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Do Federal Regulations Impede Economic Growth?

| Apr 3, 2013 | Analysis

Some politicians, business leaders, and scholars have suggested that an increase in federal regulation during President Obama’s first term, most evident in the new health care and financial regulation laws, dampened economic growth and job creation. However, new academic research suggests that these claims lack statistical support.

unemployment.jpg In a recent paper, Professor Tara Sinclair of George Washington University and Kathryn Vesey of the National Association of State Budget Officers examine whether increases to the budgets of federal regulatory agencies slow economic growth and job creation. Through a number of statistical tests, they determine that there is no empirical basis on which to conclude that this measurement of federal regulation stunts job creation or economic growth.
Using data from 1960 to 2010, Sinclair and Vesey investigate the effects of changes to federal regulatory budgets on two macroeconomic indicators—real Gross Domestic Product (GDP) and nonfarm payroll employment. The authors use regulators’ budget levels, measured by the labor and management costs of running a federal regulatory agency, as a proxy for the size of the federal regulatory regime. According to the authors, regulatory agency budgets can be an effective proxy because they capture both the total number of regulations in effect and the degree to which these regulations are enforced.
Sinclair and Vesey use a three variable model to examine the relationship among average regulatory budget levels, GDP, and job growth to test and ultimately reject the claim that increasing regulation and enforcement slows GDP growth and job expansion.
To resolve a concern that aggregating regulatory budgets may miss the varying effects of regulation across the economy, Sinclair and Vesey also examine regulatory effects on particular sectors of the economy, such as transportation, environment, and finance and banking.
In examining regulations’ effect in these particular sectors, Sinclair and Vesey consider whether this effect varies based on whether the regulation is social—for example, if it concerns health, consumer safety, or homeland security—or if the regulation is economic—relating, for instance, to finance, banking, or general business issues.
While evaluating these relationships, Sinclair and Vesey find that budgetary increases have little or no impact on either GDP or job growth, in contrast to conclusions of some prior research. Although the authors note a couple of statistically significant variations among the relationships they evaluated, they conclude that given the large number of tests they conducted, some occasional minor statistical significance does not contradict their conclusion that federal regulation does not stifle economic or job growth.
To evaluate the idea that regulatory spending might affect the private sector differently than it affects the economy as a whole, Sinclair and Vesey also examine whether their results are consistent with an analysis of isolated private sector macroeconomic data. To evaluate the private sector alone, the authors consider private sector job growth and private sector GDP, a measure calculated by subtracting nominal government expenditures from total nominal U.S. GDP. The authors’ results using private sector macroeconomic indicators “closely resemble” those results using macroeconomic indicators from the whole economy.
Sinclair and Vesey acknowledge the limits of their conclusion that federal regulatory budget levels do not cause changes in GDP and job growth. They note that because their data concern only federal budgetary information, their results may not adequately capture other factors influencing GDP and job growth.
The authors also acknowledge that the strength of their results rests on how well federal regulatory budgets approximate total federal regulation. They suggest that if these budgets do not accurately capture the level of federal regulation, it may be premature to suggest that the level of federal regulation does not causally influence economic and job growth.
Finally, Sinclair and Vesey also acknowledge that their study’s conclusions apply only to the macroeconomic effects of regulation—they do not capture the distribution of a given regulation’s effects at a microeconomic level, such as a particular regulation’s burden on small businesses. The authors acknowledge that these microeconomic distributions may have important implications for evaluating regulations.
Nonetheless, Sinclair and Vesey argue that their study indicates that policymakers and politicians should not base policy decisions on the idea that “regulations destroy jobs.”

Rather, the authors suggest that policymakers and politicians should focus on making the federal regulatory structure more effective by increasing transparency and accountability.



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