Trump's Deregulatory Successes
By David Henderson
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.
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.