A Curiously Non-Quantitative Assessment of Deregulation Effects on Economic Growth

And a funny choice of citations.

The CEA released its first “report” under the leadership of Kevin Hassett. The report, entitled The Growth Potential of Deregulation, is summarized thusly:

Excessive regulation is a tax on the economy, costing the U.S. an average of 0.8 percent of GDP growth per year since 1980. This taxation by regulation has increased sharply in recent years, with approximately 500 new economically significant regulations created over the last eight years alone. Through a thorough review of the literature, the Council of Economic Advisers (CEA) finds that deregulation will stimulate U.S. GDP growth.

Interestingly, the report’s highlighted number is based on this paper:

Coffey et al. (2016) estimates that if we held fixed the number of industry relevant regulations at levels observed in 1980, the U.S. economy would have been about 25 percent larger (roughly $4 trillion) in 2012. According to the study, the cumulative effects of regulation have slowed economic growth in the United States by an average of 0.8 percent per year since 1980. This amounts to a loss of approximately $13,000 per capita.

The figure is from Coffey, Bentley, et al. “The Cumulative Costs of Regulation.” Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA (2016).

In other words, the one quoted definitive number regarding output growth is drawn from an unpublished working paper. Now, endogenous growth models are not my specialty, but my impression is that the empirical evidence in favor of endogenous growth models is not overwhelming. The estimation approach is Bayesian, involving a nonlinear equation (as far as I can tell). My experience with estimating nonlinear equations is that they are sensitive to assumptions and starting points. It is interesting to note the several industries where under the counterfactual of no regulation, investment is lower than actual. Perhaps more interesting is the fact that only in 2008 does the actual level of GDP fall below the lower bound of the 90% confidence interval. In other words, 28 years after the simulation begins, output is significantly below predicted under the counterfactual. It’s troubling that the fall occurs in the year in which the economy suffers a major recession. This suggests that the deviation is due to model misspecification (i.e., the model cannot capture the dynamics of the recession) rather than necessarily regulation induces a deviation from predicted.

Source: Coffey, Bentley, et al. “The Cumulative Costs of Regulation.” Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA (2016).

In any case, it is interesting that this is the source for essentially the only numerical prediction in the paper. The only other one is a regarding regulation in a cross country empirical framework (Djankov et al., 2006). Interestingly, they do not cite the fourth item that pops up when typing in the words “regulation economic growth” in google scholar: Jalilian et al. (2007). That paper concludes:

The results from both sets of modeling suggest a strong causal link between regulatory quality and economic growth and confirm that the standard of regulation matters for economic performance. The results are consistent with those of Olson et al. (1998) who found that productivity growth is strongly correlated with the quality of governance, and Kauffman et al. (2005) who found that the quality of governance has a positive effect on incomes.

In other words, the quality of regulatory framework might be as important, or even more important, than the quantity of regulation.

In any case, if I were to make a bold conclusion like “Excessive regulation is a tax on the economy, costing the U.S. an average of 0.8 percent of GDP growth per year since 1980”, I’d want just a tiny, tiny bit more empirical backing.

55 thoughts on “A Curiously Non-Quantitative Assessment of Deregulation Effects on Economic Growth

  1. joseph

    Who needs facts anymore? Trump can simply claim 6% growth. Mulvaney can simply claim $1 trillion in “dynamic scoring” revenue. For Republicans, numbers are whatever you want them to be.

  2. CoRev

    Menzie, Interestingly you make an intriguing statement: “The estimation approach is Bayesian, involving a nonlinear equation (as far as I can tell). My experience with estimating nonlinear equations is that they are sensitive to assumptions and starting points.” Which has been my message to you and 2slugs in the previous articles. Advanced/complex statistical tests are possibly just testing the tester’s bias. In this instance you are biased against the CEA assumption phrased many ways. Just one example from the CEA paper is: “The evidence generated by economists from many such measures of the extent of a regulatory environment uses variation across countries and suggests that lower regulation increases economic growth.” As did your two referenced papers.

    The 2006 paper has an interesting statement: “Countries with less burdensome business regulations grow faster. ” From this it is an easy conclusion that the least burdensome regulation is no regulations>. This is a confirmation of the CEA conclusion. Less or no regulation is better.

    The introduction of the 2007 paper said this: “Deregulation was widely adopted, often as part of structural adjustment programs, with the aim of reducing the “regulatory burden” on the market economy.”
    The paper concluded with: ” Nevertheless, despite these caveats, we believe that there are good a priori grounds for assuming that better regulation leads to more rapid economic growth and that our empirical results are consistent with the view that a “good” regulation is associated with a higher economic growth in lower-income economies.” Deregulation should not be ruled out as a Quality assumptions of this paper.

    Don’t both these papers actually support, even partially, the CEA results? There are other questions regarding your own bias in these matters in selecting what you considered the problems with the CEA paper.

    1. Menzie Chinn Post author

      CoRev: You misunderstand “complexity” as typically used in macroeconomics; there it often refers to nonlinear dynamics, as in a differential equation with explosive dynamics.

      I was talking about nonlinearity in variables in the specification (I did not reproduce the equation, but you should look at it in the paper); there is an interaction term between the lagged regulatory variable and other variables in a time dated equation. I think that’s particularly problematic in a time series context. I’ve got interaction terms in some panel regressions I have estimated, but the interaction in one period doesn’t affect what happens in the next…

      I’d say almost anything I report in Econbrowser is pretty standard econometrics these days (i.e., master’s level, or perhaps even undergraduate) — so I think your critique of the methods I used as “advanced/complex” is pretty silly. Now, if you can understand what was done in the Coffey paper, then that’s advanced econometrics (and here I agree, advanced does not necessarily mean right).

      1. CoRev

        Menzie my comment re: statistical tests was meant to remind us of the previous discussions re: temperature. When you said: “they are sensitive to assumptions and starting points.” it reminded me of my questions whether starting the measured temperature records at a known low to very low point was valid to extract the extreme claims for the increase. But I don’t really want to start that discussion over again.

        My reading of your own references is “Don’t both these papers actually support, even partially, the CEA results?”

        1. Menzie Chinn Post author

          CoRev: Starting points refers to where you start the algorithm for maximizing the likelihood. Learn some econometrics before talking about econometrics…

          Both papers partially support the CEA contention. But the quantitative assertion that keeping regulations at 1980 levels would have resulted in 0.8 ppts on average faster growth in output is not supported by either paper, as far as I can tell. If you can translate the Djankov et al. and Jalilian et al. results into support for that quantitative result, please tell me how you do it. That point is what I was trying to get at by titling the post the way I did – but perhaps that was too subtle for you to get?

          Try again.

          1. CoRev

            Menzie nice try, but the over riding message was in your pull quote: “Through a thorough review of the literature, the Council of Economic Advisers (CEA) finds that deregulation will stimulate U.S. GDP growth.” You, however tried to imply with the selection of wording in your title: “A Curiously Non-Quantitative Assessment of Deregulation Effects on Economic Growth”. Really? In their “Through a thorough review of the literature, the Council of Economic Advisers (CEA) finds that deregulation will stimulate U.S. GDP growth.” they did not find a quantitative analysis?

            All I see is bias so strong to ignore logic. “In one phrase you admit: “My experience with estimating nonlinear equations is that they are sensitive to assumptions and starting points.”, and yet you ignore the 2nd point about assumptions, emphasizing cherry picking the starting point to “Starting points refers to where you start the algorithm for maximizing the likelihood.” The likelihood of the assumption, As in your explanation reinforcing the original bias.

            Bias is all I see.

          2. CoRev

            Menzie, bias is all I see. You nit picked a minor point in the paper ( 0.8 percent of GDP growth per year ) to try to trash the whole while ignoring the over riding message (deregulation have shown substantial gains). Or over regulation costs.

            My point was from the beginning that you have selected references that support the CEA study’s conclusion. The actual conclusion of the paper explains it succinctly:
            Federal regulatory activity in the U.S. may have proliferated with the best of intentions, but the negative consequences of excessive, duplicative, or badly designed regulation are a tax on the U.S. economy. Past instances of deregulation have shown substantial gains to consumers and businesses in the economy. Deregulation can unleash the greater potential of the U.S. economy, spurring the innovation and economic growth necessary to keep the United States prosperous,and to empower its citizens with greater opportunities.”
            Please note there is no reference to your biasly selected: “… costing the U.S. an average of 0.8 percent of GDP growth per year since 1980.” in the conclusion.

            Yes, I understand “Do you understand the concept of maximizing the likelihood function, in statistical theory?”, but to which model does it apply? Certainly none of yours in this article.

            Again you’ve placed statistics above reading and logic. You can not understand how your bias is coloring each, including some of your use of more complex statistical tests. Are those tests just testing the strength of your own bias? I have my own suspicion.

  3. pgl

    Kevin Hassett gave a 30 minute speech before the Tax Policy Center and suggested that adopting Trump’s tax “reform” would also significantly increase economic growth:


    Take a listen and noticed his breezy and self selected way of citing certain parts of the literature. Howard Gleckman noted how he misrepresented the transfer pricing angle (about 19 minutes in the speech). It was also curious that he cited Romer and Romer’s paper on the aggregate demand impacts of tax cuts and only later noted we were likely close to full employment.

  4. PeakTrader

    The SBA reported in 2010 federal regulations alone cost $1.75 trillion a year, which was before Dodd-Frank, Obamacare, more environmental and workplace regulations, etc.. Smaller businesses pay a disproportionately larger share – over $10,000 per employee. With construction trying to recover, excessive regulations slow the recovery. For example:

    “… a project to upgrade the Bayonne Bridge…Elevating the road so that bigger cargo ships could pass underneath required 47 permits from 19 different government entities, according to Philip Howard, a legal writer. Regulators demanded a historical survey of every building within two miles of the bridge, even though the project affected none of them. It took from 2009 to mid-2013, when building at last began, to satisfy all the regulatory requirements.”

    All federal regulations, in totality, need to be reviewed, which can lower costs much more benefits, to create a much more efficient regulatory system and improve the economy.

    1. pgl

      The Bayonne Bridge? I wonder if PeakTrader replaced David Wildstein as Christie’s man at the Port Authority? Let’s see – a bridge that connects Staten Island to New Jersey. Even if Christie stood in the middle of it blocking access, I doubt any New Yorker would care! Besides if we do not raise this bridge, South Carolina will get the shipping business which would like make most Republicans quite happy.

      1. PeakTrader

        Pgl, obviously, you missed the point about excessive regulations:

        “William Ibbs, a professor of civil engineering at the University of California at Berkley, was quoted in a September 26, 2011 Politico article saying, “As a rule of thumb, you’re looking at three years for a project, really going from the time the federal government says we have the money and want to spend it…The politicians really don’t understand how cumbersome the process is these days. Environmental permitting, especially on road projects can take years. You’re hiring attorneys, not really shoveling a lot of dirt.””

        1. baffling

          One major reason for the lack of quick action with infrastructure projects is because of the complex interaction that occurs in a typical infrastructure project. Roads and bridges affect multiple different municipalities. Traffic flow and congestion can affect each of those distinct municipalities differently, and must be accommodated for properly for the project to be effective and efficient. Environmental aspects, such as drainage, are critical as they occur across the various municipalities. You cannot simply dump the water runoff from a major project into the overwhelmed drainage system of a small local community. These projects occur over miles and miles of real estate, adding to the complexity of their interactions.

          Of course lawsuits can impede progress and cost taxpayers money. Just ask the residents of palm beach, who footed large legal bills when certain landowners sued the airport over distress to some historical structures in the community. Airport expansion, and local economic growth, would be inhibited to order to preserve the historical and serene structures in the palm beach area. You have a problem with lawsuits such as this, right peak?

          1. PeakTrader

            I’ve stated before, excessive regulations provide work for bureaucrats, make lawyers rich, waste tremendous amounts of hours, and force people to spend unnecessarily.

            Regulations is an industry in itself that rivals the health care industry.

          2. dilbert dogbert

            Your comment on how projects have far reaching impacts reminded me of 1997 when our house in Palo Alto was flooded because of the Chaucer/Pope St bridge. The bridge is a dam at high water. To fix the bridge requires the buy-in of a lot of cities and agencies. Never gonna happen in my lifetime.

    2. Oakchairbc

      I think the point is that we should use fabricated fake news from people like Kevin Bassett the SBA and CEA.
      These tools you are relating cherry pick, don’t include the benefits, etc. None of their papers survive the peer review process.
      Don’t be a hack.

    3. day_trader_dead_end

      Philip Howard is not “a legal writer.” He’s talking his deregulation book. And this time he’s promising it’s going to be different than all those other times. Good thing history is not an impediment to his crackpot schemes.

      If it were the case that deregulation worked, Bear Stearns, among many others, would still be in business.

      Peak Trader, are you an expert in bridge engineering? No. Clearly you are not.

      1. PeakTrader

        What about the civil engineering professor at Berkeley I cited above – is he an expert.

        Deregulation isn’t the same as excess regulation.

        Didn’t airline prices fall substantially after deregulation.

        1. day_trader_dead_end

          Let’s go all the way. Deregulation is good because of the illicit drugs trade. Absolutely no rules in the illicit drugs trade. That is what you are advocating.

          I know how this game works.

          The backpedaling starts with you then tacitly claiming SOME regulation is good. Deregulation is good because LIBOR scandal, billion dollar bailouts on home loan fraud schemes? And then you backpedal some more, and maybe start name-calling.

          Which regulations are good? Be specific. Post them. Except you and idiots like the “legal writer” you posted won’t. And then you cowards play the blame game when deregulation blows up in your face. (LIBOR scandal, real estate fraud that triggered a severe recession)

          Get back to me when you have an original idea.

          1. PeakTrader

            You seem to be playing some broken down video game.

            Don’t bother people till you get a hint of reality.

  5. efcdons

    Glad to see the Koch investment in the Mercatus Center paying off. It’s pretty genius. Create basically a think tank devoted to justifying your pre-existing ideological beliefs, but fully attached to an actual university so every citation has “George Mason University” in it. Then when your allies eventually are able to enter the government they have a source of “academic” legitimacy to justify implementing your ideological agenda.

    The way the far right has had so much cooperation from every level of gop government is impressive. The gop state governments use their control over state universities to facilitate the creation of ideological infrastructure that takes advantage of the university’s mission and reputation for engaging in unbiased “scientific” research.

    The Hoovers and Heritages of the country are known now even by vaguely political people as strictly idealogical which diminishes their power to persuade. The right is co-opting the idea of academic integrity to continue the think thank mission of being an intellectual sword and shield for their ideological goals.

    It’s all so cynical. And kind of ironic since the right have been accusing academia of ideological bias for generations.

    1. dilbert dogbert

      Back in the day, 1920’s/30’s there was a strong reaction to “Jewish Physics”, AKA Einstein’s. I wonder if we are not repeating that era now in Economics.

  6. macroduck

    Also from George Mason:


    Taborrak and Goldschlag created a new data set that allowed assessment of regulation at the industry level, expecting to find that increases in regulation led to a drag on productivity. They found no such relationship, and published anyway. Gotta love it when academic honesty is on display.

    Wish the comments here were as free of bias.

  7. joseph

    Well, if PeakTrader can just pull a number like $1.75 trillion in annual costs of regulation out of his, uh, hat then I can also suggest that the benefits of those regulations are worth $2.365 trillion in lives saved, cleaner air, cleaner water, reduced disabilities, fewer bankruptcies, less consumer fraud, fewer auto fatalities, better healthcare and on and on.

    Regulations have costs and benefits that are not always measured by GDP.

    1. PeakTrader

      You’re the one pulling numbers. I’m sure, you’re for more taxes and regulations, because Americans can’t be trusted with their money and time. And, a powerful government is needed to micromanage everyone’s lives.

      “Research by Morris Kleiner, Alan Krueger and Alexandre Mas estimate that by restricting employment, “occupational licensing can result in up to 2.85 million fewer jobs nationwide, with an annual cost to consumers of $203 billion.”

      1. 2slugbaits

        PeakTrader Occupational licensing requirements are largely state regulations. This discussion is about regulations out of the federal government. Go read the original post and the Mercatus paper. Now I would happen to agree with you that state regulations are much more pernicious than federal regulations. That stands to figure since state and local governments are much more corrupt and vulnerable to industry capture than is the case with the federal government. And businesses across state lines have to deal with 50 different sets of regulations. If you really want to unchain businesses from strangling regulations, I would suggest that we begin by abolishing the 50 states and replace them with larger administrative provinces.

          1. 2slugbaits

            Ugh. It’s not about the ease with which you can move from one state to another; it’s about where the most economically pernicious regulations are. If you’re really concerned about the impact of useless regulations, then I suggest you look at state and local governments. And it’s precisely because capital can freely move from one state to another that states are vulnerable to corruption and blackmail. For example, look at the “ag gag” laws and regulations in farm states. Look the list of onerous regulations cited in the CEA paper…virtually all of the ones the CEA listed are actually state regulations, not federal regulations. Businesses know that they can extract monopoly rents from state governments a lot easier than they can from the federal government. The kinds of regulations we should worry about are the ones that protect monopoly rents, but yet those are precisely the ones that you want to protect. Unbelievable.

          2. PeakTrader

            2slugbaits, so, federal regulations are good and state regulations are bad. State governments know deadweight losses can be offset by positive spillover effects. However, that’s not the reason people flee one state for another.

      2. pgl

        “Regulations have costs and benefits that are not always measured by GDP.”

        He’s right. Given that you see only costs and not the potential benefits, your claims of excessive regulation have zero foundation.

        1. PeakTrader

          There are costs and benefits to regulations.

          Yet, you believe there’s no such thing as excessive regulations and an economy can absorb unlimited regulations with no consequences.

          1. pgl

            “Yet, you believe there’s no such thing as excessive regulations and an economy can absorb unlimited regulations with no consequences.”

            Of course I never said that. But do set up straw men as that only shows what a troll you really are.

      3. Oakchairbc

        Do you have anything pertaining to the topic, logic and reality instead of right wing propaganda and mindless rhetoric?
        You seem upset that everyone’s not being dumb and falling for your dishonest postings. Cry elsewhere please.

        1. PeakTrader

          Oakchairbc, stop embarrassing yourself.

          You’re giving liberal/socialist/fascists a bad name 🙂

          1. day_trader_dead_end

            If you insist on arguing failed ideas, don’t call people names when your assertions are shown to be false.

  8. 2slugbaits

    The Mercatus working paper isn’t very convincing. For example, footnote 6 provides an example of regulations that improve output (viz., regulations mandating ethanol). But note that agriculture is not one of the 22 industries they examined. This is very strange on a number of counts because most people would argue that ethanol mandates are the epitome of godawful regulations that lower GDP, but yet this is the one case in which they cite a regulation that increases output!!! That’s just weird. And would deregulating hog confinement operations lead to an increase in welfare? I don’t think so. How would that impact real estate (which is one of the sectors they examined).

    Take a look at the 22 industries they studied. Almost all of them are industries that tend to have very high negative externalities (oil and gas, mining, chemical manufacturing, waste management, etc.). The whole point of regulating these industries is that left unregulated they will tend to overproduce. So in what world is it a bad thing if regulations act to reduce the output of negative externalities?

    The paper claims to be multi-sectoral in its approach, but that does not mean it is balanced. For example, deregulating coal mining and lowering EPA emission standards might very well increase output in the coal mining sector, but this is likely to come at the expense of renewable resource investment. Guess which sector is excluded from the analysis!!! Go on, guess. There might not be free lunches in the real world, but this paper is a veritable banquet of free lunches for industries with negative externalities.

    The population growth assumptions used in their model do not track with actual population growth rates. They assume a constant growth rate in their simulation.

    If their estimated counterfactual were correct, then we would expect to see a significant difference in the real per capita GDP growth rate when we compare pre-1980 and post-1980. There is no difference up until the Great Recession. This inconvenient fact is difficult to explain if their counterfactual were correct. It’s also a little strange that they picked 1980 as the starting point. That’s Jimmy Carter time, remember. And are we supposed to believe that the growth rate of new environmental regulations during the 1970s was lower than in the 2000s??? Not hardly.

    The way they identify growth in regulations is unhinged from reality and shows me that they have no idea how regulations are written. The point of increasing the words that their software keyed on is to reduce litigiousness, not to make regulations more burdensome. Anyone who has ever worked in government writing regulations knows that the surest way to invite lawsuits is to write fuzzy regulations. Government bureaucrats don’t write extremely precise and detailed regulations because they all have anal retentive personalities; they write them that way because doing otherwise invariably leads to lawsuits and litigation. And oh by the way….lawyers add to GDP.

    Finally, I don’t find their definition of “endogenous” at all convincing. For example, where does all of this supposed extra investment come from? The way they model the savings function that’s supposed to generate all of this investment is completely ad hoc and exogenously determined.

    1. CoRev

      2slugs, taking Menzie’s lead ignores the almost 3 full pages of references to cite just one of them, which tries to make a minor quantitative point. Did you even decipher the point of the CEA Study? Is that supported in those three pages of references? Is it supported in the Mercatus paper?

      1. 2slugbaits

        I would hesitate to call the CEA paper a “study.” In my world we always go through internal “murder board” reviews of working papers before any draft gets published. It’s a kind of internal peer review process. The CEA “study” would never have gotten through the “murder board” review process. It’s basically just a collection of speaker’s notes from some Powerpoint presentation. Maybe your idea of a study, but not mine.

        The CEA uses (or abuses) references in many surprising ways. For example, look at how they use the OECD rankings in Figure 1. Is the CEA recommending that we become more like the Netherlands, Austria, Denmark or Norway??? I only wish. The OECD ranking is about competitiveness rankings, and I haven’t seen any evidence that the CEA or Team Trump are at all interested in competition as understood by the OECD. Team Trump is all about tariffs, “fair trade”, extending patent protections, etc. Since Team Trump fundamentally disagrees with the OECD’s understanding of “competition”, then isn’t it dishonest to misrepresent their data?

        Look at the first two paragraphs of supposedly harmful regulations: restrictions on lemonade stands, dog walking, rent control, property taxes, minimum wages, etc. First of all, those are laws, not regulations. And secondly, they are all state and local, not federal, except for the minimum wage which is both state and federal. What the CEA paper is really about is Obamacare. Did Obamacare impose new laws and implementing regulations on businesses? Obviously it did. But it’s equally obvious that Obamacare also relieved consumers of the transaction costs associated with navigating one’s way through very difficult and byzantine insurance policies and regulations. That’s a huge economic and welfare benefit for consumers. But yet the CEA paper gave exactly zero weight to this benefit.

        Let’s look at Figures 3 and 4, which are based on the Mercatus database of keywords used to measure what GMU considers bad regulation. Did the CEA ever bother to ask the lawyers in the federal government why there’s this increase in the use of words like “shall” or “must”? I doubt it, so let me help them out. It’s because government lawyers now require the use of “shall” or “must” wherever the words “should” or “may” appeared previously. So anytime a regulation is updated, there has to be a wording change. It’s not a new regulation per se, just a new way of phrasing an existing regulation. And that’s because the older, fuzzier terms were seen as a court case waiting to happen.

        What about their use of “economically significant” rules. Are we supposed to believe that $100M in the 1990s is the same threshold as $100M in 2016?

        The CEA rightly puts a lot of emphasis on the costs of compliance. But notice that they are only concerned with new costs on businesses and ignore any reductions in costs for individuals. Let’s take an example like water quality. Yes, requiring water quality tests raises the costs to water providers; but those regulations also lower the information costs to consumers. Overall there is a net savings. Same with minimum health insurance standards. If consumers know that all insurance providers must offer the same 10 basic features, then deciding upon an insurance provider becomes a much simpler task. True, you give up some options, but since individuals are extremely bad at measuring risks it’s almost certainly a good thing that you surrender that right to make a bad decision. The CEA paper is all about looking at unbalanced cost/benefit analyses. The cost/benefit analysis only looks at the costs to businesses and ignores the offsetting benefits to consumers.

        Finally, both the CEA paper and the Mercatus study make a complete mess of the convergence factors used in endogenous growth modeling. Eliminating totally useless bureaucrats does not mean there’s an instantaneous shift to the most productive use. Convergence rates are glacial. We’re talking generations.

        1. CoRev

          2slugs, that’s an awful lot of words which failed to answer my question: ” Did you even decipher the point of the CEA Study? Is that supported in those three pages of references? Is it supported in the Mercatus paper?”

          You did take a swing at the Mercatus paper, but mostly provided only your own personal opinions. Just because Mercatus does not fit your economic/government views does not refute its point(s).

          1. Oakchairbc

            Your bogus fake news got owned for the garbage it is. Come back when you aren’t an idiot who falls for easy propaganda.

          2. 2slugbaits

            CoRev The principle policy intent of the CEA paper was to try and discredit Obamacare and EPA regulations. That much is clear (see Figure 5). It’s a political document rather than a piece of serious economic analysis. That badly designed regulations are bad for economic growth is hardly a new or original idea. The question is how to determine whether regulations are good or bad, and the paper really doesn’t advance that argument at all. To support its claim the CEA leans heavily on several Mercatus studies (go check the references).

            Regarding the three pages of references, most of them are focused on state and local regulations for things like rent control and certain kinds of occupational licenses. There is almost universal agreement that those are examples of bad regulations. In addition to state and local examples there are references to studies concerning developing countries with extractive wealth policies. Again, there is no disagreement about those kinds of examples of destructive and heavy handed regulations. And when they do mention OECD countries, the paper leaves the reader with the impression that the US is a highly regulated economy relative to Denmark, Austria, Norway, the Netherlands and Germany (see Figure 1). Really? That’s laughable on the face of it. I won’t hold my breath waiting for Trump’s CEA to recommend that we become more like western Europe. Fat chance.

            And as I mentioned before, the paper assumes convergence factors that are wildly out of synch with empirical estimates. They use phrases like “unleash the potential of workers and producers alike.” This is nonsense. Real world convergence factors don’t allow economists to use words like “unleash”. More like “crawl.” Here the CEA paper relies upon some very bad growth theory in the Mercatus paper. One major problem (among many) with the Mercatus paper is that it assumes you can increase growth rates through capital deepening. This is only possible in an unbalanced and explosive growth model. It’s standard growth theory that capital deepening can only raise the level of GDP but not the growth rate while following a balanced growth path. To get the intuition here, think about what happens to capital’s rate of return with capital deepening. This quickly gets us to those phase diagrams of differential equations that Menzie warned you about.

            Finally, reread the concluding paragraph in the CEA paper. The naïve and inattentive reader is led to an unsupported conclusion. The very first paragraph in the CEA paper acknowledges that there are good and bad regulations. Okay so far. But by the time we get to the conclusion we’re not only told that there are bad regulations, but that deregulation is the key to economic growth. This conclusion goes way beyond the evidence. Why not correct badly worded or excessive regulation rather than simply eliminate the regulation? And why should we deregulate in cases where regulation is working well? The CEA paper doesn’t address these questions; we are simply told that we must deregulate to unleash productive potential, blah, blah, blah. The CEA paper is a non-economist’s idea of what an economic analysis looks like.

    2. pgl

      “So in what world is it a bad thing if regulations act to reduce the output of negative externalities?”

      Judging from PeakTrader’s comments, his world. You are being really hard on this paper. For GMU – their writing is quite an admission.

  9. mike v

    That ridiculous graph seems to imply that the upper range of growth becomes *infinite* in the year 2000.

    1. day_trader_dead_end

      Bernanke’s Great Moderation was destroyed because Evil Regulations.

      Just go with it. It’s Day Trader logic.

  10. 2slugbaits

    CoRev Menzie asked if you understood the concept of maximum likelihood estimates (MLEs) in econometrics. For your reference, as a basic econometrics 101 primer you might want to consult Peter Kennedy’s “Introduction to Econometrics”, section 2.9. Kennedy gives the intuition:

    The maximum likelihood estimate is the particular pair of values mu and sigma^2 that creates the greatest probability of having obtained the sample in question; i.e., no other pair of values would be preferred to this maximum likelihood pair, in the sense that pair B is preferred to pair A.

    For a more mathematically rigorous explanation of MLE as applied to Autoregressive/Moving Average models see JDH’s “Time Series Analysis”, chapter 5.

  11. 2slugbaits

    PeakTrader so, federal regulations are good and state regulations are bad.

    I would say that overall federal regulations are better than most state regulations. It’s not as though organizations like ALEC have the public interest in mind. And state legislators and regulators are easily corruptible. I grew up in Illinois. I remember plenty of governors going to prison on federal corruption charges. And a Secy of State was hopelessly corrupt. After he died they found hundreds of thousands of dollars in cash hidden in shoeboxes in his closet. How about Texas? Or Florida? Or New Jersey? Or the New York state legislature. And how about the current bunch of state regulators in Michigan, who are under indictment? If you believe in Madison’s Federalist number 10, then you should also agree that larger political units are less vulnerable to being captured by narrow factions than smaller political units. That’s one reason why the Hamilton and the young Madison (privately) believed the “commerce clause” should be used as a vehicle for neutering the states.

    State governments know deadweight losses can be offset by positive spillover effects.

    Do you understand the definition of “deadweight loss”?

    However, that’s not the reason people flee one state for another

    And moving from one state to another in order to avoid regulations is your idea of optimal behavior that minimizes deadweight losses??? Really?

    1. PeakTrader

      2slugbaits, poor federal regulations affect all 50 states. The disequilibrium of a deadweight loss is a partial equilibrium model. Excessive regulations, like excessive taxes, is a reason to flee one state for another.

      1. PeakTrader

        2slugbaits, you say “…because capital can freely move from one state to another that states are vulnerable to corruption and blackmail.”

        So, restricting the free flow of capital will raise morality and reduce crime?

        A deadweight loss can be offset by spillover effects. For example, a minimum wage above the market price for labor creates a deadweight loss. However, the positive income effect can offset the negative employment effect, a market failure can be corrected to better match wages and productivity, and lower income workers with higher marginal propensities to consume can more than offset higher income reduced consumption, e.g. through inflation or higher prices.

        1. 2slugbaits

          PeakTrader Your argument seems a bit confused. When you suggest that people and businesses should relocate to a different state in order to avoid some regulation, that creates a substitution effect, which generates a deadweight loss. I would agree that a government failure to correct an externality would create a deadweight loss; but I’m not the one arguing against government regulations to correct market failures! You are, remember? The problem I have with state regulations is that they are more prone to deadweight losses precisely because it is fairly easy for producers and consumers to substitute away. You see that as a good thing. I see it as a bad thing precisely because it creates opportunities for deadweight losses. Uniform federal laws make it a lot harder to avoid taxes and regulations. Better yet would be global laws and regulations for certain kinds of activities that cross international borders; e.g., CO2 emissions, global wealth tax, herbicide runoffs, deforestation, etc.

          When reading the CEA paper you have to ask yourself if the Trump Administration really believes in deregulating useless and duplicative regulations, or if they just want to deregulate selective industries with very high negative externalities. Trump is many things, but he’s most definitely not an advocate of free trade. And he certainly doesn’t support deregulation of copyright and intellectual property rights, which are probably the most destructive regulations we have. Instead, Trump is focused on protecting upper Midwest farmers, gun fanatics, Big Coal, Big Pharma and reckless shadow banks. In his heart-of-hearts (assuming he actually has a heart), Trump is an old fashioned mercantilist.

          1. PeakTrader

            2slugbaits, There’s a difference between needed regulations and excessive regulations.

            I’m sure, you’re for California’s stringent regulations to fight global warming, causing all kinds of havoc on producers and consumers, which you want to impose on the rest of the country and stop people fleeing California, although there’s little or no negative externality, and won’t put a dent on slowing the warming cycle.

          2. PeakTrader

            And, you severely discount any positive effects that more than offset deadweight losses, e.g. the enormous benefits of the U.S. Information Revolution and intellectual property rights, along with harming the very people you want to help, e.g. overregulation and lower income Americans, while helping crony-capitalists, bureaucrats, consultants, lawyers, etc..

          3. day_trader_dead_end

            “I know a good regulation when I see one.” is not an argument in favor of deregulation.

            Try again.

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