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“Pro-growth” economic policy is about more than just tax reform. Smart deregulation also has the potential to boost growth. Indeed, the Trump administration is counting on deregulation as a key lever for turning a 2% economy into a 3% (or higher) economy. In a report last October, the White House’s Council of Economic Advisers declared that “deregulation will stimulate US GDP growth” and favorably cites research finding that “excessive regulation” suppressed US growth by an average of 0.8% per year since 1980.
Of course, this doesn’t mean that Trump’s deregulatory efforts will boost growth by nearly a percentage point or anywhere close. But the study does suggest regulation might be sub-optimal in a number of areas. For instance, President Trump hopes cutting environmental and other regulations will help get more bang for the buck out of his new infrastructure plan.
Now a new report from Goldman Sachs splashes some cold water on the deregulatory impulse, or at least tempers expectations. The report first notes that Team Trump’s talk about deregulation isn’t just talk. Washington issued fewer regulations last year — particularly those with an annual effect of $100 million or more — while “some existing regulations were delayed, weakened, or repealed,” according to the bank.
But what has been the economic impact? To arrive at some answers, Goldman tries three different approaches:
First, the bank asked its analysts what they are seeing on the ground. And so far not much: “Today, our equity analysts in non-financial sectors report that deregulation has largely taken a back seat to tax reform and has had only a modest impact on economic decisions so far.”
Second, the bank looked at whether job growth and capital spending have been stronger in sectors and companies that were more highly regulated before the election. Goldman: “We find no evidence that employment or capital spending accelerated more after the election in areas where regulatory burdens are higher.”
Third, to try and get a more forward-looking view of deregulation — hey, it’s only been a year — Goldman looked at stock market performance. But not much there, either: “We find a roughly 0 correlation between regulatory burdens and post-election returns among the full set of S&P 500 companies, consistent with our earlier results based on macroeconomic data.”
These findings don’t mean deregulation is unimportant. Going forward, the bank adds, financial deregulation might be especially meaningful. But as far as rules affecting the economic and business world outside Wall Street, not so much:
Overall, our results suggest that non-financial deregulation has had a limited impact on the economy to date. This is not that surprising for several reasons: the estimated costs of regulation are not that high; implementing regulatory change even by executive action can be slow and difficult; and some promising targets for change largely involve state and local rather than federal regulation.
Don’t zoom over that last part. Some of the most anti-growth regulation comes at the state and local levels, such as burdensome land-use rules and labor market rules such as occupational licensing and noncompete agreements.