Pareto Policy Solutions, LLC

advancing innovation through smart regulation

Pareto Policy Solutions, LLC is a policy analysis and advocacy firm committed to advancing sustainability through “smart” regulation: regulation that rewards, and does not penalize, superior performance.  Often, such actions leverage advances in science and technology and make the regulatory program itself more effective as well as more efficient.

Does Regulation Harm the Economy?

On March 2, 2015, the Judiciary Committee of the House of Representatives held a hearing on several bills that would reform the regulatory process.  One of the witnesses, Amit Narang (Public Citizen) representing Citizens for Sensible Safeguards, a coalition of public interest groups, said, "I am talking about studies that claim, in the aggregate, in a macroeconomic sense, that regulations are harming the economy.  Those studies are baseless."  A few minutes later, the following question was asked: “Is there any evidence that regulations adversely affect our nation’s economy?” To which Mr. Narang responded, “Again, in the aggregate, or macroeconomic sense, there is none.”

These statements are incorrect. There is a body of research in the peer-reviewed literature examining macroeconomic impacts, showing that regulation has negative impacts on growth and productivity, as would be expected from economic theory.

For example, in a paper published in 2013, John W. Dawson (Appalachian State University) and John J. Seater (North Carolina State University) examined the impact of federal regulation on macroeconomic factors, utilizing decades of time series data.  They found that regulation has statistically and economically significant effects on aggregate output and the factors that produce it—total factor productivity (TFP), capital, and labor. They concluded that federal regulation (1) has caused substantial reductions in the growth rates of both output and TFP and (2) explains much of the slowdown in US productivity observed in the 1970s. 

On this last point, a fair amount of economic research examined the decline in US productivity in the 1970s. Some empirical studies found evidence that pollution abatement regulation were partly to blame.  The impact was relatively small and short-term.

To be fair, Public Citizen’s written testimony is more circumspect than its oral testimony, focusing on the impact of regulation on aggregate employment.  It attacked the “false claim . . . that regulations increase unemployment”.   

True enough.  In the most comprehensive book on the subject, editors Cary Coglianese, Adam M. Finkel, and Christopher Carrigan sift through the evidence and conclude that although specific regulations can have negative or positive employment impacts at the sector (microecomomic) level, the net effect at the aggregate (macroeconomic) level is probably a wash. 

It is important to be specific when describing the impact of regulation.  Impact on the economy can mean many things:  employment, GDP, productivity, innovation, competitiveness, etc.  Even if regulation impedes economic growth, the social benefits of regulation can exceed the social cost, making regulation worth the investment.  This critical point is noted both by Dawson and Seater in their article and by Coglianese, Finkel, and Carrigan in their book.

When it comes to regulation and regulatory reform, organized interests tend to have a pro or con perspective, and nothing in between.  In such cases, ideological positioning takes precedence over evidence, leading to exaggerated claims. 

Observers should be wary whenever a topic as significant and multifaceted as regulation is reduced to binary generalization. 

For further reading:

Cary Coglianese, Adam M. Finkel, and Christopher Carrigan, Eds. 2014. Does Regulation Kill Jobs?  University of Pennsylvania Press:  Philadelphia.

John W. Dawson and John J. Seater.  2013. Federal regulation and aggregate economic growth, Journal of Economic Growth, 18(2): 137-177. 

Klaus Conrad and Catherine S. Morrison.  1989.  The impact of pollution abatement investment on productivity change:  an empirical comparison of the United States, Germany, and Canada.  Southern Economic Journal, 55:  684-698.

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