A Squeeze of Regulatory Reform Could Juice Productivity

The Wall Street Journal’s Greg Ip warns we’re “out of big ideas,” [subscription required] and as a result, the U.S. economy’s productivity growth has “averaged a pathetic 0.5% for the current decade.”

Productivity growth matters, because as U.S. Chamber chief economist, J.D. Foster stated in August, it’s the “mother’s milk of prosperity” and wage growth:

When labor productivity is rising, it means rising labor compensation should soon follow. It means workers and firms are becoming more competitive in global markets. And when labor productivity is declining, it means just the opposite.

Part of the problem Ip finds is that instead of innovation that focuses on big, bold ideas—say flying cars–much of it is directed toward responding to regulatory edicts, even if well-meaning:

The portion of a car’s price that pays to meet federal safety and fuel efficiency mandates has gone from zero in 1967 to 22% now, or $5,500 on a $25,000 car, according to Sean McAlinden, an economist at the Center for Automotive Research, an industry-supported think tank.

These have delivered genuine benefits: Highway fatalities fell from the late 1960s until recently, and the air is cleaner. Mr. McAlinden notes consumers may not have bought those features if given the choice.

A California mandate first introduced in 1990 now aims to make one in seven cars in the state emit zero emissions, which means powered by hydrogen or electricity. So while the purpose of the mandate, less pollution, is broadly shared, it achieves it by forcing car makers to favor certain technologies over others that may be commercially more viable.

R&D isn’t infinite. One tradeoff for focusing on technologies that satisfy federal regulations is not putting more resources into researching technological leaps like flying cars.

As Foster points out, the overwhelming Regulatory State sits like a weight on the economy:

The current dismal labor productivity figures do not reflect cyclical conditions. Coming toward the end of the current administration these figures aptly and primarily describe the net effects of the administration’s economic policies, most especially its hyper-active regulatory policies. On Aug. 8, the American Action Forum (AAF) released a study summarizing those policies.

According to AAF, the administration has issued an average of 81 major regulations a year, where major regulations are defined as costing at least $100 million, for a total so far of over 600 major regulations costing over $743 billion according to the regulators’ own estimates though the real cost could be significantly higher. At the start of the year the president indicated he would push his administration to be very aggressive in accelerating the outflow of regulations in the time remaining, so the economic drag from regulations would be expected to intensify.

The regulatory rush underway isn’t helping.

As a result, it makes businesses hesitant to go out on a limb:

Regulations have costs that go far beyond the simple calculations presented. They also create uncertainty among affected businesses as they wait for the regulations to come out, become final, and then become internalized within the business. Perhaps even more important, when businesses are subject to such an onslaught of regulations in complete disregard to the economic damage they inflict, and especially in combination with other policies such as the administration’s enacted and proposed anti-growth tax policies, the net result is to create at least the appearance of an antagonistic attitude toward businesses. Businesses can then become overly cautious and defensive and these consequences appear in the declining business investment in recent quarters.

Waning productivity growth (and a sluggish economy) is what you get when caution replaces bold, risk-taking.

Establishing a regulatory process fit for the 21^st Century can be a way to bolster innovation and boost productivity. A step toward that is for the next Congress to quickly pass the Regulatory Accountability Act. This bill–supported by 380 business groups–help ensure that agencies make the most consequential regulatory decisions in an open and transparent manner based on good data and sound science and instruct them to use the least-costly option in meeting Congress’ intent.

Better, more carefully-crafted regulations can give entrepreneurs and businesses the certainty they need to move off the sidelines and invest more in bold ideas.

It’s obvious that productivity needs a boost, and squeeze of regulatory reform could be just the trick.

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