Will ‘Deconstructing the Administrative State’ Spur Economic Growth?

The Issue:

The Trump Administration has rolled back a number of Obama-era regulations, instituted a hiring freeze on federal workers, appointed industry figures to high government positions, attempted a two-for-one repeal for all new regulations, and is seeking large budget cuts at federal agencies as part of an agenda of “deconstruction of the administrative state.” One stated reason for these moves is that the administration claims the wholesale repeal of federal regulations will promote economic growth.

Regulations are not universally good or bad—they’re tools and their impact can be beneficial or deleterious depending on how they are used.

The Facts:

• Unregulated markets can make society better off when willing participants conduct mutually beneficial exchanges. If a person values a ton of steel at $600, and it costs a vendor $500 to provide that steel, there is a gain to society of $100 when that exchange takes place. Regulations that get in the way of such exchanges reduce overall economic well-being. However, under some circumstances regulation can benefit society (see this EconoFact memo).
• Government intervention might improve economic outcomes when prices do not reflect the true cost to society. Suppose in the previous example the vendor values inputs at $500 but it costs their supplier $650 to produce them. If the vendor were to steal the inputs and sell the transformed steel as planned, the exchange would represent a $50 loss to society since the actual cost of producing that steel is $650, but consumers are only willing to pay $600 for it. Every ton produced in this manner makes society $50 worse off, even though the vendor makes a private profit from the theft.
• This may seem like an extreme example, but it has an important parallel to many actual cases.  For example, the potential social benefits of government intervention when a third party is harmed by pollution are of exactly the same form as those that come from the prevention of theft.  A steel mill that does not compensate families downwind for the increased health costs they bear means that these costs are not reflected in the price of the steel. In effect, the steel producer is “stealing” $50 worth of clean air from the people living downwind of the mill. There is a social loss when the buyers’ willingness to pay is less than the cost of production, if you take into account all social costs, such as the health costs to people not involved in the commercial transaction. Economists call a cost borne by a third party, like pollution, an “externality” because the cost is external to the parties of the transaction.
• Economists typically take into account social benefits and social costs, including externalities. But this wider view of costs and benefits has become increasingly divorced from the way in which “jobs” are discussed as a measure of a society’s well-being. When politicians use the number of jobs created as a benchmark to assess whether a policy is good or bad, they are missing an important point – the nature of the jobs matters. There are obviously desirable jobs that provide valuable services based on voluntary exchange. There are jobs that are pointless make-work (digging ditches and filling them back in, building walls in the desert that serve no purpose). Workers are paid for their time, but society gets nothing in exchange. This is equivalent to requiring beneficiaries to spend all day commuting to pick up their welfare checks. There are also jobs that are actively harmful to society, ones that would not exist if people who bore costs were fully compensated. From a point of view that takes full account of all costs, as well as all benefits, the advocacy for such jobs is economically equivalent to advocating for activities that make society as a whole worse off. At a minimum, there would be an overall gain to society (and no change in unemployment) if we could move people from actively harmful to merely pointless jobs.
• The mere presence of harm to a third party is insufficient to guarantee that government intervention will improve matters – sometimes the treatment is worse than the disease (I have found this in my own work on electricity markets). Poorly designed regulations come with a host of unintended consequences that on net might make society worse off than if the government left well alone. Another possible problem with government intervention is that it presents a ripe target for special interest group influence. Regulated businesses have a strong incentive to use those regulations to distort the rules of the game to their own benefit.  For example, taxi companies have been vociferous in their efforts to limit or exclude Uber and Lyft from their markets. These self-serving regulations are costly because they prevent the beneficial exchanges discussed above.
• Sometimes these calls are hard: fuel economy standards, for example, have long been a punching bag for energy economists due to their historically poor designs and unintended consequences. For example, allowing heavier cars to be subject to more lax standards creates the perverse incentive to make cars heavier. However, fuel efficiency standards serve an important role in reducing fuel usage in the absence of an appropriate tax on gasoline, which causes serious harm to the health of large swaths of the population. While the standards are distortionary, it is not clear that they are worse than having no policy to reduce these harms.
• Sometimes these calls are easy: The Federal government has been charging royalties on mineral leases based on the first sale of the oil, gas, or coal. This gives firms a strong incentive to sell below market value to an affiliate, pay a small royalty fee, and then resell on the open market at the full price. In Wyoming for example, over one third of coal sales are to affiliates. Less than one percent is sold this way in Kentucky, where the Federal government does not receive royalties. The Trump administration has rescinded a reform to ensure mining companies pay royalties on the market rate of their output. The reduced royalty can be thought of as a subsidy for coal production on Federal Land (ironically, this drives down coal employment in Appalachia, where it is more labor intensive). This moves in the opposite direction of ensuring the price of coal reflects its cost to society.