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Friday, September 21, 2012

Regulatory Expansion Versus Economic Expansion in Two Recoveries

Much can be learned by comparing the very weak recovery from the 2007-2009 recession with the very strong recovery from the 1981-82 recession. Both recessions were severe, and U.S. history shows that severe recessions tend to be followed by fast recoveries, even when the severe recession is due to a financial crisis. But growth has averaged only 2.2 percent in this recovery while it averaged 5.7 percent in the 1980s recovery as shown in this chart.

As I testified in a House Judiciary Committee hearing on regulation yesterday, I’ve come to the conclusion that the difference between the two recoveries is due a difference in government policies, including regulatory policy.

One measure of the difference between the regulatory policies in the two recoveries is shown in the next chart. It compares the number of federal workers engaged in regulatory activities in the years before and during both recoveries. Note that in the early 1980s the number of federal workers in these regulatory areas was declining, in sharp contrast to the situation now, even when TSA workers are excluded as in this chart.

While correlation does not prove causation, regulations, whatever their benefits, tend to raise the cost of doing business and thus discourage business expansion and economic growth. This does not imply that increased regulation was the cause of the recession, which was surely due to other factors including financial and monetary shocks. But had legislation been passed into law to contain the recent regulatory expansion, it is likely that we would have had a stronger economic recovery.

The data on federal workers comes from this paper by Susan Dudley and Melissa Warren.  This chart shows the full series going back to the 1960s, again adjusted for TSA workers in recent years.