Saturday, January 10, 2015

Summary of "A Slow Motion Collapse," an article on the effects of regulation

Pierre Lemieux's recent article in Regulation provides a discussion of the recent history of regulation in the U.S., issues with measuring regulation, and provides a summary of an academic article which tests the effects of regulation on economic growth in the U.S. since 1949. The whole thing is worth a read, but I'll highlight some of his interesting points here. It's worth mentioning that I'm working on a paper for the Public Choice Society meetings in March that measures the effects of USDA and EPA regulation on profitability and productivity in agriculture. I'll summarize the findings of that paper in a later post.

One of the first things that comes to mind when someone mentions regulation of business is licensure. Lemieux points out that 60 years ago, only 5% of Americans needed some sort of government license to work in their field. That percentage has increased to 30% today. He notes that some fields have seen deregulation over that time period, specifically transportation and energy, but indicates that regulation has increased dramatically in finance, environment, drugs, health & safety, and many others.

One of the primary ways in which regulation impedes economic growth is through the reduction of competition. Regulation benefits incumbent firms by erecting barriers to entry. People considering starting a business may not be able to bear the costs of regulation (e.g. hiring additional workers whose sole job is regulatory compliance) and thus cannot afford to enter the industry. This is difficult to measure explicitly because we can't observe businesses that are never started. However, to the extent that these regulatory barriers affect firm entry, additional competition and innovation are nipped in the bud.

As Lemieux notes, there are many ways to measure regulation. The OECD compiles indices of labor and product regulations. The Murray Weidenbaum Center at Washington University in St. Louis measures regulation by counting dollars spent on regulatory functions by government agencies and by counting the number of people employed in these functions. Other methods not mentioned by Lemieux include page counts in the Federal Register documented by the Regulatory Studies Center at George Washington University and the new RegData database of restrictive language in the Code of Federal Regulations put together by the Mercatus Center at George Mason University. (They provide an interactive tool for looking at highly-detailed trends in regulation with this online tool.)

Lemieux focuses on a recent study by John Dawson and John Seater. The authors employ a page count method on the Code of Federal Regulations from 1949 to 2005. Their results suggest that regulation had a negative effect during the entire period of their study, but the effect was greater from 1960-1980 and in the early 2000s than other periods in the study. Overall, the findings suggest that if regulation had been maintained at 1949 levels, the average American income would be 3.6 times higher today than it currently is. While this might seem high, their estimate likely includes effects of local and state regulation. Additionally, small increases in restrictions on innovation compounded over time could indeed result in dramatic effects over time.

This type of research is, I think, quite valuable. While it's very important to document in detail the effects of specific regulations on specific industries, a broader look at the effects of regulation on economic prosperity can give citizens and politicians good reason to rethink their proposed regulatory schemes. As Friedrich Hayek pointed out "The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

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