The economy is 25 percent weaker because of regulations since 1980

Mercatus:
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Economic growth in the United States has, on average, been slowed by 0.8 percent per year since 1980 owing to the cumulative effects of regulation:


  • If regulation had been held constant at levels observed in 1980, the US economy would have been about 25 percent larger than it actually was as of 2012.
  • This means that in 2012, the economy was $4 trillion smaller than it would have been in the absence of regulatory growth since 1980.
  • This amounts to a loss of approximately $13,000 per capita, a significant amount of money for most American workers.

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Endogenous growth theory builds on the idea that economic growth is primarily dependent on decisions made by actors in the economy—firms and individuals—rather than on external factors.


  • Economic growth is dependent on investment. Economic growth in a particular industry is determined by investment in knowledge creation, such as research and development, and the way that such investment leads to innovation and increases in productivity. This means that regulatory interventions that affect investment choices have a greater effect on the economy than the simple sum of static costs associated with regulatory compliance.
  • Regulations have cumulative effects. A key insight of endogenous growth models in general is that the effect of government intervention on economic growth is not simply the sum of static costs associated with individual interventions—there are dynamic implications. The accumulation of regulation over time leads to greater and greater distortion of investment choices. Moreover, the investment choices of previous years affect growth in future years because knowledge that is not created cannot be implemented next year and the years after to be more productive.

The study develops a multisector endogenous growth model that permits a counterfactual experiment: What would have happened if federal regulation had been “frozen” at the levels observed in 1980? The model accommodates industry-specific variation in how regulation affects investment and growth, while specifying the determinants and relationships needed to estimate the long-run cost of the regulation for the economy overall.
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I think the assumptions in the study appear valid.  Regulations require the hiring of managers to review them and ensure compliance and they have a cumulative effect over time.  They also can require hiring staff to work for the regulatory manager.

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