The administrative state is a leviathan that grows year by year. The big state hobbles the private sector.
Regulations
have a substantial negative impact on overall
economic growth
.
From 1947 to 2006, productivity growth in the United States averaged
just over 2%
. From 2006 to today, annual productivity growth has fallen by about 30% to just
1.5% a year
. That change has had a profoundly negative impact. That slowdown corresponds to a loss of $95,000 in output per worker. When average productivity growth slows on a secular basis, the negative effects accumulate and become substantial.
The burden of federal regulations is a major reason why productivity growth has slowed, reducing real output growth by as much as 2% a year. Currently, economic growth is about 2%, made up of annual productivity growth of 1.5% and an increase in hours worked of 0.5%. Without unnecessary regulations, annual economic growth could average 3%, not 2%. Over time, that difference means a lot. That differential in growth has led to an accumulated reduction in gross domestic product of about $10 trillion over a 36-year period. In a $35 trillion economy, per capita GDP would be over $100,000.
The National Bureau of Economic Research
finds
that economic regulations reduce growth and productivity. More regulations reduce profitability and lower equity returns. Lower returns reduce future investment, which drives long-term productivity growth. In the technology sector, greater regulatory action harms smaller firms more than larger firms. Large technology firms can spread the burden of compliance across a larger sales base. More regulation increases the hurdle rate for dynamic innovation.
In the financial sector, under the Dodd-Frank Act, compliance costs for banks increased by approximately
$70 billion annually
. The heavier regulatory burden also accelerated bank mergers and consolidations since small banks lacked the scale to comply with new regulations. This contributed to a significant decline in new bank entries. And it contributed to a sharp decline in new small business loans. New business is the primary source of job growth and technological innovation.
Because the House of Representatives is now controlled by Republicans, the Biden administration is attempting to pursue policy through regulatory actions and through executive orders. The Federal Trade Commission’s investigation into Coca-Cola and PepsiCo because of alleged violations of the Robinson-Patman Act illustrates regulatory overreach by the Biden administration.
Coca-Cola and PepsiCo provide pricing discounts to big box retailers that are not available to supermarkets, large and small. The purpose of the Robinson-Patman Act and the FTC investigation is to help small business at the expense of large business. That goal is not economically efficient. It violates the basic premises of U.S. antitrust law, economic efficiency, and consumer welfare. The Department of Agriculture says food prices at retailers such as Walmart, Costco, and Target are
8% to 27% lower
than large supermarket chains. Lower prices are especially meaningful in the current time of elevated inflation. Through December, 2022 food inflation at home is up 10.4%. The FTC is wrong to investigate Coca-Cola and PepsiCo for selling their products at lower prices to Costco than to supermarkets.
Regulations impose a very heavy burden on society.
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James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes
a daily note
on finance and the economy, politics, sociology, and criminal justice.
