Deep Dive Episode 20 – The 2017 Mercatus Report: The Implications of Regulating Over the Long-Term
Federal regulations have accumulated over many decades, so much that it would require over three years to read through them all if you started today. The buildup of regulations over time leads to duplicative, obsolete, conflicting, and even contradictory rules and the multiplicity of regulatory constraints complicates and distorts the decision-making processes of firms operating in the economy. Firms respond to both individual regulations and regulatory accumulation by altering their plans for research and development, for expansion, and for updating equipment and processes. Because of the important role innovation and productivity growth play in an economy, these distortions may have consequences for the growth of the economy in the long run.
McLaughlin will discuss his recent study (with Duke University professors Bentley Coffey and Pietro Peretto) that examines regulation’s effect on firms’ investment choices and, consequentially, on economic growth. Using a 22-industry dataset that covers 1977 through 2012, the study finds that regulation—by distorting the investment choices that lead to innovation—has created a considerable drag on the economy, amounting to an average reduction in the annual growth rate of the US gross domestic product (GDP) of 0.8 percent.
Economic growth in the United States has, on average, been slowed by 0.8 percent per year since 1980 owing to the cumulative effects of regulation:
- If regulation had been held constant at levels observed in 1980, the US economy would have been about 25 percent larger than it actually was as of 2012.
- This means that in 2012, the economy was $4 trillion smaller than it would have been in the absence of regulatory growth since 1980.
- This amounts to a loss of approximately $13,000 per capita, a significant amount of money for most American workers.