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Impact of Regulations on Growth

May 17, 2016
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For the past several years, the United States has been mired in a period of slow growth.

The average rate of GDP growth between 2007 and 2015 was a paltry 1.2%.

This anemic growth compares with an average growth rate of 3.5% between 1950 and 2000.

An excellent article by John Mauldin, at mauldineconomics. com, captures the fundamentals of growth using the formula:

∆ GDP = ∆ Population + ∆ Productivity.

(Delta is the Greek symbol for change.)

His article explored the population issue in depth. It also established that productivity growth had declined from 2.6% between 2000 and 2007, to 1.2 % between 2007 and 2015.

This is a very large decline in productivity and affects future per capita GDP, a measure of economic prosperity. Per capita GDP for the United States was $54,630 in 2014, according to the World Bank.

From 2014, the difference between a 3.5% growth rate and a 1.2% growth rate over only 20 years is huge: $116,444 vs $71,023, a difference of $45,421.

While some aspects of population, i.e., more specifically growth in work force size, are not under government control, changes in productivity are largely controlled by government policies and actions.

World Map of GDP from Wikipedia

World Map of GDP from Wikipedia

(Black >$50,000,  Ranging to Yellow <$2,000)

Therefore, the key to restoring economic growth is to improve productivity by changing government policies, or, in many cases, eliminating government regulations and intervention.

Steve Forbes’ book, Reviving America, shows how government intervention in healthcare, since and during WWII, created the high-cost, inefficient healthcare system of today.

A simplified explanation of productivity is:

Achieving greater output with less input, or output divided by input.

It is essentially, a measure of the economy’s efficiency.

In Gilbreth’s day, around 1900, providing a worker with the correct size shovel, or arranging the work place to require fewer body movements that Gilbreth measured using Therbligs, would result in improved productivity.

The movie Cheaper by the Dozen was based on the lives of the Gilbreths.

Over the last few decades, computers and information technologies provided the impetus for productivity improvements.

Improvements in productivity require investment in new technologies, not making a worker work faster or harder.

Robots, software and the capturing and utilization of data are potential forces for improving productivity.

Investment requires taking risks. If government regulations increase risk, investments in new technologies and products might not be made.

The 2010 Dodd-Frank financial law has increased risk in the financial markets. A new rule from Dodd-Frank would make directors and officers of companies liable for decisions if their decisions are wrong. This alone will cripple investments in new technologies, that by their very nature may be risky investments.

EPA regulations have put thousands of coal miners out of work, and virtually killed the coal industry. Some may argue that government support for wind and solar, using taxpayer dollars, has created new jobs offsetting lost jobs in the coal industry, but this is debatable.

However, these EPA regulations have hurt productivity.

The end result is that government regulations have shifted the economy from inexpensive and abundant electricity, to unreliable and expensive electricity, which, automatically, by definition, hurts productivity and lowers GDP growth.

Referring to the above formula for GDP growth:

More expensive electricity means a larger denominator, which results in lower productivity and lower economic growth.

This further substantiates that Renewable Portfolio Standards (RPS) requiring the use of wind and solar will hurt GDP growth.

As John H. Cochrane, in his article, Ending America’s Slow-Growth Tailspin, said:

“If it takes years to get the permits to start projects and mountains of paper to hire people, if every step risks a new criminal investigation, people don’t invest, hire or innovate. The U.S. needs simple, common-sense, Adam Smith policies.”

An excellent example of how government regulations can severely harm economic growth are the regulations designed to halt fracking.

The next article will explore the effect of government regulations on oil and natural gas.


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Nothing to Fear, Chapter 9, The Utility Death Spiral, explains why displacing fossil fuels with wind and solar will result in the bankruptcy of Utilities and the possible takeover of the industry by the government.

Nothing to Fear is available from Amazon and some independent book sellers.

Link to Amazon:

Book Cover, Nothing to Fear

Book Cover, Nothing to Fear

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