INSIGHT: Government rules impede growth and raise costs - study

19 June 2014 16:18 Source:ICIS News

By Joe Kamalick

Government regs said to hammer productivityWASHINGTON (ICIS)--A new study by George Mason University in Virginia indicates that more heavily regulated US industries have lower annual growth rates, are less productive and have higher labour costs.

Perhaps no surprise, but the analysis by economics professor Antony Davies, a senior scholar at the George Mason University Mercatus Center, takes a stab at quantifying that presumed association between government regulations and economic growth.

Davies used figures generated by RegData, an analytical tool developed at the Mercatus Center, to relate federal regulations to the performance of individual industrial sectors over the 14-year period of 1997-2010.

Rather than count the number of pages in the Federal Register for that period - an approach that previously has been used for this sort of analysis - Davies compared the number of “binding words” in the US Code of Federal Regulations (CFR) with various industrial sectors.

“Binding words” are those that generally proscribe behaviour, such as “shall”, “must”, “may not”, “prohibited” and “required”.

He chose to search the CFR because it represents actual laws and regulations put in place, while the Federal Register often includes not only regulations that have been enacted but also notices rescinding and amending previous rules.

Davies also chose not to count the number of pages, in either the Federal Register or the CFR, on grounds that a given regulation may be longer or shorter than another, regardless of its prohibitive effect on industry.

In his analysis, he cross-referenced the number of binding words in the CFR to each of 96 industries to which the regulations applied and then compared those industries’ performances.

The results, said Davies, show that the least regulated industries experienced a total of 64% growth in output per hour from 1997 through 2010, while the most regulated industries showed only a 34% expansion in output per hour.

Looking at production output per number of persons employed, Davies said that over the 14-year period, least-regulated industries averaged 3.4% annual growth in output per person while the most regulated sectors averaged 1.8% yearly expansion per worker.

“Accumulating the growth rates over all the [14] years, the least regulated industries experienced 63% growth in output per person versus 33% growth for the most regulated industries,” he said.

Over that 14-year period, the least regulated industries in each year averaged a 0.2% decline in unit labour costs, while the most regulated industries averaged a 1.5% annual growth in labour costs, the study says.

If those figures are combined for an accumulated measure of the 14-year span, said Davies, “the least regulated industries experienced a 4% decline in unit labour costs versus 20% growth for the most regulated industries”.

In his conclusion, Davies says that “industries that are more regulated also are less productive”.

He said that growth rates in output for the one-third of industries that are less regulated are 1.8 to 1.9 times higher than those of the one-third of industries most heavily regulated - that means a productive increase of nearly 200%.

Davies argues that there is no such thing as an “unregulated” industry or market.

“All markets are regulated,” he said. “The question is whether a market is regulated by government or by consumers.”

“Regulation by consumers is voluntary. Consumers choose for themselves whether to punish a firm by not purchasing its product or by encouraging others not to purchase,” he argues.

“Regulation by government imposes a cost on producers or consumers because it requires them to act in a way that they would not act voluntarily," he said, adding: “We know this because, if the required action resulted in greater profit to the producer or greater benefit to the consumer, the producer or consumer would undertake the action voluntarily.”

“For the government to have to require the action implies that the action is more costly to the consumer or producer than the voluntary alternative,” he says.

That regulations reduce productivity is important, Davies said, because “productivity is important to society as a whole because improved productivity means that we use fewer scarce resources to produce the same quantity of goods and services”.

“To the extent that government regulation decreases productivity, consumers suffer from paying higher prices than they otherwise would have had to pay, and society suffers from expending more scarce resources than would otherwise be required to produce what we need,” he said.

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By Joe Kamalick