2005 dollars of approximately $43 trillion, or $49 trillion in 2011 dollars, which is in the same ballpark as the $53.9 trillion figure calculated by Dawson and Seater.

But let's say that the two economists have grossly overestimated how fast the economy could have grown in the absence of proliferating regulations. So instead let's take the real average GDP growth rate between 1870 and 1900, before the Progressives jumpstarted the regulatory state.

  • Economic growth in the last decades of the 19th century averaged 4.5 percent per year.
  • Compounding that growth rate from the real 1949 GDP of $1.8 trillion to now would have yielded a total GDP in 2013 of around $31 trillion.
  • Considerably lower than the $54 trillion estimated by Dawson and Seater, but nevertheless about double the size of our current GDP.

Defenders of regulation will argue that regulations also provide benefits to Americans. But the measure devised by Dawson and Seater accounts for both the aggregate benefits and the costs of the regulations. The two researchers note their results "indicate that whatever positive effects regulation may have on measured output are outweighed by negative effects."

Source: Ronald Bailey, "Federal Regulations Have Made You 75 Percent Poorer: U.S. GDP Is Just $16 Trillion Instead of $54 Trillion," Reason Magazine, June 21, 2013.

 

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