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What’s Been the Economic Impact of Trump’s Deregulation Push?
“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those with an annual effect of $100 million or more — while “some existing regulations were delayed, weakened, or repealed,” according to the bank.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.
Published in Culture, Economics
On a related note, I started dieting 5 minutes ago, but I haven’t lost any weight yet.
I am an engineer working in the medical device industry. In the last 8 years, our regulatory costs have escalated enormously. To say the estimated costs of (non-financial) regulation are not high is just plain wrong. We went from being a highly profitable company to one that will be lucky to survive in the long run. All because of regulations that do nothing to improve the quality or safety of our products. If Congress really wants to reduce healthcare costs, they need to look at the FDA, not the insurance industry.
Assuming that 0.8% extra growth figure is correct, over time the results are significant. The US economy would be 35% larger than it is today had that growth occurred.
It is also unsurprising there has been little growth over one year – the increase is an acceleration. Acceleration, especial low acceleration takes time to be felt. But it is multiplicative.
I would question whether the bank has the tools or understanding of the real economy to even begin to analyze the effect of regulation. It is probably way too simplistic to assume that gains will break down by sector. Knowing what we do about complex systems, it could well be that a regulatory change in one industry primarily manifests itself in another.
Given how many industries have captured regulations to their own benefit, I would in fact find it likely that this is the case. For example, if the large banks have subverted regulations to keep profits up and limit entry into the market, the effect of bank deregulation could easily result in loss of profits in the banking industry as a whole, while removing the distortions caused by the bank’s rent-seeking might improve other industries being held back because of the resulting economic distortions. And prior to making the changes we have no ability whatsoever to predict what those might be.
No one predicted that adding six wolves to Yellowstone park would cause flooding and the directions of rivers to change. That’s because complex systems do not respond in obvious, linear ways to forced change. There is no reason to believe that an economy is any less complex than the Yellowstone ecosystem, and the results of change we impose will be any less mysterious.
James, Glad to see you are on the deregulation bandwagon.
The impact of our current regulation craze, that really goes back to the first Bush Administration but exploded under Obama, is unbelievably enormous, far larger than what most economists think. There are millions of unnecessary regulations and on top of that, a mindset of the regulatory bureaucracy that they can create and enforce any fanciful regulation they can dream of at the drop of a hat. Furthermore how and to what extent reducing this bureaucratic nightmare would liberate the economy is also based on how extensive regulatory reform would be, a process that would be hard to gauge. So , however significant regulatory reform would be – and I believe it would game changing significant if done right – I would be careful to put a growth number on it, because I think it is almost impossible to calculate regulatory reforms’ effect.
This is a perfect example of why big data and sophisticated analysis by big players can’t tell us much. Regulations cost those existing big firms but they adjusted, and indeed colluded to use the regulations to protect themselves from upstarts and change. But the important phenomena is business that doesn’t come into existence or grow because of regulatory barriers in which some of these same big old firms collude. Some potential entrepreneurial activity doesn’t take place because of regulations and collusion. All economic activity takes place in the future and new economic activity is in some entrepreneurs mind and can’t be known, but we will be able to look back after a while and look at the effects of what we tried to do. We must always return to basics that time has proven. Freedom works but we can’t know exactly what it will produce next year and regulations from the center of the largest economy in the history of the world cannot, repeat cannot, work.
In 2011 two friends and I at Boeing were facing layoff at the end of the Shuttle program. We investigated starting a tech writing company. Our business plan involved hiring four other people, so the company would have created seven new jobs. It would also have required us to sink most of our savings and most of the retention bonus Boeing was paying key Shuttle personnel to stay with the program until it ended. In the Age of Obama we decided the return we could receive was too small to justify the risks we were running by starting a new business. Instead, when we got laid off we went ahead and sought jobs at other companies.
The three of us all found work within a month at salaries at or above what we made at Boeing. Of the people we were going to hire two were still looking for work nine months later, one took a year to find a new job, and one retired after searching vainly until unemployment expired.
Of course the seven new jobs never appeared in any economic statistics. How could they? I would bet that scenario was playing out in tens of thousands all over the United States that year. Yet there is no way to measure it.
I would also bet those capable of creating new companies were not the ones hurt by the jobs that were never created. They are capable enough to find jobs as employees. Rather it was those whose jobs they took and those who did not get hired who took it on the chin.
Thanks for making my vague abstraction very real indeed.