Overregulation Hurts Job Creation and Economic Growth

May 30, 2014

Since 2011, productivity -- the main driver of job creation and economic growth -- has been growing at just half its historical rate, says John Dearie, Executive Vice President at the Financial Services Forum.

Economic growth is largely driven by gains in productivity, not increases in capital and labor. And productivity is determined by innovation, resulting in more efficient businesses and workers, lower costs, higher profits and incomes, increased demand and gains in job creation. As businesses become more efficient, costs fall and profits and incomes rise.

But while productivity has averaged 2.5 percent growth since 1948, it has grown at only 1.1 percent since 2011. In the first quarter of 2014, productivity actually declined at an annual rate of 1.7 percent.

Historically, start-ups launched by entrepreneurs have been responsible for some of the most important innovations of the past century. But alarmingly, new business formation has been declining across the country.

  • Dearie conducted roundtables with entrepreneurs across 12 American cities. According to the entrepreneurs, regulatory burdens, complexity and uncertainty are dampening their ability to launch new businesses and create jobs.
  • According to a report from the Competitive Enterprise Institute, almost 90,000 new regulations have been issued over the past 20 years -- an average of more than 4,300 per year. The report estimates their annual economic impact to be $1.9 trillion, a figure equivalent to the world's tenth largest economy.

While some regulation is essential, regulation creates economic distortions and imposes costs that must be borne by businesses. Start-ups are especially susceptible to the effects of over-regulation, because they lack large amounts of resources to absorb compliance costs.

Politicians on both side of the aisle are now seeking to pass the Regulatory Improvement Act, a bill that would evaluate, simplify, streamline and eliminate regulations. Doing so would help decrease regulatory burdens and promote higher productivity, resulting in greater economic growth.

Source: John Dearie, "Entrepreneurship is the Key to Economic Growth and Job Creation," Economics21, May 29, 2014.

 

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