Before we get to our main topic today, let’s quickly take a look at this morning’s latest report on GDP. The Commerce Department released its first estimate of 1Q GDP which increased by a wobbly 0.5% (annual rate) as compared to the pre-report consensus of 0.9%.
While today’s advance GDP report will be revised two more times in late May and June, it does confirm that the US economy has slowed down from the second half of last year. GDP expanded by 2.0% in the 3Q and 1.4% in the 4Q of last year.
The latest economic reading from the Federal Reserve Bank of Atlanta, GDPNow, has a similar reading to this morning’s GDP report from the Commerce Department, showing growth of only 0.6% in April. Earlier this month, it dipped to just above zero and some feared a new recession.
Also before we get to our main topic, the Fed left short-term interest rates unchanged at yesterday’s policy meeting – to no one’s surprise. As a result of the economic slowdown, the Committee voted 9 to 1 to keep the Fed Funds rate unchanged at 0.25%-0.50%. It remains to be seen if the Fed raises interest rates again this year. I predict only one rate hike this year.
Now on to our main topic for today, which I will summarize for you below.
New Study: US Economy Would Be 25% Bigger If
Government Regulations Had Been Capped In 1980
RED TAPE: Economists struggle when asked to explain the economy’s tepid growth over the past several years. A new study gives the likely answer: the growing, cumulative burden of federal regulations.
Under President Obama, annual GDP growth never once even hit 3%. Under President George W. Bush who took office in January 2001, there were only two years when growth topped 3%. But in the 20 years before Bush, annual GDP growth was above 3% in all but six years.
Growth has been so anemic for so long, we’re now being told that this is the “new normal.” As the Bureau of Labor Statistics put it earlier this year, “annual U.S. GDP growth exceeding 3% … is not expected to be attainable over the coming decade.” It lists several reasons for this but neglects to mention: federal regulations.
Whenever a new regulation gets passed, the government puts out a cost analysis, which focuses on the first year compliance costs. Yet these regulations don’t go away, and every year more get added to the pile. The Code of Federal Regulations is now more than 81,000 pages long.
What’s the cumulative impact of all these rules, regulations and federal mandates over several decades? A new study by the Mercatus Center at George Mason University sought to find the answer, and what it found is mind-boggling!
The study looked at regulations imposed since 1977 on 22 different industries, their actual growth, and what might have happened if all those regulations had not been imposed.
What it found is that if the regulatory state had remained frozen in place in 1980, the economy would have been $4 trillion – or 25% – bigger than it was in 2012, as shown in the chart above. That’s equal to almost $13,000 per person in that one year alone.
Looked at another way, if the economic growth lost from overregulation in the US were its own country, it would be the fourth largest economy in the world, as the chart above shows.
This is not to say that there are no benefits to federal regulations, such as cleaner water, cleaner air, better workplace conditions, etc., etc. Still, does anyone really think that we are getting $4 trillion worth of benefits from federal regulations today?
Bad as this picture is, it has only gotten much, much worse since 2012, as President Obama has embarked on a regulatory free-for-all since winning re-election. While his administration imposed 172 supposedly “economically significant” regulations in Obama’s first term, it’s added another 200+ since then. The pace of regulations under this president far exceeds those of either Bush or Clinton.
By the end of last year, Obama had imposed 85 more new regulations than Clinton and 100 more than Bush. Plus, the scale of Obama’s regulations are overall far grander than his predecessors, including the entire health care industry, the banking and financial services industry and the overbearing carbon emission rules. And he’s not done yet!
Yet, mysteriously, this massive and growing regulatory burden on the private sector never comes up when the discussion turns to our disappointing economic growth. Instead, we hear about “headwinds” and the lingering effects of the 2007-2009 financial crisis.
The authors say their findings demonstrate “that a wide-scale review of regulations … would deliver not only lower compliance costs but also a substantially higher economic growth rate.”