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How the Stealth Deregulation Boom is Driving this Economy

Why is the U.S. economy growing much faster than all the pundits and economists expected? The answer might be deregulation.

The White House with waving American flag

The White House in Washington DC with waving United States flag

The White House in Washington DC with waving United States flag

The U.S. Economy is Growing Faster than People Expected. Deregulation Could Be the Reason Why.

The second quarter has come to a close, and though we won’t know GDP numbers for a few weeks, the U.S. economy is still riding the high off its blowout number of 3.2% GDP growth in the first quarter. Nobody saw that kind of growth coming. In fact, many economists were even predicting a number of less than 2%. What happened?

After growing at a rate of 2.9% in 2018, the highest rate in the 10-year recovery, the consensus opinion was that the economy was slowing down. The stock market actually sold off nearly 20% at the end of last year on fears that we might even be decelerating towards a recession. I read the financial press every single day and I didn’t find anyone who predicted an economic acceleration.

Of course, it’s only one quarter and you can always get an outlier. The government reported a rise in inventories and a narrower trade deficit, things that are unlikely to be repeated. But there were also negatives like seasonality and the effects of the government shutdown that held the economy back.

Why is the economy continuing to accelerate at a strong pace? And why is it growing faster than all the pundits and economists expected? The answer might be deregulation.

The Deregulation Boom

The current administration in Washington has been taking aggressive steps to roll back excess regulation since 2017. That may sound like a minor thing, like improving efficiency or eliminating waste. It isn’t. The scope and cost of excess regulation in this country is absolutely staggering.

To give you an idea, in 2016, Congress passed 214 new laws. Those laws came with 3,853 brand new rules. And that’s just one year. This has been going on for decades. And there’s no system of discarding old regulations. The new ones just pile on top of the old ones. Decades of rules build up like plaque and clog up the economy.

How bad is it?

The sum total of all existing federal regulations can be found in a U.S. government publication called the Code of Federal Regulations. It’s a big publication. In 2017, it was more than 175,000 pages long. If the pages were laid out end-to-end, they would stretch for 25 miles.

The regulatory state was estimated to cost the U.S. economy about $2 trillion per year. On a per capita basis, this amounts to about $15,000 per American household, making it the single largest expense American families endure, with the exception of taxes. In fact, if the annual cost of federal regulation to the economy was the GDP of a nation state, that country would be the seventh-largest economy in the world.

And those numbers don’t include the opportunity costs associated with would-be entrepreneurs that oppressive regulations snuff out. A friend of mine owns a small business and he swears that his or any other small business could be shut down at any time by regulators because of non-compliance with an incomprehensible web of often absurd and outdated regulations.

The National Small Business Association (NSBA) estimated that one-third of business owners were holding off on investment and half didn’t hire people because of uncertainty regarding pending regulations. The NSBA also estimated that in the first year alone, small businesses spend an average of $83,000 to comply with government regulations. That number could be the difference between success and failure, or just declining to start a business in the first place.

Whole industries are held back. Banks don’t make as many good loans as they could. Energy production is held back, along with all the jobs that come with it. For years the biggest complaint among U.S. manufacturers was oppressive regulations. And manufacturing was dying.

Of course, some regulation is necessary. We need clear air and water and it would be like the Wild West with no regulations. But regulation isn’t the problem; excessive regulation is. To be honest, I don’t know exactly how much regulation is optimal. But I’m going to go out on a limb and say that 25 miles worth at a cost of $2 trillion per year is way too much.

The Trump Administration has held out deregulation as a key priority with a stated goal of cutting 75% of regulations. Already, the Code of Federal Regulations has been pared by a third. A law was passed requiring the cancelation of two old regulations for every new regulation passed. The Administration also has 514 deregulatory measures pending.

It’s admittedly difficult to trace the economic impact so far. But there are positive signs. U.S. manufacturers recently posted the highest confidence numbers in the 20-year history of the index. Unemployment is at a 50-year low. And the economy is stronger than economists expected.

There’s a lot to work with. A study at the Mercatus Center at George Mason University states that if the regulatory burden had been unchanged from 1980 to 2012, the U.S. economy would be 25% larger, an extra $4 trillion a year in GDP.

Maybe all these economists don’t just have a natural penchant for gloom. It could be that they’re missing a key factor—the stealth boom of deregulation.


*This post has been updated from an original version.

Tom Hutchinson is the Chief Analyst of Cabot Dividend Investor, Cabot Income Advisor and Cabot Retirement Club. He is a Wall Street veteran with extensive experience in multiple areas of investing and finance.