Regulatory Expenditures, Economic Growth and Jobs: An Empirical Study

Abstract

With a sluggish economy, high unemployment, and unprecedented deficit spending, growing the economy and curbing federal spending are top priorities in Washington. A now-popular target for reform is regulation, which even President Obama claims to have "stifled innovation" and to have had "a chilling effect on growth and jobs." In this POLICY BULLETIN, we use fifty years of data and modern econometric methods to provide an estimate of the relationship between government spending on regulatory activity and economic growth and job recovery. We estimate that reducing the size of the regulatory bureaucracy may grow the economy and invigorate the labor market. Even a small 5% reduction in the regulatory budget (about $2.8 billion) is estimated to result in about $75 billion in expanded private-sector GDP each year, with an increase in employment by 1.2 million jobs annually. On average, eliminating the job of a single regulator grows the American economy by $6.2 million and nearly 100 private sector jobs annually. Conversely, each million dollar increase in the regulatory budget costs the economy 420 private sector jobs. Accordingly, as Congress and the President struggle with the difficult decisions of how to shrink federal spending, an excellent place to start would be to investigate responsible cuts in the size of the federal regulatory budget. That said, while regulation imposes costs, regulation may also have social benefits, and this fact should be considered.

Keywords: Regulation, Cost of Regulation, Jobs, Employment, Government, Budget, Deficit

JEL Classification: C32, E2, E62, H5, H6, L51