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The Pro-Growth Impact of Deregulation
Regulatory policy is one of the five ingredients in the recipe for growth and prosperity.
Ideally, there should be a minimal amount of red tape, and it should be governed by sensible cost-benefit analysis (i.e., so it deals with genuine externalities such as pollution).
Unfortunately, politicians rarely favor this light-touch approach, in part because of unseemly “public choice” incentives and in part because they focus only on the benefit side of the cost-benefit equation.
But the cost is very real.
And that means that there are substantial benefits when governments reduce the regulatory burden.
Let’s look at some research published by Italy’s central bank. Sauro Mocetti, Emanuela Ciapanna, and Alessandro Notarpietro investigated the impact of liberalization last decade. Here’s what they looked at.
…the importance of structural reforms, aimed at promoting sustainable and balanced growth, has been at the center of the economic debate, in Italy… Structural reforms are measures designed for modifying the very structure of an economy;
they typically act on the supply side,i.e. by removing obstacles to an efficient (and equitable) production of goods and services, and by increasing productivity, so as to improve a country’s capacity to increase its growth potential… The aim of this paper is to assess the macroeconomic impact of three major structural reforms carried out in Italy over the last decade. They include (i)liberalization of services, (ii) incentives to “business innovation” (included in the so-called “Industry 4.0” Plan) and (iii) several measures in the civil justice system aimed at increasing the courts efficiency.
And here are their results.
Our results indicate that the three reforms, introduced in different years and with different timing, starting in 2011 and up to 2017, have already begun to produce their effects on the main macroeconomic variables and on Italy’s potential output. In particular, and taking into account the uncertainty surrounding our micro-econometric estimates, by 2019 GDP was between 3 and 6% higher than it would otherwise have been in the absence of these reforms, with the largest contribution being attributable to the liberalizations in the service sector. A further increase of about 2 percentage points would be reached in the next decade, due to the unfolding of the effects of all the reforms considered here. Therefore, the long-run increase in Italy’s potential output would lie in between 4% and 8%. We also detect non-negligible effects on the labor market: employment would increase in the long term by about 0.4%, while the unemployment rate would be reduced by about 0.3 percentage points.
More output and more jobs. Hard to argue with that outcome.
Here are some charts from the study. Figure 7 shows the impact on some macroeconomic aggregates.
And Figure 8 shows the estimated improvement in the labor market.
These results are good news, but Italy still has a long way to go. It’s only ranked #51 according to Economic Freedom of the World, and it’s score for regulation has only improved by a slight margin over the past decade.
P.S. I shared some research earlier this year about the positive impact of another type of deregulation in Italy.
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A Genuine Quality-of-Life Achievement from the Trump Administration
Last year, I shared this video from the Competitive Enterprise Institute to help explain how government bureaucrats are making it harder for Americans to clean their plates, bowls, and silverware.
Washington’s dishwasher mandate is just one example of how red tape diminishes the quality of life.
Bureaucrats have concocted other ways of spreading misery and frustration.
Inferior light bulbs- Substandard toilets
- Inadequate washing machines
- Dribbling showers
- Dysfunctional gas cans
Call me crazy, but I don’t like spending extra time in the shower, flushing more than once, and risking self-immolation when I refill my lawnmower.
But there is a bit of good news. The Trump Administration wants to make it easier for us to clean up after dinner.
The Wall Street Journal’s editorial is a good summary of the issue.
For years American homes have been stuck with dishwashers that take forever and still don’t get the job done. A new Department of Energy rule…will help change that. …Regulations on energy and water usage—tightened in 2013 by the Obama Administration—mean that dishwashers now take at least two hours to complete a full wash cycle.
Dishes may still emerge with pieces of last night’s lasagna baked on. …CEI petitioned the Energy Department to allow dishwashers that would reduce the average cycle to one hour from two, while also giving better performance. CEI argued that if the aim of the regulation was to conserve water and energy, it’s unlikely they achieved their purpose. People responded to poor dishwasher performance by pre-rinsing each dish before putting it through their washers, wasting more water… The revised DOE rule is…an example of how common-sense deregulation can deliver real benefits for the public.
And Sam Rutzick of Reason explains this latest development in the battle for clean dishes.
Trump’s Department of Energy finalized a rule establishing a new product class for residential dishwashers that will have a normal cycle time of up to one hour and that can use five gallons of water per cycle. Those rules effectively roll back an Obama-era rule limiting standard dishwashers to use no more than 3.1 gallons of water per cycle.
That limit forced dishwasher companies to adjust their products’ cycle lengths. And the supposedly more efficient but less useful dishwashers have been a punchline…the average dishwasher cycle time has jumped from the one-hour cycle that was common a decade ago to more than two hours today. The tighter rules didn’t lead to energy savings for customers. …they actually increased water consumption by 63 billion gallons, as households would have to run their dishwashers multiple cycles, or pre-rinse their dishes by hand, in order to get dishes actually clean.
But Rutzick’s column contains a very important caveat.
Joe Biden may reverse this important bit of deregulation.
Unfortunately, the new rules may not last. While the incoming administration has been vague about which deregulatory efforts they intend to undo, they have spoken in favor of tightening environmental regulations—and the new dishwasher rules could be a casualty. If so, that’ll be bad news for consumers.
For what it’s worth, while he embraced some very bad policiesduring the campaign, I don’t think Joe Biden is a Bernie Sanders-style nutjob.
But I fear environmentalism is an area where he will push policy significantly to the left.
So I’m not overly optimistic that we’ll have better dishwashers in the future.
The only good news is that Americans, every time they do the dishes, will have an irritating reminder that government is the problem rather than the solution.
P.S. Yes, I realize better dishwashers are not as important as better tax policy (or as important as worse trade policy), but I don’t think politicians should be undermining our quality of life.
Open letter to President Obama (Part 549)
(Emailed to White House on 6-25-13.)
President Obama c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500
Dear Mr. President,
I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you for trying to get a pulse on what is going on out here.
The federal government debt is growing so much that it is endangering us because if things keep going like they are now we will not have any money left for the national defense because we are so far in debt as a nation. We have been spending so much on our welfare state through food stamps and other programs that I am worrying that many of our citizens are becoming more dependent on government and in many cases they are losing their incentive to work hard because of the welfare trap the government has put in place. Other nations in Europe have gone down this road and we see what mess this has gotten them in. People really are losing their faith in big government and they want more liberty back. It seems to me we have to get back to the founding principles that made our country great. We also need to realize that a big government will encourage waste and corruption. The recent scandals in our government have proved my point. In fact, the jokes you made at Ohio State about possibly auditing them are not so funny now that reality shows how the IRS was acting more like a monster out of control. Also raising taxes on the job creators is a very bad idea too. The Laffer Curve clearly demonstrates that when the tax rates are raised many individuals will move their investments to places where they will not get taxed as much.
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Your Administration added $236 billion of red tape just in 2012 and they would love to add some more in the future.
Strangled By Red Tape
May 20, 2013 by Dan Mitchell
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