Do the authors [of the Council of Economic Advisers’ report on Trump’s deregulations] make a good case for their estimate? Yes, and in the rest of this article, I’ll lay out their case. I wonder, though, what the numbers would look like if they included the negative effects on real income of increased restrictions on immigration and increased restrictions on trade with Iran. (I’m putting aside increased tariffs, which also hurt real U.S. income, because tariffs are generally categorized as taxes, not regulation.)
The CEA starts by noting the potentially large effect of deregulation that it pointed to in its 2018 Economic Report of the President. That report referenced a fact about U.S. regulation that might surprise some of us who, just last week, celebrated July 4th in the “land of the free.” The fact is this: Of the 35 countries whose governments are members of the Organization for Economic Cooperation and Development, the United States has the ninth most restrictive regulations of product markets. Our regulations are slightly less restrictive than Latvia’s and slightly more restrictive than Sweden’s. The CEA estimated, based on these data, that if the United States deregulated to achieve the same degree of regulation as the Netherlands, which is the least regulated of the 35 OECD countries, U.S. GDP would increase by 2.2 percent over 10 years. If, instead, the United States settled for emulating Canada, U.S. real GDP would increase by 0.5 percent over 10 years.
This is from David R. Henderson, “Trump’s Deregulatory Successes,” Defining Ideas, July 7.
Another excerpt:
One way that governments raise costs and hurt competition at the same time is with regulations that are proportionally a bigger burden on small companies than on large ones. A company with, say, $10 million in annual revenue, may need to hire a lawyer to help with compliance, whereas a company with $10 billion in revenue might need to hire only 10 lawyers. The ratio of lawyers to revenue for the small firm in the above example is 1 to $10 million whereas for the large firm it’s only 1 to $1 billion. This happens so often that some years ago I coined a term for the phenomenon: “economies of scale in compliance.” Such regulations can push out small, marginal firms and make the industry they were in a little less competitive. One such regulation was an Obama-era regulation on banks under the Dodd-Frank Act. Regulations that were intended to apply to institutions that were deemed “too big to fail” were also applied to small and mid-sized banks. But the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act, signed by President Trump, will reduce regulatory burdens, thus leading smaller banks to increase their loans to small lenders. The CEA estimates that this deregulation will increase U.S. real annual income by $6 billion.
Read the whole thing; it’s not long.
READER COMMENTS
Jon Murphy
Jul 8 2019 at 9:37am
I like the phrase “economies of scale in compliance.” I’m going to use that in my lectures going forward (with credit, of course).
Alan Goldhammer
Jul 8 2019 at 10:14am
I’m all in favor of deregulation at all levels (state and local regulations are by far the worst and I wonder if the OECD captures those in their report). However there are some things that I believe are wrong in David’s commentary.
The CEA generic drug example was wrong. It was user fees and the number of drugs coming off patent that were key here. The regulations that CEA touted were already being worked on several years before the report was issued.
Why did my Netflix subscription increase by over 10% with Internet freedom? I prefer the old model with a lower price! I also have not seen my FIOS Internet bill decrease and see increased local taxes for access.
IIRC, the DSL issue was more a function of the telecoms having to put in place technology to allow line sharing than anything else. this of course has been superseded by cable and fiber optics which have much higher bandwidth speed than DSL and I don’t think there was any regulatory impediment there.
The small and mid-size bank example was recognized by both Dems and Reps as needing legislative fixing and I don’t think this can be ascribed President Trump as it was not an executive branch fix.
Finally, every Presidential administration that I can remember has engaged in this type of regulatory review and repair in the beginning of their first administration. Vice President Gore ran a very effective review of government policies. One of the key outcomes was the creation of electronic transactions across all branches including e-filing of tax returns.
Jon Murphy
Jul 8 2019 at 10:27am
And? Doesn’t change the fact that the deregulation occurred.
This is likely a case of just normal inflation rather than the deregulation. Prices generally increase; Netflix increased prices under Net Neutrality, too (October 2015 and October 2017). Both increases were about the sale (10%) as the current one.
Alan Goldhammer
Jul 8 2019 at 11:14am
Jon – of course the generic drug regulations changed as have drug regulations over the years. My point is that this had nothing to do with any initiative from the Trump administration. The major factor behind speedier approvals in both categories has been the advent of the User Fee program (first implemented for Rx drugs in 1992; disclosure I worked on the negotiating team back then and for several renegotiations that followed).
Jon Murphy
Jul 8 2019 at 11:22am
Ok. Irrelevant
Bill
Jul 8 2019 at 11:02am
” … thus leading smaller banks to increase their loans to small lenders.”
Should that be “to small borrowers”?
Thaomas
Jul 8 2019 at 6:51pm
I’d prefer to see something that looks in detail at the change in the costs and benefits of the change in the regulation. If differential impact/rates are taken into account, taxes and tariffs/quotas/prohibitions can be brought into the purview of “regulation.”
Benjamin Cole
Jul 9 2019 at 8:38am
I am happy for Trump’s deregulatory successes.
But I see no action anywhere on fuel-as-ethanol edicts and mandates, or property zoning.
BTW, the Mississippi has become a giant sewer for farmers to send run-off into the Gulf, so people in Mississippi cannot swim in the beach water anymore. Ethanol, and corn farming, is a factor in this.
I doubt we will see an end to property zoning or ethanol…maybe ever.
Rather puny victories against other regulations will have to suffice.
David Seltzer
Jul 9 2019 at 4:07pm
“economies of scale in compliance.” Such regulations can push out small, marginal firms and make the industry they were in a little less competitive. One such regulation was an Obama-era regulation on banks under the Dodd-Frank Act. Regulations that were intended to apply to institutions that were deemed “too big to fail” were also applied to small and mid-sized banks.
Startups as well small marginal firms. In 2010, we were about to launch a hedge fund with substantial funding. Dodd-Frank became law and our investors became concerned with its impact. We sought legal council for opinion and foundation of opinion. After several weeks of review and several thousands in in legal fees, it was determined we could not generate risk adjusted returns as the new law was so vague, contradictory and draconian. The venture never got off the ground.
Tom DeMeo
Jul 11 2019 at 4:42pm
Re: your net neutrality argument:
An ISP is facilitating a computer network connection between parties. The completed circuit is what provides economic value. Allowing a vendor to separate that product into separate opaque transactions; one for the sender, and one for the receiver, is highly problematic. Neither customer has an accurate understanding or any guarantee of the value of their contract, because the other side is subject to change at any time. The ISP is granted all the power in the relationship.
Given that all ISP’s require public accommodation which grant sweeping rights of way and guarantees limited competition, why do we consent to such a deal?
Comments are closed.