Regulations Are a Really Big Drag On U.S. Growth

by David Grantham,

A new Mercatus Center study suggests it has cost the U.S. economy as much as 25% of its total output since 1980.

When the Department of Commerce reported recently that the U.S. economy grew at an annual rate of only 0.5% during the first quarter of 2016, the White House attributed the meager growth in output to weakness in business investment and exports.

Yet there is another important institutional influence often overlooked — or conveniently ignored — that negatively affects the country’s overall economic performance: the increasing impact of government regulations.

In a 22-industry study released in April by the Mercatus Center at George Mason University, a group of researchers found that federal regulations created an economic drag on the U.S. economy amounting to an average annual reduction in GDP growth of 0.8%. What is unique about this study is that that it evaluates the cumulative costs of regulation over a long time period and examines the effect of federal regulations by considering a counterfactual experiment: What would have happened if federal regulations had been “frozen” at the levels that prevailed in 1980?

The study’s authors posit that the cumulative buildup of federal regulations over time leads to duplicative, obsolete, conflicting and even contradictory rules, and that the multiplicity of such regulatory constraints complicates and distorts executive decision-making concerning a firm’s planning for research and development, business expansion, investments in new equipment, and updating manufacturing processes.

Thus, because of the importance of innovation and productivity growth to the U.S. economy, these distortions have negative consequences for long-term economic growth in the U.S.

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