Economic Growth and Regulation

Does an Increase in Regulation Lead to More Economic Growth?

Economic growth can be explained by the growth or development of the market value of goods and services over time. It is measured by looking at the percentage growth of GDP (gross domestic product) adjusted for inflation. Another way of understanding economic growth is by measuring an increase in people’s income in relation to the increased price of goods that they are able to purchase.

Accumulation of regulations can have an adverse effect on both innovation and economic growth. Research from the Mercatus Center at George Mason University shows that regulatory accumulation over the past several decades is correlated with slowed-down economic growth, amounting to a nearly $4 trillion loss in US GDP in 2012. Further, this regulatory bloat has given an unreasonable disadvantage to certain demographic groups.

The paper below, Regulatory Accumulation and Its Costs: An Overview, utilizes the Mercatus Center’s RegData to analyze regulatory texts to quantify the federal regulations that target each industry in the United States. This tool takes a look at the increased amount of total regulatory restrictions and shows that there has been a 20 percent increase in the number of restrictions since 1997. Take a look at this paper to gain a better understanding of the adverse relationship between increased regulation and stunted economic growth.

The next paper, ‘The Cumulative Costs of Regulation’’, is a study looking at an economic model that examines how regulations effect firm investment options. The researchers use a 22-industry dataset that covers a time period from 1977 through 2012, and find that when firms are not able to make investment choices that lead to innovation, the economy receives a reduction in the annual growth rate of the US GDP of 0.8 percent. Regulatory accumulation can lead to a buildup of regulations that are contradictory in nature and can ultimately distort the decision-making process that firms go through when planning for development, expansion, and updating of processes. With innovation playing a key role in the productivity of an economy these kinds of distortions can have negative effects on the economy in the long run.

Take a look at the publications below for more information how regulatory accumulation can stunt economic growth.

+ Regulatory Accumulation and Its Costs: An Overview

BY: Patrick A. McLauglin, Nita Ghei, Michael Wilt
DATE: November,< 2018br>
Abstract: For several years scholars at the Mercatus Center have been examining how regulations and the regulatory process affect American consumers and businesses, and they have identified several adverse consequences. Recent research from the Mercatus Center, for example, adds to a growing body of scholarship that points to regulatory accumulation as a significant issue for the US economy.
+ The Cumulative Cost of Regulations

BY: Patrick A. McLaughlin, Bentley Coffey, Pietro Peretto
DATE:April, 2016

Abstract: We estimate the effects of federal regulation on value added to GDP for a panel of 22 industries in the United States over a period of 35 years (1977–2012). The structure of our linear specification is explicitly derived from the closed-form solutions of a multisector Schumpeterian model of endogenous growth. We allow regulation to enter the specification in a flexible manner. Our estimates of the model’s parameters are then identified from covariation in some standard sector-specific data joined with RegData 2.2, which measures the incidence of regulations on industries based on a text analysis of federal regulatory code. With the model’s parameters fitted to real data, we confidently conduct counterfactual experiments on alternative regulatory environments. Our results show that economic growth has been dampened by approximately 0.8 percent per annum since 1980. Had regulation been held constant at levels observed in 1980, our model predicts that the economy would have been nearly 25 percent larger by 2012 (i.e., regulatory growth since 1980 cost GDP $4 trillion in 2012, or about $13,000 per capita).