Regulatory Reform Can Drive Economic Recovery

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Cutting burdensome regulations is an obvious way to stimulate the economy without blowing a hole in the federal budget.


t may seem like a distant memory, but just a few months ago, the unemployment rate was historically low. An economic recovery is now in progress, and unemployment has dropped back below 10 percent. But many people are still suffering, and reexamining regulations may be the best way to revive growth and get the economy back to where it should be.

One problem facing our leaders is that some of the tools traditionally available to boost the economy during recessions are in short supply. In a typical recession, the government tends to increase spending or cut taxes. The hope is that these policies will goose the economy and get people back to work sooner. But whatever one thinks about their effectiveness, it’s getting harder and harder to justify them when trillion-dollar deficits are expected to be the new normal.

According to the Wall Street Journal, federal debt is on track to exceed the size of the economy for the first time since World War II next year. While more government spending or tax cuts could boost growth, they probably wouldn’t do so by enough to fully offset the larger deficits they’d create.

Fortunately, there is another arrow in the policymaker’s quiver that often gets overlooked: regulatory reform. It’s less sexy than cutting taxes, or sending constituents a check in the mail and a letter signed by the president, but it may actually produce more bang for the taxpayer buck.

Are regulations bad for the economy, such that removing them will boost economic growth? You might be surprised to learn that until not that long ago, there wasn’t a whole lot of solid empirical evidence on the question either way. Sure, economic theory offered sound reasons to believe that regulations stunt growth by displacing business investments and misallocating resources and talent away from their most productive uses. But few statistical studies had the data to back up that belief, because historically it’s been hard to measure regulation’s economic impact. And in economics, what gets measured tends to be what gets studied.

Thankfully, this state of affairs has begun to change in recent years. Since around the turn of the century, the World Bank and the Organization for Economic Cooperation and Development have put together indices of regulation that measure its extent across countries. By now, we have several decades of data accumulated, and they are informative.

Recently, Robert Hahn and I reviewed studies published in the peer-reviewed academic literature that rely on these indices to explore the extent to which regulations affect economic growth or productivity (which is a proxy for growth). Virtually every study in our sample pointed in the same direction: Regulation that restricts entry into an industry or imposes anti-competitive restrictions on product or labor markets has a negative impact on growth. This held true across a variety of countries, industries, and time periods, and across studies employing a variety of methodologies and statistical techniques.

Of course, regulations have benefits, too, and very often regulators aren’t even concerned with how their policies affect the level or growth rate of GDP. But in a way, that’s the problem: These unintended consequences go overlooked, both because regulators have other goals in mind when they write laws, and because even in the rare cases where they conduct an economic analysis, that analysis typically focuses on small changes in the short term, rather than the long-term dynamics associated with growth.

As this year’s recession begins to fade, regulatory reform is an obvious choice for those who want to juice the economy without blowing a hole in the budget. President Trump has already made cutting red tape a priority of his administration. But according to some measures, there has actually been a modest increase in the overall amount of federal regulation during Trump’s tenure. Trump has effectively managed to turn off the regulatory spigot, such that the flow of new regulations has slowed from a geyser to a drip. But the stock of thousands of preexisting rules still on the books is still a big problem for the economy.

Fortunately, several states have made serious headway at reducing their own regulatory regimes. Idaho and Missouri are notable for their substantial success in this regard. The Trump administration can and should learn from their example.

The coronavirus has wrought havoc on the American economy, but some of the sluggish growth we are experiencing is man-made. While the worst of the virus and the economic devastation that has accompanied it are hopefully behind us, that doesn’t mean we should sit idly by. There is much that can still be done without pushing the federal government further into the red. In that sense, regulatory reform is a can’t-lose proposition.

James Broughel is a senior research fellow at George Mason University’s Mercatus Center and the coauthor of the new study, “The Impact of Economic Regulation on Growth: Survey and Synthesis.”

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