Harvard's standing in economic policy debates took a big hit when the famous Reinhart-Rogoff 90 percent debt-to-GDP growth cliff was shown to be the result of a simple spreadsheet error. Niall Ferguson's strange rant in the Wall Street Journal about the United States becoming the land of government regulation continues the downhill slide.
The gist of the piece is that the country is going down the road to economic stagnation and suffocating bureaucracy because of excessive regulation. The Affordable Care Act (ACA) is the main villain in this story.
It's fair to say that just about everything in the piece is wrong. Starting with the meat, rather than being some horrible burden for small businesses, the main effect of the ACA on the vast majority of small businesses will be to provide them with a subsidy if they offer their workers insurance. The mandate only applies to firms that employ more than 50 workers, most of whom already provide insurance that would meet the mandate anyhow. So these engines of innovation will grind to a halt if the government offers them subsidies for insurance? Interesting theory.
Ferguson then cites a number of hack studies that find enormous costs to regulation. The main trick in this sort of study is to add up every possible cost associated with restrictions without taking account of the benefits of these regulations.
Suppose we had a new law that allowed oil, gas, and other mineral companies to dig up anyone's property without any compensation whatsoever. This would undoubtedly lead to huge growth in these extractive industries and a big gain in GDP that the Fergusons of the world would celebrate.
Of course there would be no accounting of the destruction to people's property or the loss in value they may experience as a result of having an oil rig next to their front porch. Ferguson is effectively mourning that in the United States companies don't enjoy this freedom to excavate or to in other ways damage the environment and the public's health.
Other parts of Ferguson's argument are equally off the mark. His main measure of regulation is the number of pages in the Federal Register. It's not clear that this is a measure of anything. The originally proposed Volcker Rule, which prohibited banks with government insured deposits from engaging in speculative trading, was quite short. It grew an order magnitude larger as the industry watered down the restriction with gobs of exceptions.
By Ferguson's measure, the watered down Volcker Rule means more regulation than the strong Volcker Rule because it involves more pages. There would be a similar story with many rules in the Federal Register.
Finally, Ferguson is badly confused when it comes to economic growth. He tells us:
"The last time regulation was cut was under Ronald Reagan, when the number of pages in the Federal Register fell by 31%. Surprise: Real GDP grew by 30% in that same period."
Apparently Ferguson is impressed that the U.S. economy grew in the 1980s. Of course the U.S. economy almost always grows, economists usually ask about the rate of growth. At the peak of the Reagan business cycle in 1990, the economy was 33.8 percent larger than at the prior business cycle peak in 1981. By comparison, the economy was 41.1 percent larger in 2001 than it had been in 1990. In other words, the economy grew more rapidly after the evils of regulation had returned in the post-Reagan era.
The economy grew much more in the 1960s, the highpoint of liberal intervention. It was 51.6 percent larger in 1970 than in 1960. Even the dreadful 1970s had more growth than Ferguson's low regulation Reagan days, expanding by 39.9 percent from 1970 to the business cycle peak in 1981. The productivity data, which measures growth per hour worked, would show a similar picture.
So there you have it: Ferguson has no serious measure of either the cost or the extent of regulation. And he gets the story on growth completely backward. This is the sort of wisdom on economic policy that we are coming to expect from Harvard University and the Wall Street Journal opinion page.
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