Top 1% Wins — and Middle Class Loses — on ‘Regulatory Drag’

Kevin Lamarque / Reuters
Kevin Lamarque / Reuters

A new study documents that “regulatory drag” has eliminated about a third of economic growth in America since 1980, and explains why the top one percent’s inflation-adjusted share of income has tripled, while the middle class has lost income.

Mercatus Center at George Mason University performs studies regarding the “drag” on economic growth from federal regulations. The center’s latest report reveals that the annual cost to United States Gross Domestic Product (GDP) of expanding regulations since 1980 has averaged a negative 0.8 percent per year. On a per capita basis, that almost equals the entire one percent slowdown of economic growth in the period since 1980.

Income inequality shrank dramatically from 1946 to 1980, as the 60 percent of Americans who called themselves “middle class” saw wages grow by two percent faster than inflation. Poverty also fell from 19 percent to 13 percent during the period. The rich continued to get richer, but income inequality crashed, with the top one percent’s share of all income falling from 35 to 22 percent.

What drove this better life for the middle was the 3.5 percent average annual growth of GDP from 1950 until the late 1980. Adjusted for strong population growth after WWII, income growth on an individual “per capita basis” was still a very strong 2.5 percent.

But since 1980, annual economic growth on a per capita basis has crashed to less than 1.5 percent, and the first quarter of 2016 was a contraction, -0.3 percent.

Most Americans have no clue that President Jimmy Carter started the spectacular expansion of the regulatory state during his four short years in office from 1976 to 1980.

President Franklin D. Roosevelt consolidated the first 161 of U.S. regulations into the Code of Federal Regulations in 1938. Referred to as the ‘Federal Registry,’ the Code was only 18,193 pages long when it was first published.

President Harry S. Truman in 1950 began deregulating the economy by cutting the number of pages in the Registry from 23,454 to 9,745 pages, arranged in 47 thin volumes. Many economists credit Truman’s action of getting government “out of the way” of the economy for launching a three decade boom.

The Federal Registry grew slowly over the next 26 years. But it ballooned by over 40 percent to 102,195 pages in 164 volumes during the Carter administration. Jimmy Carter still holds the one-year record by adding 11,889 pages in 1980 to expand the Registry by 16.83 percent.

Carter’s issued “Executive Order 12044 – Improving Government Regulations” in 1978, which drastically increased the reach of the federal government into the daily lives of its citizens. Although the EO states, “SECTION 1. Policy. Regulations shall be as simple and clear as possible. They shall achieve legislative goals effectively and efficiently,” the language became a hunting license for powerful bureaucrats to further politicize and expand the scope and reach of congressional legislation under “goal setting.”

A report by the National Association of Manufacturers details how regulations have a disproportionately negative impact on smaller businesses. Although the average cost per employee to comply with federal regulations is advertised as $19,564, it is only $13,750 for large companies with over 100 employees, $18,243 for companies with 50 to 99 employees, and $34,671 for companies with fewer than 50 employees.

Given that almost all the employment gains each year are created by small business, this explains why inflation adjusted wages for middle class workers peaked at $21.60 in 1978, and is still down after 38 years at $21.45 today!

Diane Katz, who publishes “Red Tape Rising” for the Heritage Foundation, estimates that the Obama administration has issued 229 major “economically significant” regulations that each add at least $100 million in cost to the private sector. Katz commented, “Given the regulatory zeal of Team Obama, it should not be surprising that economic growth has averaged only 1.4 percent annually over the last seven years.”

All of this government intervention has been terrific a competitive advantage for top corporate executives of the biggest U.S. corporations, because they have substantially less regulatory “drag” costs per employee. American income inequality since 1980 has spiked to record levels, as the top 1 percent of earners have seen their after-inflation income increased by 200 percent, while the middle class and the poor have been left behind.


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