This isn’t directly pertaining to Tyler Cowen’s work. The only link is, during an EconTalk interview with Russ Roberts, Cowen noted that free-market supporters tended to be the people who most fervently wished that the Great Stagnation thesis were not true, even though, Cowen argued, they need not be opposed to it.
Thinking about Jay Cost’s piece from the other day (my short discussion here), I realized that, in at least one respect, I do agree with Cowen: there has been a definite stagnation in the US. Looking at a chart of GDP growth rate for the US versus globally, the last decade has been pretty bad for the US, and 2010 probably won’t be any different. But even before that, you can see that it was pretty rare when the US had a significantly higher growth rate than the rest of the world. I know that there are a couple of factors that make this relatively less likely: first, the US has historically been a pretty large percentage of global GDP, so the trends will match up pretty well; and second, it’s a lot easier for a country with a tiny economy to experience large, regular growth. Still, think about this: the last time the US had a real growth rate of 5% was 1984; before that, it was 1978. During the 1970s, US growth was above 5% 4 times, and was 4.6% in 1977. In 1999, it was 4.9% and hit 4% just once after: 2000. And we now realize that the late 1990s were driven by the Federal Reserve keeping interest rates artificially low. What’s even worse is that, despite having a huge bubble in 2003-2007, growth rates were still anemic. They hit 3.6% in 2004 and have been downhill since.
I think the biggest reason for this is the long-term increase in government. Yeah, part of this is government spending as share of GDP, which crowds out private investment and limits growth. But not measured in that is the cost of regulation. In 2004, compliance with federal regulations came out to be roughly $1.1 trillion. In 2010, that number jumped to $1.75 trillion (though note in the comments that the study indicates that regulatory costs increased by “just” $63 billion during this time). And this is before the implementation of Obamacare. This also doesn’t mention state and local regulations, which themselves do a good bit of harm. Note that the US economy in 2009 was measured at $14.72 trillion, so if the $1.75 trillion is correct, roughly 10% of American economic output was prevented due to regulation. Even if you want to argue that some of the regulatory costs are shifts rather than pure losses, I would start the floor at 5% or so.
Over the past several decades, there has been a significant expansion of government. Gone are the days of 10% of GDP (of which the majority was spent by local governments); now we’re talking about governments at all levels taking 40%, and frittering away another 5-15% (including state and local governments) due to regulations.
I would argue that the end result is a significant degradation from where we could be. Compare the US to Hong Kong and Singapore, generally the 1-2 countries on economic freedom indices (like the Heritage Foundation’s). During the 2000s, Hong Kong had > 5% growth 4 separate years and Singapore was above 10% twice (above 5% 5 times). And it’s not like these are developing nations with a lot of room to play catch-up—Hong Kong has a PPP GDP per capita roughly equal to the US, and Singapore’s is actually higher. They also aren’t up there because of a few people owning major natural resources, like in Qatar or (to a lesser extent) Norway.
At any rate, Hong Kong and Singapore offer us examples of high-growth nations. These islands both have very small populations and are kind of indicative of “small, open-market economies,” so even if the US repeated with Hong Kong or Singapore do, the net effect likely would not be as great. On the other hand, aside from the occasional one-year blip, both islands regularly out-perform the US, meaning that they’re doing something right. Go back to the 40% of GDP I mentioned governments spending; in Hong Kong and Singapore, that number is closer to 17-18%. With significantly lower spending, these two islands have lower tax rates for both individuals and corporations. In addition, their regulatory environments are significantly less burdensome. All of this adds up to a large performance gap. And considering a semi-permanent ratchet effect for government regulation (how it always seems to go up on net, or at least does not go down to a considerable degree), this gets worse over time, as we have seen.
Moving toward cutting total government spending in half, eliminating vast swaths of regulatory burden, and cutting taxes significantly may not push the US up to 10% growth, but it would certainly be significantly higher than it is today, and that 5% mark would hardly be out of reach. And I do not think it out of line to believe that a massive government is responsible for a 1.5-2.5% yearly drag on US GDP growth, if not more. This is a huge drag: a 2% increase in yearly growth would double the economy in roughly 36 years, meaning that GDP per capita could have been roughly twice as high now had the regulatory state been demolished in the 1970s. There’s your stagnation right there.
