23 June 2013

The Great Stagnation and over-regulation

The Great Stagnation is the slowdown in economic growth and median wages in United States since the mid-1970s. From Tyler Cowen's book:



The proximate explanation is a slowdown in productivity:



But why did this slowdown in productivity occur?

John W. Dawson and John J. Seater argue that a big part of the explanation is regulation. From their paper, "Federal Regulation and Aggregate Economic Growth" [PDF] in the Journal of Economic Growth:

Their explanation, including why there is a lag in the slowdown:

Figure 9 shows the effect of regulation on TFP’s trend.  The effect is negative throughout the sample period, but increases in regulation actually decrease this negative effect on TFP’s trend through about 1980.  This suggests that, to the extent that regulation contributed to the productivity slowdown, it must have occurred through cyclical rather than trend effects.  The combined trend and cyclical effects of regulation can be obtained by constructing the counterfactual series which shows the level of TFP had regulation remained at its 1949 level.  Figure 10 shows the change in the ratio of actual TFP to counterfactual TFP.  As with output, there is an initial point artifact.  Ignoring that, we see that the change in the ratio is about zero in 1965 and then becomes increasingly negative until about 1980.  After that, the change rises sharply and is positive in some years through the late 1990s, after which it falls again. Throughout the 1965-1980 period the change is negative, indicating a persistent negative effect of regulation on TFP during the infamous productivity slowdown.

Their counterfactual:


(reason's cover of the paper.)