Is America's accumulating pile of regulations slowing down economic growth? According to a new study from the Mercatus Center at George Mason University, the answer is yes: Thanks to regulatory drag, the U.S. economy is $4 trillion smaller than it otherwise would have been.
Of course, proponents of regulations can always point to the good that the rules are supposed to do. On Earth Day, I was on a climate change panel with Avi Garbow, general counsel for the Environmental Protection Agency, and he certainly believes his agency does far more good than harm. He cited President Barack Obama's Clean Power Plan, which would force power plants to cut their carbon dioxide emissions by 30 percent by 2030. According to agency calculations, American families would see up to $7 in health benefits for every dollar invested through the Clean Power Plan. By lowering particulate, ozone, and nitrogen oxide pollution, the EPA argues, Americans will gain the health equivalent of $55 to $93 billion annually; the yearly costs will be only $7.3 billion to $8.8 billion by 2030.
Garbow added that EPA regs don't just stop harms but spur technological innovation. He specifically cited regulations that support the deployment of renewable energy supplies, and he pointed out that there are now more jobs in the solar power industry than there are in coal mining.
Maybe. Given the great reductions in U.S. ambient air pollution that have already been achieved, epidemiologists are not all agreed that deeper cuts will bring commensurate benefits. A March 2015 study in the Annals of Epidemiology asks, "Has reducing fine particulate matter and ozone caused reduced mortality rates in the United States?" The researchers looked at trends in nearly 500 counties between 2000 and 2010 and found that "predicted substantial human longevity benefits resulting from reducing PM2.5 [particulate matter] and O3 [ozone] may not occur or may be smaller than previously estimated." A May 2014 study in Epidemiology also found no meaningful increase in cardiovascular risk among Europeans who experienced long term exposure to current levels of air pollutants. Different researchers have found otherwise. But such studies suggest that some regulatory efforts have reached the point of diminishing returns, and may in some cases impose costs that outweigh the gains.
"For each new regulation added to the existing pile, there is a greater possibility for…inefficient company resource allocation, and for reduced ability to invest in innovation," explain the Progressive Policy Institute economists Michael Mandel and Diana Carew in a 2013 regulatory reform policy memo. "The negative effect on U.S. industry of regulatory accumulation actually compounds on itself for every additional regulation added to the pile." They offer three explanations for how the growing pile of federal regulations slows economic growth. In the first, regulations act as "pebbles in the stream." Tossing a few pebbles into a stream will have no discernible effect on its flow, but the accumulation of regulatory pebbles eventually dams the river of innovation. (The development of mobile health applications, for example, has arguably been blocked by the accretion of medical privacy rules, FDA approvals, and insurance regulations.) The second explanation rests on how regulations can interact in counterproductive ways. (Think of how fuel economy standards push automakers toward lighter vehicles even as safety standards favor heavier cars.) The third focuses on "behavioral overload." As the web of regulations becomes more complex, confused managers and workers must devote more resources to compliance and away from innovation and company growth.
The Mercatus Center's new study aims to quantify the damage to economic growth that the accumulation of regulations causes. The paper refines the work of two economists, John Dawson of Appalachian State University and John Seater of North Carolina State. In 2013, the two calculated that if regulations had remained at the same level as in 1949, GDP would have been $53.9 trillion instead of $15.1 in 2011. In other words, U.S. GDP in 2011 was $38.8 trillion less than it might have been—a 2 percent annual reduction in economic growth cumulated over 56 years. In other words, federal regulations had made Americans nearly 75 percent poorer than they would have been.
Dawson and Seater's work was based on a regulatory burden index the two had developed by counting the growth in the number of pages in the Code of Federal Regulations.
The Mercatus researchers devised a new regulatory database that analyzes all federal regulations between 1970 and 2014, seeking to determine the magnitude of the limitations and mandates they impose on specific industries. This new RegData 2.2 database enables researchers to probe how the rules affect key decisions in particular industries, such as amounts of investment, product and service outputs, and market entry and exits. In the study, three economists focus on federal regulations aimed at 22 major industries, including oil, coal, natural gas, chemicals, machinery, metals, computers, trucking, financial, air transport, health care, and entertainment.
The Mercatus researchers cranked their data through an endogenous growth econometric model to estimate regulations' effect on entrepreneurs' investment decisions throughout the U.S. economy between 1980 and 2012. "In endogenous growth theory, innovation is not an exogenous gift from the gods but rather the result of costly effort expended by firms to realize gains," they explain. "The growth generated by that entrepreneurship can be thwarted by misguided public policy." Money and brainpower spent on compliance cannot be invested in innovative technologies, processes, and procedures that boost productivity, create new companies, and speed up economic growth.
So what did they find? "Our results suggest that regulation has been a considerable drag on economic growth in the United States, on the order of 0.8 percentage points per year," the Mercatus economists report. Noting that their estimate is a bit less than half that found earlier by Dawson and Seater, they believe that "it is still within a reasonable range, especially since their study covers a longer time horizon."
Slowing economic growth by slightly less than one percent per year may not sound like much, but it adds up over time. Consider that in 1980, U.S. GDP in real (2009) dollars was $6.5 trillion; by 2012, it had multiplied to $15.2 trillion. This implies an annual growth rate of 2.7 percent per year. If the economy had grown at a rate of 0.8 percent more—a rate of 3.5 percent—U.S. GDP in 2012 would have been $19.5 trillion instead. "The economy would have been about 25 percent larger than it was in 2012 if regulations had been frozen at levels observed in 1980," the authors say. "The difference between observed and counterfactually simulated GDP in 2012 is about $4 trillion, or $13,000 per capita."
Garbow could be right that the Clean Power Plan will yield significant health benefits. But you have to wonder how much more good health Americans might have procured had their incomes been 25 percent higher.