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I’ve grown increasingly skeptical of magic bullets, or silver bullets, or big-bang ideas to charge up the American growth machine. More likely it’s going to take lots of smaller-but-smart ideas all doing their bit to make the US more productive. That said, one area with potential is regulatory reform, as I pointed out yesterday with some encouraging comments about President Trump’s “one in, two out” executive order.
Still, just how much growth impact can be expected from regulatory reform on a number of fronts? What’s the potential here? The WSJ’s Josh Zumbrun offers a cautious, balanced take.
Broadly speaking, there are two approaches to estimating costs and benefits. A “bottom up” approach aggregates estimates for each individual regulation. A “top down” approach relies on economic modeling to show the overall effect of regulations on growth. The Office of Management and Budget already estimates the cumulative cost-benefits via an annual report to Congress. In its most recent report, OMB estimated regulatory costs of between $74 billion and $110 billion. The benefits of the regulations, however, were significantly higher: $269 billion to $872 billion. …
The top-down approach instead uses complex economic models to determine relationships between regulations and their effect on growth. The most aggressive of these studies find that regulation reduces the annual growth rate every year, and that therefore, compounded over time, the effects become enormous. One study from George Mason University‘s Mercatus Center, known for its antiregulation stance, estimated regulations across 22 industries reduced the growth rate by about 0.8% per year. “Had regulation been held constant at levels observed in 1980, our model predicts that the economy would have been nearly 25% larger by 2012,” conclude the authors, Patrick McLaughlin of George Mason and Pietro Peretto and Bentley Coffey of Duke University. That amounts to a $4 trillion reduction in GDP, nearly $13,000 per capita.
I mean, I really, really want that Mercatus study to be right. And while I think there is value to be had with broader efforts like “one in, two out,” one specific area I would focus on are regulations that hamper business creation and the ability of startups to scale. (Other areas including housing and labor markets.) More from Zumbrun:
For example, one 2006 analysis by a trio of researchers at the London School of Economics and World Bank found that moving from having more burdensome regulations—in the bottom 25% of all countries—to more business-friendly ones—in the top 25%—could boost annual economic growth by as much as 2.3 percentage points. That supports the notion that regulatory improvement could lead to much faster growth. But it’s unclear if such gains are available for the U.S., because it’s already ranked as having the eighth-best regulatory environment. The report suggests the U.S. has room for meaningful improvement on a few dimensions. The World Bank ranks the U.S. 51st (out of 190) for starting a business, 39th for ease of obtaining construction permits, and 36th for ease of paying taxes.