Study: Federal Regulations Have Made America 72% Poorer

Government up to a certain point can be a boon to an economy. Laws that protect our rights, and provide a legal process for settling disputes, allow for a stable environment in which commerce can flourish.

Beyond a certain point, government is a burden. And a new study from economists John Dawson at Appalachian State University and John Seater from North Carolina State University seeks to quantify just how much of a burden the federal government has become.

Their findings? America’s Gross Domestic Product would e 72% higher if regulatory burdens were at 1949 levels:

Federal regulations added over the past fifty years have reduced real output growth by about two percentage points on average [annually] over the period 1949-2005. That reduction in the growth rate has led to an accumulated reduction in GDP of about $38.8 trillion as of the end of 2011. That is, GDP at the end of 2011 would have been $53.9 trillion instead of $15.1 trillion if regulation had remained at its 1949 level.

Based on the study, “the average American household receives about $277,000 less annually than it would have gotten in the absence of six decades of accumulated regulations—a median household income of $330,000 instead of the $53,000 we get now,” writes Ronald Bailey for Reason. And even if you make some very generous assumptions about the positive impacts of these sort of regulations, Bailey notes that they’re still doing more harm than good:

Defenders of regulation will argue that regulations also provide benefits to Americans: lower levels of air pollution, higher minimum wages, and so forth. But the measure devised by Dawson and Seater accounts for both the aggregate benefits and the costs of the regulations. The two researchers note their results “indicate that whatever positive effects regulation may have on measured output are outweighed by negative effects.” There may be some unmeasured positive outputs that result from regulation. But the benefits would have to be hugely substantial to offset the loss of $39 trillion in output in 2011 alone. Is that plausible?

Dawson and Seater explicitly do not attempt to separately measure the benefits of regulation in their study, only its overall effects on output. But the Office of Management and Budget does claim to measure the costs and benefits of federal regulation. In the most recent Office of Information and Regulatory Affairs (OIRA) report, the highest estimates for costs and benefits for regulations adopted from 2002 to 2012 are $84 billion and $800 billion respectively. Let’s be extremely generous in calculating regulation’s benefits and assume that they provide not just $800 billion in total benefits over 10 years, but that much in just one year. Then, just to be sure that we haven’t overlooked any non-monetized benefits unaccounted for the OIRA, and to take into account of the fact that number of pages in the CFR have risen six-fold, let’s multiply that by 6, yielding an estimated annual regulatory benefit of $4.8 trillion.

That’s just a bit more than a quarter of the current GDP. Recall that Dawson and Seater have calculated that if the regulatory burden had remained the same as it was in 1949, the U.S. economy would be about $38 trillion bigger than it currently is. So the upshot of this wildly optimistic set of assumptions regarding the benefits of regulation is that Americans have foregone $33 trillion in income that we otherwise would have had. Or in the alternative case, where a lower rate of growth results in a GDP of only $31 trillion, that would mean that Americans have foregone about $10 trillion in income due to overregulation.

Whatever the benefits of regulation, an average household income of $330,000 per year would buy a lot in the way of health care, schooling, art, housing, environmental protection, and other amenities.

Economist Mark Perry thinks the study “might actually under-estimate the total drag on economic growth since they only include the cost of compliance and enforcement after the regulations are in place.”

The cost of federal regulations measured by the number of pages in the Code of Federal Regulations doesn’t include the burden of wasteful rent-seeking that private firms engage in before the regulations are in place, as they attempt to influence (support, oppose or change) federal regulations when they are first being proposed and considered by Congress or a federal agency.

What’s interesting is that this study comes at a time when many high-profile commentators – notably Paul Krugman – argue for aggressive government growth in the name of economic stimulus. In fact, the assumption that growing government stimulates the economy (and all growth in government is going to, in one way or another, represent more tax burden and red tape for the economy) is seemingly the centerpiece of President Obama’s economic philosophy.

But government growth isn’t making us more prosperous. It’s making us poorer.