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Economy & Jobs

How Deregulation Can Increase Economic Growth

4 minute read

Overregulation hurts the economy broadly:
  • Excessive regulation is a tax on the economy, costing the U.S. an average of 0.8 percent of GDP growth per year since 1980.
  • If we held fixed the number of industry-relevant regulations at levels observed in 1980, the U.S. economy would have been about 25 percent larger (roughly $4 trillion) in 2012.

It is making us less competitive:

  • The United States ranks 27th out of 35 countries in product market regulation (which measures whether regulation encourages competition and ensures a level playing field among firms) behind France, Chile, and the Czech Republic (according to OECD calculations).
  • The United States used to be the least regulated country, pursuing strong deregulation policies during from 1975 to 1998, using OECD regulatory indices that measure investment rates as a share of capital stock find (1975-1998).

It is costly, with much of the burden falling on small businesses and entrepreneurs:

  • CEA estimates that business’ costs on compliances officers’ salaries have increased 171 percent since 2000 accounting for inflation — an annual growth of 6.9 percent each year on average – or more than twice the rate of growth of the economy.
  • In 2000, completing paperwork for Federal regulation cost an estimated $236 billion (up from $143 billion in 1980). Assuming the same proportion of compliance officers’ salaries out of total paperwork cost, the cost of paperwork increased to $881 billion in 2015.
  • Regulation is especially burdensome for small businesses: the cost per employee of complying with regulations was higher for small firms ($11,724) than it was for firms with over 100 employees ($9,083)
  • Burdensome regulations are easier for larger firms to shoulder, and drive small firms out of business or prevent them from entering in the first place.

It perpetuates inequality, hurting the most vulnerable the hardest:

  • The burden of government regulation falls most heavily on low-income Americans, who spend a larger proportion of their income on heavily regulated goods including transportation, gasoline, utilities, food and healthcare.
  • Increases in total regulations lead to increases in consumer prices that add up, with the poorest households experiencing the highest overall levels of inflation and price volatility.
  • Entry regulations may force individuals into fields that do not utilize their skills, resulting in lower income, or encourage individuals to operate illegally within their preferred occupation.
  • Increasing the number of procedures required to start a business by one standard deviation increases a country’s Gini coefficient, a commonly used measure of economic inequality across geography, by 1.5 percent, and distorts the share of income going to the top 10 percent of earners by 5.6 percent.
  • Countries with more significant labor market regulations for low-skilled workers has resulted in greater technological development and automation in low-skilled sectors. In other words, overregulation of labor may inadvertently encourage employers to use cheaper machines instead of humans.

Occupational licensing can be a form of regulation that creates barriers to entry and makes workers less mobile:

  • Occupational regulation or licensing generally requires individuals to file registration paperwork, acquire certification, or receive licensure, often referred to as “the right to practice.”  This red tape has grown exponentially over the past 50 years, with the share of the workforce needing a license to work growing fivefold.
  • CEA finds that roughly two-thirds of the overall increase in licensing is due to more occupations requiring licenses rather than more workers joining these heavily licensed occupations.

This taxation-by-regulation has increased sharply in recent years: 

  • There were approximately 45,000 more pages in the Federal Register, which reflects the flow of new regulations, than 40 years prior — an increase of about 90 percent.
  • The Code of Federal Regulations (CFR), which measures the existing stock of regulations on the books, has increased over time, rising 160 percent from 1975 to 2016.
  • Counting the prevalence of the words “shall,” “must,” “may not,” “required,” and “prohibited” in the CFR, the number of restrictions measured using this dataset increased 107 percent from 1975 to 2016.
  • The number of “economically significant” rules — those estimated to have an annual effect of $100 million or more — increased dramatically under the Obama Administration, with the government promulgating 494 new significant rules, 38 percent higher than under the George W. Bush Administration.

The Administration’s continued deregulatory policies will drive continued economic growth:

  • Reducing administrative costs of regulation would be a boon to the economy. For EU countries that cut regulatory costs by 25 percent, real GDP went up by 1 percent per year.
    • Putting that deregulation savings into research and development spending, the long-run growth effect was even higher at 1.7 percent.
  • The elimination of occupational licensing and other regulations that serve as barriers to entry encourages greater competition and lowers prices to consumers.
  • If a country deregulates enough to move from the most-regulated quartile to the least-regulated quartile, its annual rate of growth could increase as much as by 2.3 percentage points.

You can read the full report here.