Regulation rollback and the ‘Trump bump’

Late week, the Commerce Department released its estimate of quarter two U.S. GDP growth, and the economy grew at an impressive 4.1 percent annual rate. The Dow Jones is up about 7,000 points since President Trump’s election, and unemployment is reaching lows not seen in nearly two decades.

For these reasons, some have posited that a “Trump bump” explains the economy’s strong performance. Plenty of experts are skeptical, though, especially when it relates to the impact of Trump’s regulatory reforms.

{mosads}Here are a few reasons why the experts may be at least partly wrong.

First, consider the arguments of the skeptics. Since Trump took office, there has been very little regulation actually removed from the books. As of 2017, the Code of Federal Regulations stands at about 186,400 pages. That’s up from about 185,000 pages when Trump took office. The Mercatus Center similarly estimates that the level of federal regulation grew just 0.7 percent in President Trump’s first year.

In other words, there has been a slowdown in new regulatory activity, but not an overall reduction.

Nonetheless, a considerable number of consequential rules have been delayed or withdrawn. Since President Trump’s inauguration, 31 final regulations have been published in the Federal Register with the words “delay” or “extension” of “effective date” in their title. Some of these rules delay multiple regulations at once. The administration claims to have delayed as many as 700 regulations in total and withdrawn some 635 regulations from the regulatory pipeline.

Critics will rightly point out that delayed regulations will be implemented eventually. And those that were withdrawn were not a burden on the economy yet. So is it possible that regulatory reform is giving the economy a boost?

The answer is yes, and here’s how.

Let’s say a regulation costing a business $5 million was going to be implemented this year, but instead it is delayed for five years. Some funds the business would have put toward compliance will be invested instead for a time, such that when the regulation is finally implemented, the business’s overall resources have grown. So after the business spends the $5 million on compliance, there is now more money left over.

The benefits from injecting this capital into the economy may even grow as returns are reinvested. In the short run, we may not feel much difference. Even a billion dollar rule is small relative to the overall size of the economy. But in the long run, the benefits from delaying an expensive rule can add up to a lot.

There are other reasons to think Trump’s reforms may be making a difference.

Economic theory suggests that the economy has a tendency towards a natural rate of growth, given certain fundamentals like the rate at which the workforce is growing and the rate at which new ideas are discovered by innovators. 

However, in the real world, various forces — shocks — cause the economy to deviate from this natural rate of growth. One of these forces is regulation. So stopping shocks, especially ones that recur year after year, can be enough to boost growth rates by allowing the economy’s underlying fundamentals to take hold.

Trump has reduced regulatory output across agencies. This means fewer shocks from new rules, but it won’t stop the shocks that occur every year from all the existing regulations. However, there is also evidence that enforcement of old rules may have gone down recently.

Taken together, a slowdown in the creation of new rules and less enforcement of old rules could, in theory, boost growth. If the reforms last, this could add up in the long run and serve as more than a temporary stimulus.

The statisticians are still working out whether GDP growth has changed measurably since Trump took office. But regardless, GDP isn’t the best measure of the economy’s health, especially in the short run. Spending on regulatory compliance can boost GDP, so a drop in compliance costs can actually make GDP fall.

The stock market may be a better indicator, but some of the benefits of regulatory rollback are hard for investors to anticipate. Who would have guessed, for example, that airline deregulation in the 70s and 80s would pave the way for today’s innovative companies like Amazon and FedEx?

The regulatory tide has slowed to a crawl. This may be giving the economy a needed reprieve, with the potential for greater gains to come. Like a patient in the emergency room, just stopping the bleeding can do a world of good. But it’s only the first step on the way to full recovery. 

James Broughel is a research fellow with the Mercatus Center at George Mason University.